Attempts to use public policy to influence and shape society into a utopic ideal are bound to fail. This is in part because society is too complex for any institution to design and even if they could, contradicting goals are tied to appear. This tension is perfectly shown by government efforts to both force investment in green energy and the desire to rewrite antitrust precedent to protect small businesses. The problem with an expansive government is that eventually, it bumps into itself.
The environmental movement is focusing on what is referred to as Environmental and Social Governance (ESG) which covers a wide range of business practices. At its core, ESG focuses on mitigating climate change and other social concerns, a move away from industry profit-seeking towards achieving non-economic goals. The primary social motivation behind these policies is shown by the low returns that ESG funds yield compared to others, and some evidence that poor-performing companies ascribe to ESG as a shield for their lack of economic achievement.
These low returns have caused some to call for legal intervention. This year Congress passed a bill that would prohibit pension fund managers from basing investment decisions on such social goals that include ESG. Biden ultimately vetoed the bill. Fifteen states have enacted anti-ESG measures; more are in the works. Several attorneys general have launched investigations into the largest banks propagating ESG and even filed a lawsuit against the Department of Labor. The Republicans in the House established an ESG Working Group, and are currently holding a number of hearings investigating its practices.
Some level of environmental concern is based on economic reasoning such as the exploration of renewable energy for long-term viability or conservation which balances short and long-term profit. There is also economic reasoning when shareholders have diversified business interests that mirror the larger economy, don’t want negative externalities from one investment to impact others, or risk long-term earnings.
However, the push for ESG to be fulfilled through binding or multi-firm agreements opens it up to antitrust complaints.
A prime example of how such coordinated actions can bump into antitrust concerns is demonstrated by automakers in California. During the Trump administration, the Department of Justice launched an investigation regarding four automakers’ agreements to maintain fuel-efficiency standards that were lower than the law mandated at the time.
The agreement to maintain higher fuel-efficiency standards could have resulted in higher consumer prices, meaning that the agreement between the automakers would have harmed consumer welfare and could constitute a restraint of trade.
According to proponents of ESG-type agreements, voluntary cooperation is not enough to impact meaningful change, thus binding contracts are necessary to achieve environmental and social goals. At the same time, asset managers are voting by proxy with others’ invested funds (unbeknownst to the clients) in pursuit of these environmental/social goals.
The tension between coordinated efforts to reach noneconomic goals is a barrier to many proponents of ESG as social goals are not accepted as a defense in antitrust actions. In 2022, current Chair of the Federal Trade Commission (FTC) Lina Kahn authored a piece in the Wall Street Journal where she states that ESG goals would not stop the agency from investigating otherwise illegal actions and deals.
Under Kahn, it has been widely discussed how the agency has an apparent bias against size. This bias is shared with lawmakers who seek to impose specific regulations and presumptions of anti-competitiveness based on a firm’s size or market share.
In contrast, according to a research review on firm social responsibility, the authors found in part that financially weak firms were less likely to improve their environmental scores. According to the authors this suggests that being able to comply with ESG goals requires capital, which can be a barrier to certain firms. With this understanding, large firms may be best able to implement changes to comply with ESG goals. However, large firms are also the ones facing increased antitrust scrutiny.
The problem with the government attempting to fix a litany of perceived social problems is that eventually, they bump into each other. Those who believe antitrust should focus on protecting “small dealers and worthy men,” want to use the law to protect small businesses. Proponents of ESG initiatives see large market players as potential drivers of both environmental and economic change. Protecting small businesses and the environment can coincide when done by private actors. Plenty of worthwhile goals exist outside the scope of government. When the government gets too big, it contradicts itself.
Tirzah Duren and Kristen Walker work on tech and energy policy for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit www.theamericanconsumer.org or follow us on Twitter @ConsumerPal.