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ESG and Antitrust: A Legislative Perspective

John O'Toole

ESG and Antitrust: A Legislative Perspective
Alistair Berg via Getty Images

I. Introduction

In the past few years, environmental, social, and governance practices (“ESG”) have become a hot topic and the subject of fierce political debate. While many champion these efforts, some have challenged them as symptomatic of a “woke” culture. Recently, many Republican state attorneys general and members of Congress have extended these criticisms to the antitrust realm, arguing that engagement in certain ESG practices may constitute an agreement in restraint of trade that violates Section 1 of the Sherman Act. There has also been a push to develop ESG-related legislation on both sides of the aisle, including at the state level, to outline how or when ESG efforts may violate the antitrust laws. This article explores how the legal framework of antitrust is being used to challenge or promote ESG-related legislation at both the state and federal level.

II. Legal Framework

The interplay between ESG and antitrust has been viewed mainly through the lens of Section 1 of the Sherman Act. Section 1 prohibits agreements in restraint of trade. The primary source of risk in the ESG context is “horizontal” agreements, or collaborations among competitors who generally sell (or buy) the same thing. To establish a Section 1 violation, an antitrust enforcer must prove three elements:

  • Agreement. Section 1 requires concerted activity, and does not prohibit unilateral conduct, regardless of its purpose or effect on competition. Parallel conduct—sometimes referred to as “conscious parallelism”—does not constitute a violation of Section 1 unless it arises from an agreement
  • Unreasonable restraint of trade. Although the text of Section 1 outlaws “every contract, combination, or conspiracy in restraint of trade,” it has long been established that Section 1 does not prohibit every restraint of trade, only those that are unreasonable.
  • Effect on interstate commerce. The agreement must be “in restraint of trade or commerce among the several States, or with foreign nations.” Given the modern economy, this factor is typically met.

In practice, some conduct is always deemed to be unreasonable and therefore illegal, regardless of effects or justifications (“per se”). This applies to conduct with obvious anticompetitive effects and no redeeming values (e.g., price fixing, bid rigging, market allocation among competitors). Certain forms of conduct are subject to a modified per se rule, where the conduct can be subject to a per se rule if there is proof of market power. Other conduct is subject to an assessment of pro- and anticompetitive effects in a relevant market (“rule of reason”). This is a highly fact-specific standard that applies to most potentially anticompetitive conduct.

To date, some state AGs (among other others) have challenged certain efforts among companies to meet particular environmental goals in the United States, framing the efforts as agreements to exclude or refuse to deal with a third party (or “group boycotts”) in violation of Section 1 of the Sherman Act. In addition to efforts by state AGs, there have also been state legislative efforts to challenge ESG initiatives as violations of the antitrust laws. For example, on March 2023, Utah enacted H.B. 449, which provides a right to civil action for injunctive relief or damages against any companies that “with the specific intent of destroying a boycotted company and without an ordinary business purpose, coordinate or conspire with another company to eliminate the viable options for the boycotted company to obtain [a] product or service.” The legislation defined a “[b]oycotted company” as a company that “does not meet or commit to meet: (i) environmental, social, or governance criterial…[or] (ii) environmental standards.” Separately, federal agencies have made clear that there is no ESG exemption under the antitrust laws. Federal Trade Commission (“FTC”) Chair Lina Khan has stated that “antitrust laws don’t permit us to turn a blind eye to [illegal activity] just because the parties commit to some unrelated [ESG] benefit,” a position she and Assistant Attorney General Jonathan Kanter reemphasized at the ABA Antitrust Section Spring Meeting last month.

Section 1 enforcement in the ESG context is not purely theoretical. In September 2019, the Department of Justice (“DOJ”) opened an investigation into four automobile manufacturers—BMW, Honda, Ford, and Volkswagen—over a commitment that the four had made regarding emissions to comply with California state law. The four car manufacturers had committed with the State of California’s Air Resources Board to meet stricter emissions standards than those proposed by the Trump Administration, including that their vehicle models would be able to travel 50 miles per gallon of gasoline by 2026. The DOJ under the Trump Administration investigated this agreement as a potential violation of Section 1. The DOJ closed the investigation a few months later, with no enforcement action. That the automobile manufacturer commitments the DOJ was investigating explicitly involved a state agency likely meant that the restriction in question was protected under the Noerr-Pennington doctrine.

III. Recent State Legislation

a. Anti-ESG Legislation

Anti-ESG legislation has taken many forms at the state level and states with Republican leadership are spearheading the efforts. Many of the proposed bills focus on forbidding state government actors from contracting with companies that supposedly “boycott” certain sectors of the economy. For example, Senate Bill 261 in Alabama prohibits governmental entities from entering into “contracts with companies that boycott businesses because the business engages in certain sectors or does not meet certain environmental or corporate governance standards or does not facilitate certain activities.” The law further authorizes the state’s attorney general to “take actions to prevent federal laws or actions from penalizing, inflicting harm on, limiting commercial relations with, or changing or limiting the activities of companies or residents of the state based on the furtherance of economic boycott criteria.” Similarly, Arkansas’s Senate Bill 62/Act 411 prohibits public entities from “engag[ing] in a boycott of energy, fossil fuel, firearms, and ammunition industries.”

Beyond legislation banning supposed “boycotts” of companies, many of the proposed state laws also mandate increased oversight or disclosure of ESG-related activities. For example, Arkansas created an “ESG Oversight Committee” to monitor financial providers that “discriminate against energy, fossil fuel, firearms, or ammunition companies.” And bills in other states—including in Florida, Indiana and Kansas—are aimed at preventing state pension systems from contracting with financial managers that consider ESG factors as part of investment decisions.

b. Pro-ESG Legislation

Conversely, there are several states with Democratic leadership that are enacting pro-ESG-related legislation. For example, California passed a law requiring that companies doing business in California must disclose greenhouse gas emissions, an Illinois law requires investment managers to disclose their strategies regarding how sustainability factors into investment decisions, and a Minnesota law requires companies with over $1 billion in assets to submit climate risk reports. There are also several proposed bills in New York that would have similar effect.

Unlike the anti-ESG laws that prohibit certain types of conduct, these laws are largely aimed at increasing disclosure to investors. As such, compliance with these laws would require unilateral action, which would not satisfy a fundamental element of an alleged violation of Section 1.

IV. Federal Legislation

At the federal level, there has been some legislation proposed directly related to ESG, although it has not progressed. One recent example is the Protecting Americans’ Retirement Savings from Politics Act (H.R. 4767), a Republican-sponsored bill to prioritize corporate growth and welfare over political issues in the shareholder voting and proxy processes.

Moreover, executive branch agency action in the form of policies or proposed rules may provide some guidance about the types of legislation that may get introduced or replace legislation entirely. For example, the Securities and Exchange Commission has increased requirements for disclosure of ESG-related investments and climate risk disclosures, with the final rule being issued in March 2024. The rule would require funds to disclose their ESG strategies. These agency actions may introduce compliance complexity since complying with securities-related disclosure requirements may increase the risk of antitrust exposure, and vice versa.

V. Implications and Conclusion

Without federal legislation or clear antitrust agency guidance, companies potentially may be subject to a web of (potentially conflicting) state laws regarding ESG practices and run the risk of facing antitrust enforcement actions. Many companies operate across state lines, and it may be difficult for a company to adjust its ESG-related practices to comply with various states’ laws. This could either force a company to decline to engage in ESG practices or subject itself to legal risk. Antitrust scrutiny of ESG practices will likely continue, and there will be considerable uncertainty at least until federal actors and states clarify their approaches to such practices. For now, the political debate on ESG will continue.