As business and community interest in environmental, social, and governance (ESG) efforts continues, nonprofit organizations play a crucial role in defining, coordinating, and advancing ESG initiatives.
Nonprofit organizations may be involved as thought leaders on ESG-focused issues or may coordinate ESG efforts among industry participants. At the same time, however, ESG efforts are facing a political backlash mainly, but not exclusively, from the right, as evidenced by the recent letter from the House Judiciary Committee to a sustainability nonprofit, questioning whether the organization "facilitated corporate collusion to promote ESG-related goals."
All of this coincides with a robust and sustained interest in antitrust issues and enforcement,
creating what may be a perfect storm that could catch nonprofits , among others, unaware.
In recent months, several Republican state attorneys general have announced investigations into whether ESG collaborations may run afoul of antitrust laws.
At the same time, antitrust leaders in the Biden administration — Federal Trade Commission (FTC) Chair Lina Khan and Assistant Attorney General for the Antitrust Division of the Department of Justice (DOJ) Jonathan Kanter — have confirmed that there is no ESG exemption to federal antitrust laws.
Indeed, several high profile investigations focused on this area have targeted nonprofits that serve organizing and guiding functions for corporate companies engaged in ESG efforts, including nonprofit net-zero and advertising alliances.
Big picture, antitrust law is concerned with promoting all aspects of competition.
DOJ, FTC, state AGs, and private plaintiffs can all bring antitrust challenges. As antitrust investigations and lawsuits can be costly and distracting, nonprofits — as well as the business community — should remain mindful of antitrust risk when collaborating on ESG initiatives. Below are some high-level guidelines for nonprofits that plan to collaborate on ESG initiatives.
1. Nonprofits Are Not Immune From Antitrust Challenges
U.S. antitrust law generally does not distinguish between for-profit and nonprofit companies.
For example, may compete against each other to hire talented employees
or to offer financial assistance, even if they view themselves as advancing a shared charitable or tax-exempt mission.
Nonprofits engaging in commercial activities, such as healthcare companies or athletic associations, for example, have been targeted for antitrust enforcement. In 2021, the Supreme Court critiqued the NCAA for imposing restrictions on member schools that "decrease ... compensation that student-athletes receive compared to what a competitive market would yield."
And nonprofit organizations, such as alliances and trade associations with rules allegedly limiting members' competition, can also face antitrust liability — as illustrated by DOJ's 2019 allegations that National Association for College Admission Counseling had promulgated membership rules restricting competition among member colleges (including rules that the association asserted were intended to protect low-income students).
2. Use Caution When Facilitating Industry Working Groups
Nonprofits can play a critical role in defining priorities and setting standards for business activities, including through ESG-focused industry certifications, such as nonprofits creating standards for sustainable coffee
or fair labor in the apparel industry.
To the extent that this work brings together different stakeholders and industry participants (especially those that might be viewed as competitors) care should be taken to ensure that the group's work is not derailed by antitrust concerns or enforcement actions. To minimize antitrust risk, industry working groups that are designing standards — even voluntary standards — should be open to all industry participants (not just the "big" or "leading" companies). And business participants should continue to make business decisions independently — companies shouldn't agree amongst themselves to avoid doing business with certain suppliers or customers, even as part of an ESG-focused collaboration.
3. Coordinate Information Exchanges Cautiously
Industry benchmarking and exchanges of best practices can be a helpful tool in some ESG initiatives; however, such efforts can also give rise to antitrust risk if participants are competitor companies who may be exchanging competitively sensitive information
. Nonprofits can play a key role in minimizing the risk posed to businesses participating in such exchanges, for example, by serving as an intermediary to anonymize or aggregate this information before disseminating it among participants.
However, recent antitrust enforcement efforts illuminate continuing antitrust risk in this area in a few important ways. In early 2023, DOJ withdrew long-standing guidelines setting out "safe harbors" for information sharing, indicating renewed focus on information exchanges even if coordinated through a neutral third party.
Likewise, DOJ recently challenged a benchmarking arrangement among poultry processing companies and included the third-party managing the information exchange as a defendant in that case.
Any nonprofit facilitating these types of industry benchmarking and information exchanges should remain mindful of antitrust risk because DOJ will pursue an alleged facilitator even if it does not compete in the affected market.
4. Always Consider Tax-Exempt and Nonprofit Status
In addition to the antitrust concerns, nonprofits involved in ESG activities should also consider whether those activities are consistent with their nonprofit mission and the requirements of federal and state tax-exempt status.
For example, nonprofits involved in industry working groups or benchmarking should consider whether the activities provide too much benefit to commercial participants (as opposed to benefitting the nonprofit's mission) and if revenue generated should be classified as taxable (as opposed to tax-exempt) income. Both antitrust and tax-exempt issues should be evaluated as part of a holistic review of ESG activities.
Nonprofit organizations engaged in ESG activities should be aware of the intense antitrust scrutiny that such activities may generate, especially given recent challenges by state attorneys general and congressional attention in this area. Activities motivated by ESG priorities can lead to welcomed and meaningful change in industries; however, nonprofits supporting such efforts need to be aware that neither nonprofits nor ESG activities are immune from antitrust enforcement. Therefore, nonprofits must remain vigilant in managing antitrust risk and seek experienced antitrust and tax-exempt organizations counsel on these issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
