Prior to the recent midterm elections, we wrote about five Senate Republicans who issued a warning letter to major U.S. law firms regarding the potential antitrust implications of Environmental, Social, and Governance (“ESG”) investing and activities. The letter advises that ESG activities may be viewed as “climate cartels” and present antitrust risk when firms engage in ESG group initiatives. With the midterm election results, those Senate Republicans will likely not be able to follow through on this line of investigation. However, House Republicans have taken up the issue, and they will have the ability to conduct antitrust scrutiny of ESG initiatives.
On December 6th, Republican members of the House Judiciary Committee, including the likely incoming Chair of that Committee, Congressman Jim Jordan (R-OH), announced an investigation into whether corporations acting collectively in the name of ESG are violating the antitrust laws. Specifically, Congressman Jordan and other Republican members wrote to steering committee members of Climate Action 100+, an investor-led ESG initiative founded in 2017. The letter requests a broad range of information about Climate Action 100+ activities, including documents and communications regarding efforts to solicit member organizations to agree to advance ESG goals and other documents regarding collective efforts by the initiative.
The letter asserts that participating companies may have worked “together to punish disfavored views or industries, or to otherwise advance” ESG goals in a way that may violate the antitrust laws. The letter also cites an opinion editorial from 2019 by the then Assistant Attorney General for the DOJ Antitrust Division in the Trump Administration, Makan Delrahim, asserting that agreements between competitors as to how they should act in the marketplace regarding ESG initiatives may draw scrutiny from the federal antitrust enforcement agencies.
In addition, some state Attorneys General (invariably Republican) have also begun investigating ESG investors and policies, some of whom are focusing on antitrust issues.
Various ESG activities can present a range of moderate to appreciable antitrust risk, and companies investing in this space should put guardrails in place to ensure that such initiatives do not run afoul of the antitrust laws and invite liability, especially in collaborations with industry-wide initiatives.
Overview of ESG Conduct Governed by the Antitrust Laws
As an initial matter, it is important to note that there is no ESG exemption to the antitrust laws. Current Federal Trade Commission Chair Lina Khan stated as much in her congressional testimony on September 20, 2022. Chair Khan explained that merging parties will sometimes proffer favorable ESG considerations as an avenue for fixing anticompetitive deals. Chair Khan noted that she does not find persuasive the idea that ESG considerations provide a valid defense to an anticompetitive violation:
“As a general matter, collusion is unlawful . . . we’ve seen firms come to us and try to claim an ESG exemption, and we’ve had to explain to them clearly that there is no such thing . . . Certainly, those types of cooperation or agreements—inasmuch as they can affect competition—are always relevant to us.”
The U.S. antitrust laws seek to promote robust competition by prohibiting certain types of business conduct, agreements, and mergers that have an adverse impact on competition and consumers. The antitrust laws generally prohibit agreements between competitors that unreasonably restrain trade and other forms of unilateral business conduct that may have an anticompetitive effect.
ESG policies and practices can present varying levels of antitrust risk depending on certain factors, including whether such policies and practices are implemented unilaterally by single firms or adopted by multiple competitive players. Where different players are agreeing to abide by certain standards or adopt industry-wide best practices, firms should be careful not to “agree”—tacitly or explicitly—on certain aspects such as price or output as a result of implementing those standards or practices. Agreements between competitors to fix prices, restrict supply or output, or to refuse to deal with certain competitors or suppliers are likely to trigger heightened antitrust scrutiny.
Below are a few key examples of ESG activities that may create antitrust risk when examined by the enforcement agencies:
- Coordinated Conduct and Industry Initiatives. Multiple state attorneys general have begun to investigate firms engaging in coordinated conduct through investor-led ESG initiatives, such as the Climate Action 100+ initiative. For clarity, agreements between competitors to undertake certain marketplace conduct can violate the Sherman Act—even when such agreements take the form of a climate pledge or ESG initiative. The recent House letter also alleges that ESG initiatives present a “textbook” antitrust violation by requiring owners of capital to collude to restrict supply. Firms engaging in ESG collaborations should discuss with counsel the antitrust implications of any ESG collaborations with their competitors.
- Group Boycotts. One such agreement between competitors that may be considered to violate the Sherman Act is a “group boycott” (i.e. where firms collectively agree to refrain from doing business with targeted individuals or firms). Certain ESG conduct, such as competitors collectively petitioning the government to enact or adopt ESG standards, is permissible under the antitrust laws according to the Noerr-Pennington doctrine, and at least one circuit has suggested that “politically motivated but economically tooled” boycotts of whole industries where the boycotters are non-competitors with the industry do not fall within the purview of the Sherman Act. There, the Eighth Circuit case involved a group boycott of the convention industry in states where the Equal Rights Amendment had not been adopted. However, the Supreme Court has not directly spoken on whether group boycotts of certain industries—when engaged in for social or political goals—violate the Sherman Act. In any event, firms engaging in ESG collaborations should utilize counsel to assess antitrust risk and avoid agreements not to compete or organizations that require members to refrain from investing in certain industries (e.g. oil, coal, and gas).
- Sharing of Competitively Sensitive Information. As ESG initiatives continue to develop, firms may find themselves in a position where they are negotiating best practices or standards across the industry. Firms should be careful not to share competitively sensitive information—or information that is not publicly available—with competitors such as price or output in the course of these discussions, as the exchange of such information may likely violate the antitrust laws. Firms should take precautionary steps through a robust antitrust compliance program to ensure such competitively sensitive information is not shared during the course of ESG discussions and activities.
- Naked Price-Fixing, Bid-Rigging, and Market Allocation. These practices are referred to as hardcore cartel conduct and are per se illegal under the antitrust laws. Competitors may not fix prices for products or services, agree to rig bids, or allocate customers or markets under the guise of ESG activities. (This is a theory being advanced by at least one state Republican Attorney General). Such agreements involve severe antitrust risk.
ESG activities are beginning to attract regulatory scrutiny from an antitrust perspective, typically from institutions controlled by conservative politicians (e.g., attorneys-general from certain states). Republican state Attorneys-General have already announced investigations into ESG activities. In March 2022, then Arizona AG Mark Brnovich penned an opinion editorial in the Wall Street Journal announcing an investigation into “a coordinated effort to allocate markets” and criticizing Climate Action 100+ for using “coordinated influence to compel companies to shut down coal and natural-gas plants.” Other state AGs have written letters to industry participants demanding answers as to whether ESG investments present other theories of liability, such as violation of fiduciary duties.
Congressional Republicans are also participating in this effort. In the Senate Republicans’ recent letter, the writers expressed specific concern with “. . . the collusive effort to restrict the supply of coal, oil, and gas, which is driving up energy costs across the globe and empowering America’s adversaries abroad.” And most recently, the House Republicans’ letter is the latest step towards increasing antitrust scrutiny of ESG activities. Firms should be aware of the associated antitrust risk.
ESG is a subject which draws both strong support and opposition. It seems clear that some opponents have decided that antitrust might be a forceful—and potentially legitimate—weapon to use against the adoption of ESG principles and the conduct of ESG-related activities. The antitrust risk lies mainly in the area of coordinated activity or agreements, and antitrust counseling can reduce any potential exposure. Industry participants should be aware that House Republicans and state attorneys general are already pursuing antitrust theories of liability against industry-wide climate initiatives. Furthermore, private plaintiffs may bring their own actions under the same theories of antitrust liability independent of government enforcers. Industry participants either present in or venturing into the ESG space should be aware of the potential antitrust implications of participating in collective ESG initiatives and implement safeguards to avoid liability and mitigate antitrust risk.
 Letter from Senators Tom Cotton, Charles E. Grassley, Marco Rubio, Michael S. Lee, and Marsha Blackburn to 50 Law Firms, United States Senate (“ESG Letter”) (Nov. 3, 2022), available at: https://www.grassley.senate.gov/imo/media/doc/cotton_grassley_et_altolawfirmsesgcollusion.pdf.
 See “Missouri Attorney General Leads 19 State Coalition in Launching Investigation Into Six Major Banks Over ESG Investing,” Press Release, Eric Schmitt Missouri Attorney General (Oct. 19, 2022 11:16 AM), available at: https://ago.mo.gov/home/news/2022/10/19/missouri-attorney-general-leads-19-state-coalition-in-launching-investigation-into-six-major-banks-over-esg-investing; “Paxton Launches Investigation into S&P Global’s Use of ESG Factors in Credit Ratings, Potentially Violating Consumer Protection Laws,” Press Release, Ken Paxton Attorney General of Texas (Sept. 28, 2022), available at: https://www.texasattorneygeneral.gov/news/releases/paxton-launches-investigation-sp-globals-use-esg-factors-credit-ratings-potentially-violating.
 Oversight of Federal Enforcement of the Antitrust Laws, Subcommittee on Competition Policy, Antitrust, and Consumer Rights (“Khan Testimony at Oversight Hearing”), Senate Judiciary Committee (Sept. 20, 2022).
 Id. at 2:03:37-2:04:26.
 See Missouri v. National Organization for Women, Inc., 620 F.2d 1301 (8th Cir. 1980).
 Id. at 1302.
 Treasurer Ball, Attorney General Cameron Request Information on Role of ESG-Investment Practices in Kentucky’s Public Retirement Systems (Oct. 31, 2022), available at: https://www.kentucky.gov/Pages/Activity-stream.aspx?n=KentuckyStateTreasurer&prId=95.
 ESG Letter, supra note 1.