On May 15, 2023, 22 state attorneys general sent a letter to several insurance companies warning that the companies' Environmental, Social, and Governance (ESG) policies may violate antitrust laws. Just six weeks earlier, on March 30, 2023, 21 state attorneys general sent a letter to 53 investment fund managers criticizing their ESG efforts. These letters are the latest in a string of attacks on ESG efforts led by state attorneys general and federal lawmakers.
In addition to providing social and environmental benefits, ESG initiatives can create opportunities for more efficient or innovative competition and ensure compliance with regulations. Those opposing ESG efforts, however, have raised concerns under the antitrust laws about collaboration between competitors that employ similar ESG criteria or benchmarks. This alert examines these issues, identifies potential risks, and provides guidance for companies seeking to balance their ESG commitments and obligations with their antitrust obligations.
ESG has been a priority among many industry leaders for more than a decade. Lately, these efforts have come under fire from a growing anti-ESG movement. Much of that movement has focused on securities and consumer protection issues. Indeed, the March state AG letter specifically cites consumer protection and fiduciary law. These letters, however, also provide insight into where the anti-ESG movement is headed.
In particular, without expressly laying out an antitrust legal theory, the March letter suggests there are "antitrust implications" to ESG efforts, referencing "[c]oordinated efforts," "horizontal agreements," and "colluding asset managers." The May letter suggests that United-Nations-convened working groups to implement climate change goals may be an "illegal boycott" or a "collective agreement to fix prices" in violation of state and federal antitrust laws.
The anti-ESG momentum is also hastening at a federal level. A recent letter from members of the House Judiciary Committee made clear their belief that an effort by major investors to promote ESG priorities "may be unlawful under US antitrust laws." The letter raised concerns about entities it calls "woke" corporations enacting progressive values. Similarly, in a letter sent to executives of the Steering Committee for Climate Action 100+, House members described the coalition as "seem[ing] to work like a cartel to 'ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change.'"
Because ESG policies often take the form of pledges and sometimes involve interactions between competitors, companies engaged in these efforts should be sensitive to potential antitrust issues. Companies should also understand that providing social benefits does not provide immunity from antitrust enforcement, as officials across the political spectrum (from Jim Jordan to Lina Khan to Tom Cotton) have emphasized. Khan, for example, wrote that ESG commitments do not create a special shield against the antitrust laws. This is because social welfare benefits are no defense when applying antitrust law. See FTC v. Superior Court Trial Lawyers Assn., 493 U.S. 411, 424 (1990) (citing Nat'l Soc. of Professional Engineers v. United States, 435 U.S. 679, 695 (1978)) ("The social justifications proffered for respondents' restraint of trade thus do not make it any less unlawful.")).
ESG critics in Congress expressed concern that there has been "cooperation among competitors in ways that restrict price, output, or quality." But many companies unilaterally make ESG pledges because they believe ESG can help their businesses succeed. Corporations seek to improve their products and compete for customers who value certain environmental or social issues. In the same vein, asset managers might adopt ESG policies to attract investors seeking to direct capital towards socially and environmentally responsible businesses or consider ESG criteria to be required as part of their fiduciary duty. Many companies prioritize ESG to promote internal productivity as well. Some may seek to build diverse teams that can often produce more efficient and higher quality work. And others seek to attract talent or motivate an increasingly socially conscious workforce. A company pursuing ESG based on a unilateral business decision rather than as a commitment made with others is well positioned against critics in the anti-ESG movement.
Coordinated ESG commitments between competitors, on the other hand, could present risk. Antitrust law scrutinizes industry coordination, and navigating such scrutiny requires tailored legal advice that considers an array of factual circumstances. In the ESG context, counsel must consider: (1) the nature of any collaboration or discussions between companies surrounding ESG commitments; (2) the identity of the other industry participants; (3) the business goals associated with a company's ESG commitment; (4) the impact, if any, of agreements between competitors on competition in the market; plus a plethora of other case-specific facts.
To evaluate whether an ESG commitment opens the door to antitrust risk, companies should keep the following in mind:
- Consult experienced antitrust counsel before entering into an ESG pledge or commitment.
- A company's ESG strategy should be driven by its own priorities and interests.
- Unilateral conduct is typically less risky than coordinated conduct.
- Document the business justifications for undertaking ESG efforts, such as increasing productivity, attracting investors, and gaining customers.
This guidance can provide a starting point for companies facing ESG scrutiny as they, along with their counsel, navigate the growing trends opposing ESG efforts. When in doubt, go back to the basics of the antitrust laws: Compete vigorously to provide great products, high returns, and increased value to customers. If ESG policies are adopted in pursuit of those unilateral ends, antitrust risk is substantially reduced.
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.