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Republicans Seize on ‘Climate Collusion’ to Muzzle ESG Plans

Nov. 8, 2022, 6:13 PM

Republican warnings that corporate ESG efforts could violate the nation’s antitrust laws are heightening some companies’ go-slow approach on climate efforts, and causing others to call for clearer federal guidance.

“General counsel are definitely concerned, frustrated, and feel they’re being thwarted from doing the right thing,” said Hill Wellford, a partner at Vinson & Elkins.

The pressure became more direct last week when five Republican senators warned the nation’s largest law firms to “fully inform” their clients of risks they would incur “by participating in climate cartels and other ill-advised ESG schemes.”

“Over the coming months and years, Congress will increasingly use its oversight powers to scrutinize the institutionalized antitrust violations being committed in the name of ESG, and refer those violations to the FTC and the Department of Justice,” wrote Sens. Chuck Grassley of Iowa, Marco Rubio of Florida, Tom Cotton of Arkansas, Michael Lee of Utah, and Marsha Blackburn of Tennessee. “To the extent that your firm continues to advise clients regarding participation in ESG initiatives, both you and those clients should take care to preserve relevant documents in anticipation of those investigations.”

The letter references FTC Chair Lina Khan’s response to questions from Cotton about the potential for anticompetitive conduct in the push for stronger ESG initiatives. Khan said the agency has “seen firms come to us and try to claim an ESG exemption, and we’ve had to explain to them clearly that there is no such thing.”

Recipients included the country’s 30 largest law firms by revenue, among them Kirkland & Ellis, Latham & Watkins, DLA Piper, Baker McKenzie, Hogan Lovells, and Ropes & Gray. If Republicans win control of the Senate in Tuesday’s midterm elections, the senators could take action next year in the form of congressional hearings.

The Nov. 3 letter follows a warning in August from 19 Republican state attorneys general, who wrote to BlackRock, the world’s largest asset manager, targeting its role in a climate initiative. BlackRock’s continued participation and “coordinated conduct with other financial institutions to impose net-zero … raises antitrust concerns,” the attorneys general wrote.

Targeting Climate Initiatives

While a company acting independently to reduce its emissions would not generally trigger antitrust concerns, companies often share information about best practices to achieve their goals, sometimes facilitated by standard-setting organizations. Participation in such groups is normally a safe move, but could easily trigger antitrust scrutiny if the organizations facilitate activities like group boycotts, the sharing of competitively sensitive information, or hardcore cartel conduct such as market allocation.

Some corporate lawyers are urging caution amid a national debate about setting ESG goals, said Wellford, who this year co-wrote a paper on the topic.

Dirk Middelschulte, the global general counsel for competition at London-based Unilever, a multinational consumer goods company, said “there is a risk that companies act too cautiously because they are unsure of where the limits are.”

US authorities have offered little clarity on how or if companies can pursue climate initiatives without running afoul of antitrust laws. European regulators have been confronting the problem for years, however, and some have even created climate exemptions to allow such initiatives to proceed.

“The reactions of the state attorneys general send a signal that there is not a very open-minded or welcoming position in terms of ESG cooperation,” Middelschulte said. “That’s something companies will notice and factor into their decision-making when making an ESG cooperation decision. Companies might not cooperate or even contemplate ESG cooperation in such an environment.”

Cotton, who questioned Khan about potential antitrust liability at a Capitol Hill hearing in September, called ESG “an effort to weaponize corporations to reshape society in ways that voters would never endorse at the ballot box,” language repeated nearly verbatim in last week’s letters to the 51 law firms.

Cotton had specifically called out BlackRock for participating in investor-led Climate Action 100+, which says its mission is “to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”

BlackRock said its participation in Climate Action 100+ “is not an informal or formal agreement” to buy, sell, or vote its shares with any other signatory. And BlackRock CEO Larry Fink has said the firm doesn’t coordinate its votes or investment decisions with any external group.

Ceres, a global investor network and one of the founders of Climate Action 100+, said it’s not concerned about the legal challenges because its actions don’t violate antitrust law. Kirsten Spalding, a senior program director at Ceres, said investors “will act in accordance with the law in their respective jurisdictions.”

“No one is trying to do secret deals,” she said, adding that the criticism could come from a misunderstanding of Climate Action 100+. The organization was created five years ago with plenty of legal review, Spalding said, its actions are not a boycott, and it isn’t facing any legal complaints.

‘Systemic Risks’

The Justice Department has raised the issue of possible antitrust violations in the context of climate initiatives before.

During the Trump administration, Justice investigated car companies including Ford and Volkswagen over an agreement they had made with California to aim for lower emissions standards than the White House then sought. The investigation was ultimately dropped, and a DOJ attorney later linked the probe to President Donald Trump’s critical tweets about the California agreement.

Voluntary, unilateral initiatives on best practices—like disclosing emissions or using renewable energy—are unlikely to attract antitrust scrutiny as long as companies can back out of them whenever they want, said Diana Moss, president of the American Antitrust Institute.

More direct collaborations between companies that depend on enforcement mechanisms to keep members compliant are risky, she said.

But Amelia Miazad, a professor at the University of California, Davis School of Law who studies ESG initiatives and their relationship to antitrust, noted that because climate change risks are not confined to specific companies, some ESG efforts likely will require cooperation.

“The financial success of individual companies depends on addressing systemic risks, and those systemic risks can only be addressed collaboratively,” Miazad said.

Global Focus

Some countries are giving companies more flexibility to collaborate on climate initiatives than would normally be allowed. The European Union’s competition authority requested comments in the spring on proposed rules that would allow higher levels of cooperation between companies.

“Horizontal cooperation may lead to substantial economic and sustainability benefits, including support for the digital and green transition,” said Margrethe Vestager, executive vice president of the European Commission, in a statement on the call for comments. The proposed rules aim to ensure that “beneficial cooperation can take place, for example when it comes to sustainability or data sharing,” she said.

Austria added sustainability exemptions to its antitrust laws last year.

And the competition authority in the Netherlands has said that agreements offering greater benefits can receive an antitrust exemption under Dutch law. The authority has taken a leading role on the sustainability question, publishing guidelines stating that sustainability agreements can mostly be made without “major problems.”

Martijn Snoep, who leads the Dutch authority, said that when he was in private practice he encountered companies wanting to enter sustainability agreements “but were afraid” of what regulators might say.

But now, the sustainability question is “on a global agenda of competition authorities worldwide,” he told Bloomberg Law.

‘Where Are the Big Initiatives?’

One climate pledge formed by some of the biggest insurance companies in the world reeled itself in over fear of overstepping on antitrust, Bloomberg News reported earlier this year. Insurance companies including Axa SA and Allianz SE had entered a climate pledge to stop insuring coal mines as part of their goal to cut emissions, but the plan was purposely limited following advice from lawyers, Bloomberg reported.

“This is not a situation where general counsel are waving their hands, saying this is all ghosts and chimeras,” Wellford said about the general concern around ESG scrutiny. “They genuinely believe there’s a danger, and I think they’re right.”

Alec Burnside, a Dechert partner based in Brussels and London, said stricter US antitrust laws can give cover to companies that say they want to participate in ESG initiatives—but might hide behind a fear of legal scrutiny.

Burnside has spent years working with client groups such as Fairtrade, a product certification company that seeks to improve pay and working conditions for farmers on coffee and cocoa plantations. He has experience dealing with how antitrust concerns can limit what companies may see as responsible action.

“No one is saying that ESG is a kind of Harry Potter invisibility cloak: You say ‘ESG’ and suddenly antitrust disappears,” Burnside said. “But it is possible for companies to work together in pursuit of things their customers care about, where even if what they do is restrictive, it may be protected under the antitrust laws because of the benefits it brings.”

To contact the reporters on this story: Dan Papscun in Washington at dpapscun@bloombergindustry.com; Clara Hudson at chudson@bloombergindustry.com

To contact the editors responsible for this story: Gregory Henderson at ghenderson@bloombergindustry.com; Roger Yu at ryu@bloomberglaw.com; Jeff Harrington at jharrington@bloombergindustry.com