United States | Publication | January 2023
On December 31, 2022, Republican members of the House Judiciary Committee sent a letter (the House Letter) to a member of the steering committee of Climate Action 100+, an investor-led initiative that pursues decarbonization and greenhouse gas reduction at companies in which its members invest. The House Letter, which followed an earlier letter sent on December 6,1 reiterated the concern that Climate Action 100+ "seems to function like a cartel." Its authors asserted authority to conduct "oversight of how coordinated efforts to push environmental, social and governance (ESG) policies could violate antitrust laws" and expressed skepticism that "this collusive behavior is not anti-competitive." The letter repeated earlier requests for the voluntary production of documents and information, in order "to examine unlawful restraints of trade and commerce," and it warned that, in the absence of voluntary production, "the Committee may be forced to resort to compulsory process." The letter closed with an assurance that "the Committee will continue to pursue this oversight matter into the 118th Congress," which began on January 3, 2023.
The House letter echoes a November 2022 letter from five Republican senators (the Senate Letter) to dozens of US law firms regarding the firms' ESG practices, particularly as they relate to environmental sustainability. The Senate letter cautioned that "there is no ESG exemption to antitrust laws" and said that the firms should advise clients on "the risks they incur by participating in climate cartels and other ill-advised ESG schemes." The senators declared that going forward, "Congress will increasingly use its oversight powers to scrutinize the institutionalized antitrust violations being committed in the name of ESG, and refer those violations to the FTC and the Department of Justice."
The House and Senate letters spotlight the tension between sustainability and other ESG goals, which can suggest collective actions in the same industry (e.g., standard-setting or sector-wide goals), and antitrust laws, which generally prohibit cooperation among competitors when doing so would raise prices, restrict output or decrease consumer choice. By using the language of "cartels," both letters also invoke the possibility of criminal enforcement in the United States, where antitrust cartel offenses can lead to significant criminal fines for corporations and imprisonment for individuals.
Both letters also portend congressional investigations during the current term to determine whether ESG initiatives comport with federal antitrust laws. Republicans now control the House of Representatives, and one of the signatories of the House letter now chairs the powerful House Judiciary Committee.
Finally, the letters draw into starker relief the growing divergence between enforcement approaches with regard to handling the intersection of sustainability initiatives and antitrust enforcement, both within the United States and between the United States and other jurisdictions, especially in Europe.
Companies are under increasing pressure from investors, customers, employees, governments and other stakeholders to reduce their carbon footprints and make progress on other ESG goals. This advisory examines the differing approaches taken at different levels of government in the United States and Europe and the antitrust risks facing companies engaged in sustainability initiatives.
In the United States, corporations must navigate the complexities of a federal system, which empowers both federal enforcement agencies and state attorneys general (state AGs) within their respective jurisdictions. While federal and state enforcers often coordinate, there is no requirement that they do so, and states independently can take actions that may be inconsistent with or contrary to those made at the federal level. Additionally, as evidenced by the House and Senate letters, Congress may conduct its own investigations and refer potential violations to antitrust enforcers.
US law makes clear that even commendable policy goals such as sustainability have no impact on the legality of an alleged antitrust violation, and the Supreme Court has held that "social justifications proffered for respondents' restraint of trade … do not make it any less unlawful."2
The two competition enforcement agencies in the United States—the Department of Justice's (DOJ) Antitrust Division and the Federal Trade Commission (FTC)—share responsibilities for civil enforcement of federal antitrust laws. Additionally, the DOJ investigates and prosecutes antitrust cartels criminally in partnership with federal law enforcement agencies like the Federal Bureau of Investigation.
To date, neither the Antitrust Division nor the FTC has signaled that it will approach enforcement differently or do anything other than apply the law as it exists, regardless of the merits of an underlying sustainability objective.
In August 2019, identical letters from the then-Assistant Attorney General (AAG) of the Antitrust Division to four auto manufacturers illustrated the enforcement risks corporations face from working towards sustainability goals at the industry level. The automakers had announced a month earlier their agreement with a state regulator in California to adopt fuel efficiency standards that were stricter than the Trump administration's proposed federal standards. In the letters, the then-AAG wrote that the Division had learned through media reports of a possible agreement between the carmakers and said that "we are concerned that [the recipient's] agreement with three automobile companies may violate federal antitrust laws" and requested meetings with the recipients.
The theory of harm was that the automakers' agreement potentially restricted competition by limiting the types of vehicles that the auto companies offered to consumers. DOJ later defended the investigation against claims that it was politically motivated, saying that "[i]f the automakers had in fact entered into a horizontal agreement, it would have given rise to a potential antitrust violation. This is the case irrespective of whether the subject matter of an agreement involved a current political topic like emissions — such considerations are irrelevant to our prosecutorial judgment." (The Antitrust Division ultimately closed its "narrow investigation" in early 2020, finding no evidence of collusion.)
Under the Biden administration, the Antitrust Division and FTC have been at the forefront of a sweeping, "whole of government" mandate with regard to competition in the American economy, and the agencies' leaders have decried decades of underenforcement of the antitrust laws.
Amidst this increased enforcement activity, however, both agencies have taken a neutral stance on ESG initiatives. While neither has either taken or suggested enforcement actions targeting sustainability initiatives (such as the House and Senate Letters, or the Antitrust Division's August 2019 letter), the current heads of both agencies have acknowledged the possibility of enforcement. During a September 2022 Senate oversight hearing, for example, both the FTC Chair and Antitrust Division AAG testified that there is no ESG exemption to the antitrust laws and that collusion between firms remains generally unlawful. In a December 2022 opinion essay, the FTC Chair punctuated this stance and extended it to the agency's consideration of mergers, writing "Some in corporate America seem to think that the FTC won't challenge an otherwise illegal deal if we approve of its ESG impact. They are mistaken."
ESG initiatives also must account for possible state-level enforcement in the United States. Whereas some states' environmental regulatory agencies are active in pushing for greater sustainability (as was the case with California's efforts to establish heightened emissions standards in 2019), other states' enforcers have scrutinized these efforts as potential antitrust violations. In response to these anti-ESG enforcers, still other state enforcers have defended the efforts as lawful.
Unlike the general neutrality of the federal agencies in the Biden administration, some state attorneys general (state AGs) have expressed the same concerns as the House and Senate letters, alleging that sustainability initiatives can amount to illegal collusion to harm certain industries.
The response of state AGs to banks and other lenders' efforts to achieve so-called "net zero" emissions goals are noteworthy. This includes the United Nations' Net-Zero Banking Alliance (NZBA), a group of over 100 banks that are "committed to aligning their lending and investment portfolios with net-zero emissions by 2050," by helping clients across their portfolios transition away from greenhouse gases and to invest in green energy innovations.
In March 2022, Arizona's AG claimed in a published editorial that "The biggest antitrust violation in history may be in plain sight." The essay claimed that banks and investors are colluding to shut down investment in energy production in the name of climate action. He declared an investigation into "potentially unlawful market manipulation," citing climate activist groups that are seeking "Decarbonization of capital expenditures."
Other state AGs repeated this claim. In early August 2022, nineteen Republican state AGs signed a letter expressing concern that "coordinated conduct" between "financial institutions to impose net-zero . . . raises antitrust concerns." The letter noted that the ESG initiatives raised potential antitrust violations such as "group boycotts, restraining trade, or concerted refusals to deal," which would "clearly run afoul" of federal antitrust laws.
Following that letter, in October 2022, numerous state AGs launched a multistate investigation in which they issued civil investigative demands to six US banks, seeking information from the banks about their involvement with the NZBA.
In announcing the investigation, one state AG said that the banks "collectively agreed that each of their lending practices will reflect the target of net-zero greenhouse gas emissions by 2050, with interim targets in 2030 …," and cited the effect of the alleged agreement on the ability of "companies engaged in fossil fuel-related activities" to obtain credit. The state AGs launched their investigation despite the voluntary nature of NZBA participation, including an October 2022 statement from the NZBA Steering Group Chair that members should "set [their] own individual targets and make independent decisions as to how to meet those targets."
In contrast to these anti-ESG state AGs, a separate group of 17 state AGs has defended ESG initiatives. In a November 21, 2022 letter to Democratic members of Congress, this group criticized as "unsupported" the idea of characterizing investor-led sustainability initiatives as "climate cartels" that violate antitrust laws. The letter states that "an expression of general recommendations or a statement in favor of or against certain policies does not, without more, constitute a violation of the Sherman Act."
In addition to federal and state enforcers, the US Congress has broad powers to investigate. Congressional investigative authority encompasses not only informal requests for information or documents—such as those made in the December 2022 House letter—but also includes the power to subpoena both documents and witness testimony. Failure to comply with a congressional subpoena can result in a referral to DOJ to institute a criminal investigation for contempt of Congress.3
While Congress can and likely will investigate ESG initiatives' compliance with federal antitrust laws in its new session (based on the House and Senate Letters), it has limited powers to enforce. If Congress believes that it has discovered illegal cartel conduct related to a sustainability initiative, for instance, it has no authority to prosecute the conduct. Rather, it must refer the matter to DOJ for investigation, and DOJ (presumably through the Antitrust Division) would exercise its independent discretion regarding whether to pursue further investigation or criminal charges, with no obligation to act on a congressional committee's recommendation.
This does not mean, however, that congressional investigations in this area are likely to be without consequence for subjects of the investigation. Two risks stand out in this regard:
First, Congress' ability to obtain documents and witness statements itself carries risk. These investigations may uncover problematic documents from a corporation and do so in a way that threatens significant reputational harm or prompts private civil litigation. Even just a single document or statement isolated and taken out of context could damage customer and investor relationships. Additionally, if a congressional investigation were to uncover truly "hot" documents, it would act as a force multiplier for federal agency enforcement by DOJ, which likely would follow up with its own investigation.
Second, Congress also could refer a potential violation to a state AG with jurisdiction and enforcement capability. While a referral to a state AG is historically rare, and it likely would not result in criminal prosecution (states generally lack criminal antitrust enforcement authority), in light of the public signals from members of Congress and anti-ESG state AGs, this possibility should not be overlooked. State AGs could step in as proxy enforcers for congressional investigations.
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The enforcement environment for sustainability programs in the United States therefore is complex, including these strong suggestions of congressional investigation, the existing reality of state AG investigations and the ever-present possibility of federal investigation.
The calculus becomes even more complex for corporations trying to navigate ESG and sustainability issues on a multinational basis.
There has been significant debate about the proper role of sustainability objectives in the European Union (EU) since the European Commission's (EC) introduction and subsequent adoption in 2020 of the European Green Deal, a set of climate initiatives aimed at climate neutrality by 2050.
The EC issued a call for submissions on the topic of competition and sustainability in September 2020 and held a February 2021 conference on competition policy and the European Green Deal. In parallel with these efforts, the EC's Directorate General for Competition undertook a series of public consultations on the competition rules revised incident to the European Green Deal.
Through these processes, "Companies flagged … the need for more clarity on the assessment of types of cooperation agreements that they consider essential for pursuing sustainability objectives," including "industry-wide agreements to phase out unsustainable products [] and/or unethical modes of production; joint procurement of sustainable input products; joint R&D&I and production agreements, in the context of which information may need to be exchanged; and setting industry standards for the use of sustainable products and green technologies."4
Despite this consensus for greater clarity around the intersection of antitrust enforcement and sustainability initiatives, the treatment of industry efforts in pursuit of ESG goals remains unclear under EU law, and the EC is committed to continued vigorous enforcement of Articles 101 and 1025 in all sectors of the economy. Differences of approach across the national competition authorities in individual member states further complicate the issue.
A looming question surrounds the availability of potential antitrust exemptions and the related question of how sustainability benefits may weigh against potential restrictions of competition. In a September 2021 policy brief, the EC noted that agreements restricting competition can be exempted under Article 101(3) if their benefits outweigh the restrictive effects on competition and indicated that it would clarify how it would account for sustainability benefits under this exemption. This lack of clarity has created challenges for businesses looking to adopt ESG collaborative efforts without the risk of drawing potential antitrust scrutiny, particularly as businesses are required to self-assess their compliance under the EU antitrust framework (and the equivalent rules in individual member states).
At the EU-level, much like at the US federal level, and notwithstanding numerous public statements made in support of ESG by the EC, the treatment of ESG initiatives under antitrust law remains "business as usual." But change may be on the horizon.
The EC is finalizing its revised guidelines on horizontal cooperation agreements (the Draft Horizontal Guidelines), which are expected to be released in the first half of 2023. The Draft Horizontal Guidelines suggest a possible "soft safe harbour" for certain sustainability agreements.6 If adopted in the final Horizontal Guidelines, the "soft safe harbour" would give businesses an indication on what joint sustainability activities could fall outside Article 101's prohibition on agreements, decisions or concerted practices that restrict competition.
To date, however, there has been no change to the EC rules (which trump member state antitrust rules). In February 2022, the European Commissioner for Competition warned that competition policy could become inefficient if it focused too much on the debates about the green transition and said that she was "not ready" to adopt the view that wider sustainability-related benefits could counterbalance specific anticompetitive harms.
While there are signs of a potential shift in EU-level antitrust policy, uncertainty remains for businesses working on sustainability-focused initiatives. That uncertainty is compounded by enforcement activity that reminds companies of the consequences of getting it wrong: in May 2021, for example, the EC imposed fines totaling €875m on European car makers for colluding on the technical development in the area of nitrogen oxide cleaning. The same companies now face follow-on collective action suits in the United Kingdom (UK).
Much like the divergence between federal and state enforcers in the US, navigating the antitrust issues around sustainability has been complicated by the different approaches the EU's member states take.
The Netherlands, Greece and Austria lead the way on antitrust enforcement policies that are more receptive to ESG collaborations between competitors.
The Netherlands and Greece each have published guidance on how their respective competition authorities may treat sustainability initiatives.
As just one example of how this guidance has been implemented, since publishing draft guidelines on the assessment of sustainability agreements in 2021, the Dutch authority has blessed numerous industry-level agreements on the basis of their positive environmental impact. In September 2022, for example, it approved an agreement among garden centers to boycott suppliers that used illegal pesticides, noting that but for its environmental impacts, such a boycott of suppliers normally would be illegal.
Greece's guidance, meanwhile, noted that "Competition law should become more synchronised with the broader constitutional values and programmatic aims regarding sustainability" and pioneered the idea of an antitrust "sandbox" to allow experimentation with new business formats to realize sustainability goals, including those that involve competitor cooperation.
Austria has gone further. In addition to recent guidance promulgated by its competition authority, the Austrian legislature in 2021 amended the Federal Cartel Act to provide a possible exemption for cartels that "contribute substantially to an ecologically sustainable or climate-neutral economy," a position that stands in stark contrast to the EC's position that these considerations should not factor into the analysis of cartel behavior.
Like the Netherlands and Greece, the UK's Competition and Markets Authority (CMA) has published guidance to help provide certainty for businesses so that they "do not unnecessarily shy away from those [sustainability] initiatives on the basis of unfounded fears of being in breach of the law." In January 2021, the CMA published an "information sheet" to help businesses and trade associations better understand how competition law applies to sustainability agreements.
In March 2022, the CMA followed up on this guidance and gave its advice to the UK government on how the competition and consumer protection regimes could better support the UK's transition to net zero. In providing this advice, the CMA noted a lack of evidence that the current UK competition law framework was an impediment to sustainability initiatives. It further signaled "some flexibility under the current rules to take environmental benefits into account when considering exemptions for agreements that restrict competition." The CMA has committed to bringing forward even more detailed guidance.
The CMA's March 2022 advice came just two weeks after the EC's Draft Horizontal Guidelines, and although the CMA's emerging position generally aligns with that of the EC, there are some early indications of potential divergence between the EC and UK. First, the EC's Draft Horizontal Guidelines are broader and extend to economic and social (including labor and human rights) development, whereas CMA's advice is focused on the UK's net zero goals. Second, it is unclear whether the CMA intends to adopt a anything like the "soft safe harbour" in the EC's Draft Horizontal Guidelines and, if so, how closely it may follow the EC's qualification criteria.
The CMA also launched a dedicated internal Sustainability Taskforce and has prioritized cases involving conduct that could impede the UK's transition to a low carbon economy. This commitment already has been seen in its 2021 market study on electric vehicles and subsequent investigation into exclusive arrangements for charge points at motorway service stations, which concluded with commitments in March 2022.
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Much like in the US, the lack of a settled position between various enforcers in Europe, paired with inconsistent approaches across the EC, Member States and the UK creates enforcement uncertainty and prevents businesses from knowing the boundaries between lawful ESG industry collaboration and conduct that may violate competition laws.
In the US, EU, UK and elsewhere, corporations face growing pressure from various stakeholders—including shareholders, customers, employees and regulators—to make progress on ESG issues like sustainability. But they must do so without running afoul of competition laws, which themselves differ across jurisdictions, and enforcers, which have taken divergent and often politicized approaches with regard to sustainability—especially in the United States. It is essential that companies understand the inconsistent enforcement environment across jurisdictions as they plan and move forward with these initiatives.
As a general principle, under the laws of the US, EU and UK, companies that are not dominant in their market may decide unilaterally to adopt standards that further ESG goals. To the extent that companies seek industry-wide, collaborative solutions, they should appreciate the several attendant antitrust risks and consult with counsel throughout the process. Even entering into non-binding, voluntary codes of conduct on ESG may not be enough to insulate companies from investigation, especially in the US, where the political environment has led to inconsistent and incompatible enforcement approaches between federal and state enforcers and Congress. For companies that operate multination-ally, the considerations are even more complicated.
Norton Rose Fulbright's team includes former federal and state antitrust enforcers, congressional staff counsel, UK competition officials and other experienced and knowledgeable practitioners around the globe. We excel at providing strategic antitrust advice and counseling that fosters our clients' business objectives while minimizing their risk of government enforcement actions or private litigation.
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