Balancing ESG Initiatives and Antitrust Risk

Companies face a difficult choice between taking heed of growing anti-ESG voices while continuing to meet investor and shareholder demands.

For several years, companies have come under intense pressure from their boards, investors, employees, customers, and other stakeholders to adopt ESG initiatives, such as reducing emissions, diversifying workforces and improving labor conditions. Progressive lawmakers have assisted this push, joining the Biden administration, the SEC, and other federal agencies in pursuit of policies designed to move companies toward these goals.

But recently, anti-ESG voices have grown louder. In May 2022, Senate Republicans introduced a bill aimed at limiting the ability of large shareholders to insist on ESG initiatives. In December, House Republicans launched an investigation into whether companies working together to advance ESG goals are violating antitrust laws. The congressional probe follows similar moves from the Missouri and Arizona attorneys general earlier last year.

These competing pressures often leave companies with numerous gray areas to traverse. ESG initiatives may have serious benefits, including higher wages and more efficient products, but they often involve some elements of collaboration with a competitor. Such collaboration can take many forms, including common membership in trade associations, standard-setting activities, or even common investments in early-stage companies. At times, competitors may be encouraged to engage in ESG activities by a common customer.

In this political environment, ESG initiatives come with real antitrust risks, especially when they involve a collaboration between competitors. But there are safe harbors and strategies companies can use to protect their ESG initiatives from meaningful antitrust scrutiny.

Going it alone

Antitrust law treats unilateral and multilateral conduct differently. Companies which act unilaterally rarely raise antitrust concerns when they lack market power — that is, the ability of a single firm, acting by itself, to raise prices or exclude competition. Antitrust law doesn’t establish a threshold to define market power, but courts generally hold that companies need to control at least 50 percent of a market to have it. To benefit from this favorable antitrust treatment, these companies must take care to ensure their ESG initiatives are truly unilateral, and that they do not appear to be the result of a collaboration with a competitor.

Companies with market power may still adopt a unilateral ESG initiative. However, their conduct is more likely to draw scrutiny from antitrust enforcers and private plaintiffs. So working with legal counsel to carefully structure those unilateral initiatives is key.

Collaborating with competitors

Competitor collaborations carry more antitrust risk than unilateral conduct. But not all such collaborations are created equal. Some nearly always harm competition, such as agreements to fix prices, divide markets or customers, rig bids, or boycott suppliers. Courts have found that none of these agreements has a legitimate business justification, making it easier for the government or a private plaintiff to prove an antitrust violation. For example, if an ESG initiative were to result in a group of competitors setting the same price for a product or paying the same price for an input, the initiative would likely draw serious antitrust scrutiny.

Other types of collaborations are easier to defend as pro-competitive. Joint ventures, licensing agreements and trade associations are ubiquitous in many industries, and they rarely raise antitrust concerns which straightforward legal advice cannot address. In its treatment of these competitor collaborations, antitrust law lays out a path for companies looking to adopt collaborative ESG initiatives.

Here are the basics: As long as an ESG initiative does not result in fixing or stabilizing prices, rigging bids, dividing markets or customers or boycotting suppliers, the legality of the initiative will turn largely on the collective market share of the participants in it, and on whether the initiative harms competition.

If the collective market share of companies adopting an ESG initiative is 20% or lower, the initiative is unlikely to raise antitrust concerns. The U.S. Department of Justice and Federal Trade Commission have created a “safety zone” for those competitor collaborations under federal antitrust guidelines.

But while these guidelines are the first steps in building a defensible ESG collaboration, they shouldn’t be a company’s only line of antitrust defense. Ultimately the guidelines are statements of current thinking on prosecutorial discretion at antitrust enforcement agencies, and hence are subject to change. In February, for example, the Department of Justice revoked competitor collaboration and information-sharing guidelines for the healthcare sector which had been in place for nearly three decades.

If the members of an ESG initiative have a collective market share between 20% and 50%, the initiative falls outside the safety zone. Yet the group is still unlikely to hold market power, and thus the initiative is unlikely to harm competition.

For instance, imagine that a group of small companies representing 25% of a market agree to source their parts from a supplier that meets certain ESG standards. Even assuming this joint-sourcing agreement resulted in higher prices for finished products, 75% of the market in this example is unaffected by the agreement, and consumers could easily avoid those higher prices.

However, a word of caution: Defining a relevant antitrust market is not an exact science. Antitrust enforcers and private plaintiffs may have a much narrower definition of a relevant market than companies may anticipate, and narrower markets often lead to higher market shares. Antitrust counsel can be invaluable in helping companies think through whether their defense of an ESG initiative turns on market definition.

Another safe way for companies to structure an ESG initiative is to steer clear of reaching an agreement with their competitors. Here, the avoidance of mandatory terms is helpful: optional industry best practices, non-exclusive codes of conduct and elective certification standards are the sort of voluntary and nonbinding measures that are unlikely to raise antitrust concerns as long as some simple compliance measures are put in place.

Finally, competitors can achieve their ESG goals without raising antitrust concerns if they jointly petition the federal government to adopt them. Genuine attempts to petition the government are protected from antitrust liability under the First Amendment.

Other paths

Even if competitors cannot take advantage of any of these compliance steps, their ESG initiative may still be defensible. For example, ESG initiatives may have no effect on prices or output, or those effects may be outweighed by countervailing procompetitive benefits. ESG initiatives may also have pro-competitive benefits, such as promoting product standardization and interoperability, reducing waste, addressing systemic issues, and increasing wages, even if those procompetitive benefits are realized in markets other than the United States.

However, defending an ESG initiative before an antitrust enforcer or court will be time-consuming and expensive. The new era of ESG and antitrust requires companies to balance ambition and risk, and companies will have to decide whether the benefits of adopting an ESG initiative outweigh the costs of defending it.

Stephen Medlock and Hill Wellford are partners at Vinson & Elkins, practicing in the firm’s antitrust group. Jon Solorzano, counsel at Vinson & Elkins, co-heads the firm’s ESG taskforce.

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.