Antitrust Considerations for ESG Initiatives

There is a growing awareness of and societal demand for companies to undertake serious environmental, social, and governance (“ESG”) efforts. Often overlooked, though, are the antitrust implications of ESG-driven business decisions. The antitrust implications of ESG are widespread, from considerations related to information sharing to consensual limits on the supply or demand in a business’ supply chain to potentially even considerations in merger review, as reflected by reports that U.S. antitrust enforcers have requested merging parties to submit ESG policies.

Perhaps most startling is the fact that U.S. antitrust law can be an impediment to those attempting to effectuate environmental and social change with others. This includes coordinating efforts deemed necessary for the survival of our planet. For example, COP26’s goal to reach global net zero by 2050 is so significant that it cannot be achieved without intra-industry coordination. Or, for companies that rely on or supply finite natural resources, especially those that are rapidly decreasing in volume, coordinated resource conservation (i.e., output reduction) efforts may be needed to ensure reliable, long-term supply for future generations. Yet, well-intentioned supply chain coordination that results in diverting demand or reducing supply may be deemed anticompetitive under today’s antitrust standards.

Antitrust Pitfalls in ESG Coordination
Many ESG policies can be implemented unilaterally and, therefore, are less likely to create significant antitrust risk. ESG initiatives that seek to effect large-scale change, however, may require industry-wide action. Characteristics and outcomes of successful, uniform, wide-ranging ESG implementation may include compulsion and coordination leading to reduced supply or higher prices. Coordinated resource conservation in the form of output reduction of certain inputs in a supply chain, for example, risks challenge as a per se violation of the Sherman Act, regardless of good-intentioned ESG motivations.

In 2019, the DOJ initiated an investigation into whether Ford, Volkswagen, Honda, and BMW violated federal antitrust laws when they agreed to follow California’s strict vehicle fuel-economy targets instead of the more relaxed federal regulations. The DOJ closed the investigation after only five months, not taking any further action. Outside the U.S., foreign competition agencies have brought enforcement actions against companies coordinating on sustainability initiatives. In Indonesia, palm oil producers signed the voluntary Indonesian Palm Oil Pledge (“Ipop”) whereby they undertook to buy palm oil from farmers practicing sustainable agriculture. Two years later, Indonesia’s antitrust authority, the Komisi Pengawas Persaingan Usaha (“KPPU”), took issue with Ipop. The KPPU alleged that the pledge amounted to a boycott of farmers who could not afford to implement sustainable agriculture and barriers to entry protecting large, commercial palm oil farmers from smaller palm oil farmers.

Even if the coordination does not entail direct restrictions on supply or demand, supply chain coordination carries the risk of side agreements that might not be necessary to otherwise lawful coordination. In 2011, the European Commission charged household products companies with an antitrust violation following their implementation of an initiative to reduce waste from laundry detergent boxes and bags through their trade association. The EC fined the companies €315 million after finding that the initiative included agreements to maintain prices, eventually increase prices, exchange pricing information, and restrict promotional activity.

In the U.S., the antitrust agencies have provided limited guidance on the antitrust implications of cooperative ESG initiatives. The antitrust agencies’ positions can be largely gleaned from their 2000 Guidelines for Collaborations Among Competitors, FTC Staff Advisory Opinions, and DOJ Business Review Letters. The opinions and letters include guidance for a variety of industry initiatives, such as an ethical supplier program and a fishing cooperative.
Each generally tracks well-established antitrust principles and the 2000 Collaboration Guidelines, emphasizing competitor collaborations are unlikely to generate anticompetitive effects when they are voluntary, impose non-binding commitments, aggregate any shared information, and do not contain agreements on competitively sensitive matters (e.g., inputs, prices, outputs, etc.).

In 2015, the FTC provided some relevant, albeit brief, targeted guidance titled “Doing Good Well.” In this guidance, the FTC reiterated that joint pursuit of “laudable social welfare objectives” by competitors violates U.S. antitrust law if it involves per se violations (output restriction, price increase, etc.) or collective competitive harm under a rule of reason analysis. Generally, according to the FTC, competitor collaborations do not raise antitrust concerns unless reducing input, increasing prices, or reducing other forms of competition, such as quality or innovation. That is, antitrust laws do not ultimately “preclude collective action in pursuit of social welfare objectives,” but cooperative arrangements among competitors, even if only for adoption of environmentally- or socially-beneficial goals, “are proper matters for antitrust concern.” Within the context of competitor agreements in pursuit of “laudable social welfare objectives,” the FTC observed the following best practices:

(i) objectives should not be facially anticompetitive;
(ii) competitive decisions should continue to be made on an individual basis;
(iii) shared information should be aggregated; and
(iv) price increases for U.S. consumers should be unlikely.

How Can ESG-Good Be Antitrust-Harmful?
Given the public attention on ESG initiatives, it is possible that some degree of ESG “good” could weigh positively against anticompetitive effects if the judiciary and U.S. agencies develop a legal framework that moves beyond the current antitrust standards focusing on the potential for increased prices and reduced output. Where consumers prefer a higher quality, more expensive environmentally-friendly product, for example, it is plausible that consumers would not be harmed by higher prices (and suppliers would not need to coordinate or collaborate given the consumer demand). Disrupting decades of precedent may be difficult, especially where disruption could lead to higher prices for consumers.

Eventually, the U.S. antitrust laws will be forced to confront ESG head on. As the climate situation becomes more dire calls for widespread coordination will intensify. To ensure that antitrust law is not a roadblock to implementation of critical ESG initiatives, the antitrust bar must consider how best to address competitor collaborations while not diminishing antitrust law’s ability to safeguard fair competition and protect consumers.

Nicholas Putz is an associate in the Antitrust practice. He advises clients on a range of antitrust and competition issues while regularly representing them before the U.S. Department of Justice and U.S. Federal Trade Commission. His practice focuses on merger clearances, agency investigations, and civil litigations.

Noah Brumfield is a partner in Allen & Overy’s Antitrust practice and splits his time between Washington, D.C. and Silicon Valley. He partners with clients to craft and execute global antitrust strategies while also representing them before US courts, the US Department of Justice, Federal Trade Commission, and the various states’ Attorney General offices. Noah draws on his 20 years of experience with complex cross-border antitrust issues, with a focus on how the antitrust laws intersect with intellectual property.