A prisoners’ dilemma or collective action problem arises. It is in the best interest of each individual consumer and producer, and of society as a whole, to take action to minimize or avoid the physical and economic damage arising from climate change and massive nature loss – but only if everyone does so together, and on a level playing field. If there is inadequate (or no) regulation, carbon taxation, or subsidization, the prospect of a first mover disadvantage discourages efforts to clean up production. The short-term “rational” course of action for each individual producer in such an environment is to continue to exploit nature and emit greenhouse gases with abandon and forego investments to develop cleaner and cheaper products and to bring them to market at scale. Everyone loses.
Cooperation between market players can be a way to solve this market failure, by reducing or eliminating the free rider problem. Recent economic theory adds further nuance, by analyzing the economy not as a system in equilibrium, but as a constantly evolving ecosystem, i.e., a complex web of adaptive systems characterized by feedback processes, where boundedly rational market players act in ways that change the economy, and the evolving shape of the economy in turn affects these agents’ actions, with a dynamic pathway and an end-state that are hard to predict. This analysis suggests there are different phases in innovative processes and the transition to new clean technologies. These include an early R&D phase, where new technologies are developed (like renewables several decades ago, and advanced nuclear today); a subsequent evolution where new technologies start to displace the incumbent (like e-vehicles becoming competitive with internal combustion engine cars); and a “reconfiguration phase” where the new technology is displacing the old, but the wider system around that new technology still needs to be developed and adjusted (as is the case with wind and solar power, which are competitive in themselves, but still need complementary development to deal with, for instance, intermittency). In each of these different stages, different forms of cooperation in the private sector can play a role. This includes net zero alliances such as the Net Zero Asset Owners Alliance and Climate Action 100+: “By joining together business leaders—and sometimes civil-society and government actors—alliances can help firms be more ambitious, responsible, and effective in their efforts to accelerate systems change and save the planet.” The ultimate goal would be to create social, economic, and technological tipping points towards a net zero economy.
Many forms of sustainability cooperation do not affect competition at all, and raise no issues under antitrust law. Whitelisted examples in the EU and UK Guidelines include:
- Internal initiatives, like limiting printing, waste, and consumer plastic use within the business;
- Joint lobbying to the government on sustainability issues;
- Joint advertising of clean products, services and sustainable policies covering all products industry-wide;
- Industry-led training and education available to all competitors;
- Agreements to comply with laws and regulations and forgo illicit commercial activity;
- Voluntary codes of conduct or targets, leaving competitors free to decide on implementation;
- Sustainability standards that meet the criteria for a “soft safe harbor”;
- Objective and non-binding lists of (un)sustainable practices, suppliers, and inputs;
- Joint R&D efforts to develop and market products and services that would not come to market (or not as quickly and cheaply) without cooperation, for instance, if the parties could not develop the technology alone, and their capabilities are complementary; and
- Certain coordination between shareholders to encourage investee companies to transition to a clean economy, or to divest from certain sectors.
The Guidelines also warn against practices that are clearly not allowed under antitrust law, not even when they purport to reduce environmental damage or spur the development of climate technology. These include the following blacklisted agreements:
- Price fixing and output limitations agreed between competitors to raise their prices and profits, and benefit financially at the expense of consumers;
- Geographic or product market allocation;
- Information exchanges, standards, or coordination that go beyond what is reasonably necessary to support a permissible sustainability arrangement;
- Agreements to pass on cost of emission reductions, or costs of emissions trading rights;
- Limitation of innovation;
- Agreements not to be more ambitious in pursuing sustainability goals than required by existing regulation; and
- Agreements to undermine or circumvent regulation.
The analysis under EU, UK, and US law of these whitelisted and blacklisted types of agreements is unlikely to differ. The situation seems less clear, however, with respect to agreements that potentially restrict some aspects of competition but may be redeemed by countervailing benefits or efficiencies. These agreements qualify for exemption or a rule of reason under EU and UK law, and in certain other jurisdictions, but currently lack explicit guidance in the US. These include, for example:
- Arrangements to “phase out, withdraw, or, in some cases, replace non-sustainable products (for example, plastics or fossil fuels, such as oil and coal) and processes (for example, coal-fired steel production) with sustainable ones.”
- Binding joint codes of conduct for supply chains, especially when combined with an agreement not to buy from suppliers who do not comply with objective sustainability rules;
- Open sustainability standard setting outside the “soft safe harbor” mentioned above, based on objective criteria, with the specifications available for all competitors to use, on fair and reasonable and non-discriminatory terms;
- Joint purchasing of sustainable inputs, in order to achieve upstream economies of scale, or speed up availability of such input on an affordable basis;
- Joint production of sustainable products, in order to achieve economies of scale or scope;
- Agreements not to supply products or services (including finance or insurance) for objectively unsustainable projects, like high-emissions activities, or new unabated fossil fuel development; and
- Coordination between shareholders that could affect competition, but that is justified by efficiencies or sustainability benefits.
The EU and the UK Guidelines discuss conditions that must be fulfilled for this third group of agreements to be allowed. Under Article 101(3) TFEU and Section 9 of the UK Competition Act 1998, these agreements are exempted from the prohibition under antitrust law if they genuinely (1) contribute to improving the production or distribution of goods or to promoting technical or economic progress, including environmental and climate sustainability; (2) consumers receive a fair share of the resulting benefits; (3) the restrictions in the agreement are essential to achieving these objectives; and (4) there is enough competition left in respect of the products in question.
There is little precedent in US antitrust law specifically with respect to sustainability cooperation. During the first Trump administration, the US Department of Justice (DOJ) opened an investigation into auto companies coordinating with California to limit emissions, but that case was dropped absent evidence of a horizontal agreement. As a result of this policy gap and perceived legal uncertainty in the US, international companies are unwilling to come forward with EEA-wide or world-wide sustainability cooperation, even if permissible in EEA, UK and elsewhere, since arrangements at that level would likely have effects in the US as well. It has been suggested that the Federal Trade Commission (FTC) and the DOJ should update the Guidelines on Horizontal Cooperation between Competitors to reflect an analysis for sustainability agreements under a rule of reason, but the Guidelines are now withdrawn.
The writing on the wall in the US
The Heritage Foundation Report. In the US, climate initiatives have drawn political opposition. The Heritage Foundation’s Project 2025 report, published in April 2022, recommended that the FTC set up an ESG/DEI collusion task force to investigate firms, particularly in private equity, to determine whether ESG is used to “meet targets, fix prices, ... reduce output,” or otherwise violate antitrust laws. Even though the incoming President repudiated that report during his campaign, there remains a possibility that the FTC or DOJ might take that recommendation on board.
The House Majority Reports. Net zero alliances between financial institutions and insurance companies have been targeted with legal threats, which caused several institutions to leave, and drove alliances to pull back from their stated goals. In July 2024, the majority in the US House Judiciary Committee issued an interim staff report (the “Majority Report”) asserting that a “ ‘climate cartel’ of left-wing environmental activists and major financial institutions has colluded to force American companies to ‘decarbonize’ and reach ‘net zero.’ ” Organizations like Climate Action 100+, Ceres, CalPERS, and Arjuna, for instance, allegedly “declared war on the American way of life,” to limit how Americans “drive, fly, and eat.” They allegedly did this through collective boycotts, “forcing corporations to disclose their carbon emissions, to reduce their carbon emissions, and … handcuffing company leadership and muzzling corporate free speech and petitioning.” The report was followed by a hearing by the House Judiciary Committee, and on July 31, 2024 by a demand for production of documents sent to more than 130 companies, retirement systems, and Government pension plans allegedly involved in coordinated investor action to encourage investee companies to transition to net zero, through Climate Action 100+.
The Majority Report was political in approach and contained little legal analysis. It concluded that it will “examine the sufficiency of federal law” and “whether legislative reforms are necessary,” effectively acknowledging that there is no basis for accusations of collective boycotts under current antitrust law.
On December 13, 2024, the US House Judiciary Committee majority supplemented the Majority Report with additional allegations concerning the alleged “climate cartel’s ‘net-zero’ pressure campaign” against ExxonMobil, which led to the replacement of three of ExxonMobil’s board members and the adoption of net zero commitments by ExxonMobil for the first time (the “Supplemental Report”). And just before Christmas, the Committee send information requests to 60 asset managers about their involvement in the Net Zero Asset Managers’ initiative.
The Supplemental Report is thin on legal analysis, too. The Report cites a few cases as authority for the proposition that: “Under U.S. antitrust law, competitors may not self-regulate markets through ‘private governance’ designed to reduce the output of disfavored products.” The bare citations in the opening paragraph, without explanation or elaboration, fail to mention the rule of reason. Two of the cases cited, FTC v Wallace and Fashion Originators Guild, involved a horizontal attempt to exclude rivals - which is neither the aim nor effect of investor initiatives to encourage climate action by portfolio companies. Two others, National Society of Professional Engineers and Indiana Federation of Dentists, concerned agreements between rivals to restrict price or other information to customers, which the defendants claimed were necessary to ensure quality of service. These cases, too, concerned horizontal agreements where the competitive impact was felt in the market where the parties were active, and the purpose was to raise prices. While even these cases recognized that such restraints on competition should be analyzed under the rule of reason, it was no surprise that the Supreme Court concluded in these cases that “the discipline of the market” would deliver the optimal outcome for consumers. In the case of climate agreements to remedy market failures, on the other hand, unmitigated market forces have exactly the opposite effect, harming consumer welfare. The Supplemental Report does not even begin to address this, and the cases it fleetingly cites do not support the conclusions it reaches. One can legitimately conclude that these Reports are intended to intimidate rather than enlighten. The recent withdrawals from the NZBA, and the suspension of the NZAM suggest this strategy may have been effective, whatever its merits.
The House Minority Report. A report from Democratic members of the House Judiciary Committee (the “Minority Report”) rebutted the Majority Report with a detailed factual and legal analysis. It found that “[i]nvestor-led ESG initiatives respond to a genuine demand from investors for greater transparency into public companies’ exposure to climate change”, and “[t]he evidence produced in this investigation undermines, rather than supports, theories of potential antitrust liability for these ESG initiatives”. It mentioned the need to avoid free rider problems and “first mover disadvantages” as a justification and concluded: “There is no theory of antitrust law that prevents private investors from working together to capture the risks associated with climate change. There is certainly no antitrust law that prevents investors from asking corporations how they plan to transition to a climate-resilient economy.” To the contrary, petitioning for climate-related policy change, and exercising rights to vote on shareholder proxy resolutions, are allowed under “longstanding precedent immunizing expressive activity from antitrust condemnation” and “an actual group boycott of fossil fuel companies motivated by a desire to end climate change could likely make a colorable argument for First Amendment protection.”
Recent appointments to US antitrust leadership suggest the debate may continue. The new administration tapped Andrew Ferguson as the chair of the FTC. While much of the FTC and DOJ attention may be directed at the digital sector, continuing the recent Brandeisian streak in that area, Ferguson’s application for the position stated that he might “investigate and prosecute collusion on DEI, ESG, and advertiser boycotts, etc.” At the same time, Ferguson promises to “protect freedom of speech” and to stay away from “politically motivated investigations”.
The test case – Texas v. Blackrock
Eleven State Attorneys General led by Texas stole a march on the Federal antitrust authorities, on November 27, 2024. Texas v. Blackrock, State Street, and Vanguard is one of the first US court challenges under antitrust law against climate cooperation.
The Plaintiff States claim that BlackRock, State Street Corporation, and Vanguard Group (the “Defendants”) engaged in unlawful, anti-competitive practices in the name of ESG activism that “artificially constrained the supply of coal, significantly diminished competition in the market for coal, increased energy prices for American consumers, and produced cartel-level profits for the defendants.” The causes of action are two-fold: first, that the Defendants’ acquisitions and use of stock in coal companies allegedly resulted in “concentrated ownership of horizontal competitors [which] poses a significant threat to competition in the markets for coal” (assessed under Section 7 of the Clayton Act). Second, the Defendants’ use of their shares “by engagement, by proxy voting, and otherwise” to lessen carbon emissions by reducing coal output is said to have resulted from an unlawful agreement that reduced competition in the coal markets (analyzed under Section 1 of the Sherman Act).
Section 7. The Section 7 complaint observes that the Defendants have a collective stake of between 8% and 34% of the eight publicly-held coal producers (which represented c.46% of US domestic coal production). It asserts that the Defendants individually wield “immense influence” over the publicly-held coal companies, and as the three largest shareholders of every publicly-held coal company in the U.S., collectively “possess a power to coerce management that is all but irresistible.” While normally, an investor’s power to influence management decisions, such as output or pricing, poses an insignificant risk to competition, the Plaintiff States insist that the Defendants’ significant investment across these publicly held coal companies puts the Defendants in the position to “influence the entire industry.” Even though they do not actually allege facts showing that the Defendants’ minority shareholding conveys control of these companies, they argue that the Defendants’ investments across all public coal companies “pose a similar risk to competition as an outright merger of those competing coal producers.” It is the Plaintiff States’ belief that the Defendants’ acquisitions of competing coal companies alone is therefore prohibited by under Section 7 of the Clayton Act. This is a novel theory, even apart from the questions whether the theory reflects the real objective in bringing the case, and whether the facts fit the theory.
Section 7 of the Clayton Act does “not apply to persons purchasing such stock solely for investment and not using the same … to bring about, or [attempt] to bring about, the substantial lessening of competition.” Defendants bought the shares as investment rather than to bring about a merger, and any active stewardship was incidental to the protection of the value of their investment rather than to take control of management. The Plaintiff States allege, however, that the Defendants no longer remained passive investors. “Defendants openly committed to wielding the substantial power of the shares they control to recalibrate carbon production and competition to reduce overall coal production and thereby increase market-wide profits above competitive levels.” All three Defendants joined Climate Action 100+ (“CA 100+”) and the Net Zero Asset Managers Initiative (“NZAM”), and are alleged to have committed to reach net zero greenhouse gas emissions and achieve “decarbonization goals” by 2050 across all assets under management. Specifically, they each committed to phasing out coal assets and ceasing support to coal companies that engage in certain activities, such as building new coal infrastructure or expansion of mining. The Plaintiff States allege that all three Defendants publicly commented that they would use their shareholder rights to enforce their goals.
The Plaintiff States claim that the “Defendants’ pressure campaign also had its intended effect”—the public coal companies, complying with the Defendants’ wishes, reduced coal production. The Plaintiff States do not allege the coal companies actually exchanged information to determine available reserves or otherwise coordinated a reduction in output, or that the shareholders somehow caused the coal companies to raise prices, but still claim that the effect of the Defendants’ “sharing of information, communications with management, and their voting of their shares” drastically constrained competition in domestic coal markets. This meant, they say, that when coal prices spiked in 2022, the coal companies did not expand output accordingly. In summary, the “Defendants blocked their portfolio Coal Companies from responding to market forces—a response that would have lowered energy prices for all Americans.” The Defendants allegedly created an artificial shortage of coal, leading to an increase of prices, and resulting in “cartel-level” profits for the Defendants.
Section 1. The Section 1 claim seems underdeveloped. There appears to be no allegation of horizontal collusion to fix prices or reduce output in a relevant financial services market, or that the exercise of shareholders’ rights reduced competition between Defendants in attracting investors or opportunities. While the Complaint alleges exchange of competitive information, it does not identify exactly what non-public information was exchanged; nor does it prove a hub-and-spoke cartel in the coal markets (perhaps because it would implicate the coal companies and could lead to damage claims against them). The Defendants will undoubtedly point out that they made and make their investment and stewardship decisions independently, and that their purpose is not to raise prices or reduce their output and thereby benefit financially, or to exclude rivals from the market to increase their market power, but to comply with their fiduciary duty to protect their shareholders’ long-term interests against climate damage. Indeed, a recent EDHEC study concludes that even without climate tipping points, financial assets could lose 40% of their value as a result of climate change physical and systemic risk.
Apart from these points, questions arise about the causal connection between the alleged conduct and the alleged coal or energy price increases. It appears from the Complaint that the reductions in coal production were mainly the result of reduced production in the two largest mines, Black Thunder Mine and North Antelope Rochelle Mine. That decrease can largely be attributed to the fact that the coal power plants downstream from these mines were retiring or repurposed. Further, cheap renewables, cheap gas from fracking, and the 2020 Russia–Saudi oil price war, all appear to be alternative reasons behind the fall in production. The Defendants may also not have had as much influence on coal prices as the Plaintiff States allege. About 85% of coal produced in the US is consumed domestically. The majority of domestic coal trade takes place under long-term or medium-term contracts with fixed prices. Only two of the six privately-held coal mines sampled were able to (modestly) raise output when prices spiked in 2022. Therefore, contrary to the Plaintiff States’s assertion, producers were largely unable to take advantage of higher prices even when they temporarily emerged with the price shock in 2022.
In addition to the allegations under Section 7 of the Clayton Act and Section 1 of the Sherman Act, the Plaintiff States claim that the Defendants’ actions violated State antitrust law in Texas, Montana, and West Virginia, and that BlackRock has engaged in deceptive trade practices, in violation of Texas law, when it made statements regarding its non-ESG funds. The State Plaintiffs seek damages, injunctions, equitable relief, and divestment.
Non-antitrust implications of the Complaint. Apart from the antitrust flaws, a concern arises that Plaintiff States are proposing to interfere in the shareholders’ business judgment on how to limit climate change risks in order to limit climate damage to the remainder of their portfolio. This seems inconsistent with the laissez faire approach the States otherwise advocate. The possible implications for investment funds and managers are noteworthy, too. The Plaintiff States argue that “when a shareholder owns stock in a single firm, maximizing the profits of that firm maximizes the profits of that shareholder; but when that shareholder owns stock in all the firms that compete in an industry, maximizing the profits of the entire industry maximizes the profits of the shareholder.” This supposedly influences management, too: “when management knows their firm is owned by so-called ‘horizontal shareholders’—i.e., by shareholders who own shares in the competing firms across an industry—management has an incentive to maximize the profits of the industry. In other words, the incentive is to operate as a cartel.” It is unclear how, but if that argument succeeds, it could present asset owners and asset managers with a dilemma: to either become silent and passive (in which case they can be universal asset owners, but not be active stewards and cannot take action to reduce systemic “beta” risk so as to preserve asset value, even if that is in the interest of their beneficiaries), or to limit active investment to one investee company per market only (in which case they can be active stewards, but not engage in proper risk spreading so as to reduce “alpha” risk, even if that is in the interest of their beneficiaries). They may not be able to be both active investors and own shares in companies that compete. These implications, if the complaint is upheld, could curtail the investment thesis of ETFs and index funds (including anti-ESG funds like Vivek Ramaswamy’s Strive Management that engage in shareholder activism), curb universal asset ownership as a method to spread idiosyncratic risk, and interfere with shareholders’ rights and fiduciary duties that asset owners owe to their investors and other beneficiaries.
The case also raises questions under the free speech protections of the Constitution. The goal in this case is not rent-seeking through a refusal to deal, but the protection of asset values and reduction of risks and damage for investors, through investment in and active engagement with portfolio companies. If the Defendants’ actions were “designed to force governmental and economic change”, as the plaintiffs appear to think, they did so by bringing awareness to and taking financial action on climate change as an important political and economic issue of the day. The Defendants thus enjoy protections under the First Amendment’s freedom of speech clause, which includes “commercial speech” – even profit-motivated speech. In fact, “[t]he First Amendment requires heightened scrutiny whenever the government creates ‘a regulation of speech because of disagreement with the message it conveys.’”
The divestment remedy the Plaintiff States seek raises its own questions: it is not only ironic, considering that Texas and other States have opposed calls for divestment from fossil fuel companies, but could also have a negative impact on listed companies – beginning with the coal companies themselves. Most of these large asset managers own shares in hundreds of public companies. If they had to divest, it is unclear who would step in to purchase those interests, thus potentially impacting the liquidity, share prices, and access to capital for those companies.
Efficiencies defense and the rule of reason
It is conceivable that the claims in Texas v. Blackrock will be dismissed for failure to state a claim because, for instance, there are no allegations of a conspiracy to harm competition among asset managers, no merger or acquisition of sole or joint control over the coal companies, no direct financial benefit to the Defendants, and the Defendants are not active in the markets where effects are allegedly felt. Moreover, no hub-and-spoke cartel is properly alleged. Alternatively, the claims might not survive a motion for summary judgment, or may fail in trial, for instance, because there is no evidence of acquisition of control, no agreement (since each party decided independently in the exercise of its fiduciary duties), no market power, no competitive effect, or no causal connection between the alleged anticompetitive conduct and reduction in output, as discussed above. In addition, the claims could be found to interfere with shareholders’ rights, freedom of speech, or fiduciary duties.
Even if a complaint overcame these and other hurdles, arrangements like the alleged are not an agreement “whose nature and necessary effect are so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality”, which would be “illegal per se” (for purposes of Section 1). A rule of reason would therefore apply under Section 1, which dictates that courts consider whether the benefits of the agreement at issue outweighs any competitive harm, as discussed below.
Similarly, for purposes of Section 7, the arrangements alleged would not necessarily bring about a “substantial lessening of competition”. Outgoing FTC Chair Lina Khan suggested that “[t]he laws … prohibit mergers that ‘may substantially lessen competition or tend to create a monopoly.’ They don’t ask us to pick between good and bad monopolies.” The point is, though, that an arrangement that resolves a market failure or creates efficiencies does not lessen the competitive process but improves it.
Accordingly, “[t]he trend among lower courts … has been to recognize or at least assume that evidence of efficiencies may rebut the presumption that a merger’s effects will be anti-competitive.” Defendants here could legitimately argue that their actions improve effective competition, and would “result in significant economies and that these economies ultimately would benefit competition and, hence, consumers.” The efficiencies would have to be “merger specific,” in the sense that the transaction is necessary to achieve the efficiencies, and they cannot be obtained by one party acting alone. They must also verifiable and not speculative. The considerations mentioned in the context of the rule of reason below would be relevant in this context, too.
A rule of reason proceeds in accordance with a four-step burden-shifting approach:
“[P]laintiff bears the initial burden of showing that the challenged action has had an actual adverse effect on competition as a whole in the relevant market . . . . After the plaintiff satisfies its threshold burden of proof under the rule of reason, the burden shifts to the defendant to offer evidence of the pro-competitive ‘redeeming virtues’ of their combination. Assuming defendant comes forward with … proof [of procompetitive justifications], the burden shifts back to plaintiff for it to demonstrate that any legitimate collaborative objectives proffered by defendant could have been achieved by less restrictive alternatives, that is, those that would be less prejudicial to competition as a whole. Ultimately, it remains for the factfinder to weigh the harms and benefits of the challenged behavior.”
The diagram below illustrates these steps for assessment under a rule of reason for sustainability agreements. We then discuss each of the justification steps.
