As the private sector has become increasingly engaged in the effort to combat climate change, debates have emerged about the impact and legality of collaboration among firms – particularly those in the same industry.
Hundreds of business climate collaborations have begun in recent years, with goals ranging from the establishment of shared net zero targets to the development of frameworks for carbon accounting. As these groups have proliferated, antitrust questions have arisen regarding joint standard-setting and information sharing in industry-wide collaborations, as well as coordinated engagement by investors and financial institutions.
Antitrust challenges are said to be chilling necessary engagement and the mobilization of private actors to fight the accelerating harms of climate change.
Nowhere is this more obvious than in the anti-ESG efforts of Republican politicians, who have weaponized antitrust theories in their broader effort to obstruct climate action. In the latest salvo, the House Judiciary Committee issued subpoenas to an umbrella of industry-specific climate alliances known as the Glasgow Alliance for Net Zero, or GFANZ, and to a leading shareholder advocacy group, As You Sow, accusing them of antitrust violations.
The subpoenas mark an escalation of the past year’s efforts by congressional Republicans and Republican attorneys general to use antitrust laws to stymie financial institutions’ ESG practices.
Although climate alliances with net zero goals were the initial target, those theories of antitrust violations have largely failed to gain traction, and an expanded set of firms that engage in shareholder advocacy and proxy advice on any ESG-related matter have recently been targeted. The language in the subpoenas is purposefully broad, and demonstrates either a lack of understanding about the inherent complexity and ambiguity of ESG-related actions, or a strategy that is more political narrative than substance.
The effort began in earnest last fall, when 19 Republican state AGs announced an investigation into six large U.S. banks involved with the Net Zero Banking Alliance. Then, in April, 21 Republican state AGs published an open letter to more than 50 large asset managers, claiming potential violations of fiduciary duty obligations and state consumer protection laws due to the managers’ ESG investment activities.
This summer, Congress expanded its own anti-ESG agenda, and the House Judiciary Committee issued a subpoena to Ceres, claiming that the shareholder group “appears to facilitate collusion” through its involvement with Climate Action 100+. Later, the House Judiciary Committee sent investigative letters reciting similar climate and antitrust concerns to two top proxy advisory firms, Glass Lewis and Institutional Shareholder Services, as well as the activist investor Trillium Asset Management, and the hedge fund Engine No. 1.
The GFANZ and As You Sow subpoenas are a continuation of these efforts to weaponize consumer protection laws to resist efforts to address the financial risks of climate change.
Antitrust principles
Two primary federal antitrust statutes govern agreements among competitors: the Sherman Act of 1890, which prohibits monopolization and unlawful trade restraints, and the Clayton Act of 1914, which identifies additional prohibited conduct, including with respect to mergers and acquisitions and interlocking directorates (when the same director – or even limited partner firm – sits on the boards of two or more competing firms).
States can enforce the federal laws, and in many cases have their own antitrust laws. These statutes proscribe unlawful conduct in general terms, establishing broad principles as to how markets should operate fairly and competitively, leaving courts and regulatory authorities to inquire into the specific details of any challenged business practice.
Under these antitrust laws, certain types of agreements among firms – such as price fixing and market share allocation – are deemed so likely to harm competition that they are considered per se unlawful, and antitrust violations will be assumed without the consideration of any potential benefits to the agreements.
By contrast, other agreements – such as mergers, or vertical arrangements – may have both anti-competitive effects and pro-social benefits, and thus are analyzed under a “rule-of-reason” framework to assess the overall effect of the behavior, including “pro-competitive” effects that may be beneficial to consumers. In practice, most antitrust cases are resolved in courts under “rule of reason,” which means assessing the facts of each case and weighing the harms against the benefits.
ESG cartel?
Industry associations have always faced scrutiny under federal and state antitrust laws: these groups are designed to facilitate communication among competitors, and thus naturally invoke the specter of potential antitrust violations. Competitor coordination runs contrary to the broad consumer protection goals of antitrust law to deliver competitive prices while ensuring that businesses operate at high levels of quality and efficiency. Agency guidelines, as well as robust case law, have developed to direct the behavior of trade associations and standard-setting organizations.
GFANZ, Climate Action 100+, and other climate alliances, fall within this tradition of industry trade groups. GFANZ is a global coalition of leading financial institutions committed to accelerating decarbonization in line with the goals of the Paris Agreement. GFANZ alliances are built around information sharing and voluntary standard setting, among other collaborative activities among members.
These attributes of independence and voluntariness are important to establish that under traditional antitrust principles, the coalitions are not vulnerable to group boycott claims. And their behavior is not unusual: voluntary industry standard-setting and trade associations – like the American Petroleum Institute – have long been permissible under U.S. antitrust laws. Indeed, the FTC and DOJ offer guidelines to support the practices of trade associations and standard-setting organizations, clearly distinguishing between collaborative, often pro-competitive, practices, and behavior that violates antitrust law.
It is important to remember that a corporate boycott under antitrust law is not the same as a consumer “boycott” or protest movement to stop purchasing from a specific company. Rather, a corporate boycott is a specific type of horizontal agreement among competitors, where firms agree to take joint action against another competitor.
The intent of a collective boycott must be anti-competitive – like excluding a rival from the market – to raise antitrust concerns. Industry coalitions with shared commitments, such as targeting net zero goals, do not fit this legal definition. Indeed, in the GFANZ alliances, the member financial institutions do not compete with the companies they finance.
There is no case law that suggests that climate alliances are vulnerable under any of these theories, and notably, despite rampant accusations from Republican officials about antitrust violations, no cases have yet been filed.
This may be because, given the legal risks, trade associations typically take precautions to ensure that prohibited topics – like sharing information on pricing or other competitively-sensitive information – are kept out of bounds. The fossil fuel industry itself is attuned to these risks. The American Petroleum Institute, for example, publishes extensive antitrust guidance for its members, and emphasizes in its literature that lobbying is API’s main function. Joint lobbying efforts are one of the main functions of many trade associations, as these efforts to influence legislative or executive action enjoy First Amendment protection.
When professional associations have been found to violate antitrust laws, it is often because the conduct in question veers too close to cartel behavior. The phrase “ESG cartel” does appear in the allegations recited in the subpoenas’ cover letters. However, the term “cartel” invokes specific meaning under antitrust law. In short, it refers to a group of producers who coordinate – illegally – to fix prices, divide markets or customers, limit production, or otherwise restrain trade.
As an initial matter, the use of “ESG,” which stands for “environmental, social, and governance,” is problematic. The term has become casual shorthand for a range of divergent ideas, including not only rigorous portfolio risk analysis, but also aspirational strategies for investors to “do well and do good.” It is also often used simply as a marketing tool.
This unfortunately means the term easily lends itself to misrepresentation. It is unclear here what specific market “ESG” is referring to – an antitrust violation would depend on a precise definition of the market: for a type of fossil fuels, perhaps, or a renewable energy source, or an investment product. Further, there is no group of “ESG” producers that appear to be conspiring here, nor is there an indication of which prices have allegedly been inflated. The phrase “ESG cartel” has a compelling rhetorical flourish, but it is legally meaningless.
Similarly, there does not appear to be merit to the other allegations against As You Sow, a nonprofit organization that engages with companies on behalf of shareholders to reduce greenhouse gas emissions.
One implicit theory in the subpoena is that As You Sow may function in a “hub and spoke” model, where the group engages on topics around climate action with multiple firms in the same industry. But there is nothing illegal about that model. Such behavior is only prohibited by antitrust laws if it facilitates another type of anti-competitive practice – facilitating market collusion by sharing data among competitors, or encouraging monopolization, for example.
That does not seem to be the Judiciary Committee’s claim here. And of course, As You Sow does not compete with the companies it engages with, making the legal arguments for anti-competitive behavior quite difficult to craft.
Vested interests
Perhaps ironically given the current maelstrom, antitrust has actually been underenforced for decades in the United States, under both Republican and Democratic administrations.
During that time, the nation has seen the rise of monopolies and oligopolies across the economy, in industries as diverse as technology and healthcare, airlines, retail, and defense contractors. Many analysts point to this consolidation as a significant driver of inequality, and those concerns have led to a surge of enforcement activity from the Federal Trade Commission and Department of Justice under the Biden Administration.
While prosecutors aim to reinvigorate the anti-monopoly origins of antitrust, some Republicans are aggressively trying to undermine the enforcement efforts of the FTC and DOJ. Nonetheless, they have seized on this moment of increased focus on competition concerns to oppose routine information-sharing and investor engagement in areas like climate change where the fossil fuel lobby has specific interests.
The legitimacy of these antitrust claims should be evaluated in the context of the deep anti-climate interests of the campaign’s funders. While there are legitimate substantive criticisms of ESG and its commercial adoption, the anti-ESG campaign is organized and funded by the fossil fuel industry and antagonizers of robust climate change policy.
The current challenges to proxy advisors and shareholder advocates suggest a widening, but legally weak, Republican effort to challenge the consideration of climate risk in the financial community.
Antitrust is a poor weapon of choice for their fight. Antitrust law, among other purposes, is meant to efficiently allocate resources to serve consumers. And consumers have an interest in a livable climate.
The authors co-lead the Antitrust & Sustainability Project at Columbia University’s Climate Law & Finance Initiative. Ms. Hanawalt is the Director of Climate Finance and Regulation at the Sabin Center for Climate Change Law.
Ms. Hearn is a Resident Senior Fellow at the Columbia Center on Sustainable Investment and co-author of The Myth of Capitalism: Monopolies and the Death of Competition.
