Complexities in the ESG landscape: pursuing targets through business collaboration

Collective ESG initiatives carry a range of risks 18 min read

Ongoing regulatory and geopolitical developments have demonstrated that environmental, social and governance (ESG) considerations continue to evolve in subject matter and complexity. One area of emerging complexity in Australia and abroad relates to collective initiatives aimed at securing ESG-related targets and objectives.

This Insight explores the impacts of an overseas proceeding for Australian businesses—particularly investment and asset managers—when participating in collective ESG initiatives and managing potential risks including in relation to competition law.

Key takeaways 

• Businesses are participating in collective ESG initiatives as a way of implementing public commitments to achieve ESG-related targets or outcomes. However, there is growing momentum around reconsidering participation in these initiatives, with recent legal developments overseas highlighting potential risks, including in competition law. There are a range of sustainability and other ESG initiatives that companies can engage in without giving rise to issues under competition law. However, certain types of conduct may create risks. Some of these risks have been highlighted in the US proceeding Texas v Blackrock,¹ which has put a focus on the conduct of investment managers that, as members of prominent climate-focused investor alliances, are alleged to have engaged in anti-competitive conduct. While this style of claim has not yet surfaced in Australia, our legal framework offers a pathway for businesses to seek regulatory authorisation to engage in certain 'sustainability collaborations' that may otherwise be prohibited as a matter of competition law.
• Beyond potential competition risks, businesses, including investment managers, must remain conscious of their other obligations at law when participating in collective ESG initiatives. Relevant obligations include a manager's duties to act in its members' best financial interests.
• To manage these and other risks, companies may consider: seeking regulatory authorisation, as appropriate; ensuring their participation in collective initiatives does not conflict with other obligations at law; and putting strategies and processes in place to align ambition with practice. As is established practice for some sustainability collaborations, companies may also consider implementing protocols to guard against potential competition law issues, including by setting parameters for what can or cannot be discussed with other participants in meetings.

Who in your organisation needs to know about this?

Boards, in-house / general counsel, sustainability teams, external and regulatory affairs teams, and risk and compliance teams.

Collective ESG initiatives and competition considerations

The pursuit of ESG-related outcomes has been on corporate and social agendas for some time. For instance, in 2024, 45% of Fortune 500 companies (an index representing the 500 largest companies in the US) planned to be net zero by 2050. The prevalence of corporate ESG-related ambitions is also reflected in a range of businesses participating in collective ESG initiatives. Prominent examples include the Net-Zero Asset Owner Alliance, the Net Zero Asset Managers Initiative, Climate Action 100+ and the United Nations Principles for Responsible Investment. Membership of these initiatives can convey a clear signal to consumers, markets and civil society that a business has formally committed to achieving certain ESG goals.

However, in an evolving regulatory and geopolitical landscape, there is a growing sense of uncertainty when it comes to pursuing ESG-related targets alongside other business objectives. Adding to this, consumers and other stakeholders continue to scrutinise companies' ESG credentials, including regarding commitments made as part of collective initiatives and the potential for any misalignment when it comes to actual practices. As a result of these and other factors, there is a growing momentum when it comes to companies reconsidering and, in some cases, withdrawing from collective ESG initiatives. At the same time, some companies have dialled back public commentary while continuing to work towards ESG goals for a range of reasons, including commercial imperatives, stakeholder and investor expectations, and anticipation of potential domestic law requirements.

The complex considerations when participating in collective ESG initiatives are further highlighted by the intersection of ESG and competition law. In a recent proceeding in the US, Texas v BlackRock, it was alleged that certain investment managers engaged in anti-competitive conduct as signatories to prominent climate-focused initiatives.

Texas v Blackrock

In November 2024, a group of 11 states in America, led by Texas, brought a proceeding against three of the largest institutional asset managers in the world: BlackRock, Vanguard and State Street Global Advisors. The lawsuit alleges various contraventions of antitrust laws through the defendants' acquisition and exercise of shareholdings across nine publicly held coal companies in the US, as part of a pursuit of specific climate targets.

The defendants were signatories to two prominent climate-focused investor alliances: the Net Zero Asset Managers Initiative (joined by all three defendants but subsequently exited by BlackRock); and Climate Action 100+ (joined by BlackRock and State Street, but subsequently exited by both firms). It is alleged that, as part of these initiatives, the defendants made public commitments to achieve net zero emissions for all assets under their management by 2050 and reduce thermal coal production.

The plaintiffs allege the asset managers have violated US antitrust laws on grounds that include:

• their acquisition and exercise of shares in particular coal companies has had the effect of substantially lessening competition; and
• relevantly, through their participation in the Net Zero Asset Managers Initiative and Climate Action 100+, as well as through proxy voting and shareholder engagement, they entered an unlawful agreement in restraint of trade to leverage their common ownership of shares to coerce coal companies to reduce output, which yielded supracompetitive profits for the defendants.

They also allege BlackRock deceived investors by representing that funds invested through certain investment products would not be invested in companies that consider or promote ESG outcomes (so-called 'non-ESG funds'), when BlackRock invested non-ESG funds in companies, or otherwise leveraged its holdings in those companies, to pursue ESG goals. This aspect of the claim is discussed below.

The plaintiffs seek remedies including damages, civil penalties and injunctive relief (in the form of the asset managers divesting from the coal companies). After an unsuccessful attempt to dismiss the proceeding, the asset managers filed their defences recently in September. The asset managers deny they used their shareholdings to 'affect a substantial reduction in competition in coal markets' and reduce output, and claim that their actions were pro-competitive, lawful and in their 'unilateral business interest'. In this respect, the asset managers seek to rely on a safe harbour under US law which permits the purchase of shares which may have the effect of substantially lessening competition, provided the purchase was 'solely for investment' and not for the purpose of substantially lessening competition (whether by exercising any votes attached to the shares or otherwise). The asset managers also claim there is no causal link between their alleged conduct and reduction in coal output, and point to other forces, including the availability of more affordable natural gas, falling demand for coal and increased environmental regulations, as the drivers behind shifts in coal production.

The case has attracted the attention of federal authorities, with the US Federal Trade Commission and Department of Justice filing a statement of interest in the case. These authorities have sought to clarify the agencies' position on the correct application of US antitrust laws, which supports the states' case. However, the statement also provides commentary to the effect that US antitrust legislation permits passive fund investing, shareholder advocacy can enhance corporate governance, and active investing does not necessarily harm competition. What does this mean for Australian businesses?

Texas v Blackrock raises interesting questions in relation to competition law and the boundaries of investing for purposes that include ESG-related ones. While similar claims are yet to be aired in Australia, the legislative prohibitions the subject of the US proceeding are similar to those under the Competition and Consumer Act 2010 (Cth) (the CCA).

Cartel conduct and other anti-competitive practices

Environmental initiatives and collaboration, particularly between competitors, may give rise to a range of conduct prohibited under the CCA. For example:

In its guide for business on 'Sustainability collaborations and Australian competition law', the Australian Competition and Consumer Commission (ACCC) outlines that commitment to a non-binding, industry-wide emissions reduction target is unlikely to raise competition concerns, provided each participating business independently determines whether and how it will meet the target, and continues to independently set its own prices. However, as is alleged in Texas v Blackrock, conduct may carry risk in circumstances where market participants agree on how to achieve targets and subsequently seek to influence decision-making to further certain environmental objectives.

The spotlight on this distinction between unlawful coordination and permissible alignment on climate targets is highlighted not only by this US case. It was also the subject of a recent investigation in New Zealand. Following a complaint from Federated Farmers of New Zealand, the New Zealand Commerce Commission investigated five major banks in relation to concerns of anti-competitive conduct regarding the NZBA. The banks account for 97% of agricultural lending in New Zealand and are either direct or affiliated members of the NZBA. The complaint alleged the banks coordinated their lending policies to align with climate targets, including emissions reduction goals for the agricultural sector, which, it was alleged, could reduce farmers’ access to capital and result in higher borrowing costs and more stringent lending terms. However, the Commerce Commission found no evidence of unlawful coordination, concluding that the banks had made their own, independent decisions.

For fund and asset managers and other investors, the risk level associated with directing portfolio companies on environmental initiatives can vary significantly, depending on the manner and extent of involvement. Low-risk conduct could involve setting broad, non-binding environmental goals or targets at an industry or portfolio level, where each portfolio company retains autonomy to determine whether or how to achieve those outcomes. For instance, encouraging companies to voluntarily pursue emissions reductions, or to consider climate-related factors within their own business strategies, is unlikely to raise competition law concerns.

By contrast, high-risk conduct arises where managers actively coordinate with each other or require their portfolio companies to implement specific environmental measures in a uniform or synchronised manner—particularly where these requirements could directly affect market behaviour or competitive differentiation. Examples of high-risk activities include mandating that:

• all portfolio companies phase out certain products simultaneously;
• adopt identical sustainability standards that limit choice; or
• collectively restrict supply to advance environmental targets (as is alleged in Texas v Blackrock).

Where managers wish to take an active approach and have cross-shareholdings in portfolio companies that are competitors or potential competitors, risk mitigants should be put in place to ensure there is no coordination across companies—eg implementing ring-fencing within funds to ensure that separate staff within them are working with separate portfolio companies.

Acquisition and use of cross-shareholdings

The Texas v Blackrock case also prompts consideration of the acquisition of cross-shareholdings by investors. The merger clearance test in the US is similar to the legal test under the CCA, which prohibits acquisitions of shares or assets that have the purpose, effect or likely effect of substantially lessening competition in any market in Australia. When assessing whether an acquisition could have the effect or likely effect of substantially lessening competition, the ACCC could consider whether cross-shareholdings are likely to dampen competitive rivalry, by altering incentives or enabling coordination through the sharing of competitively sensitive information (eg through board representation or reporting). The regulator would look at factors such as the size of the shareholding, governance rights, the degree of influence the acquirer would gain over the target and the potential for information sharing.

Unlike the US, Australia does not provide a 'solely for investment' safe harbour for such acquisitions. Its new merger regime, beginning 1 January 2026, will offer some certainty for passive investors, in that:

• notification will only be required where the acquirer gains 'control' over the target. 'Control' is the ability to determine the outcome of decisions regarding the target’s financial and operational policies, as defined in s50AA of the Corporations Act—it is important to note that this also includes joint control with an 'associate', and control by a special purpose vehicle; and
• acquisitions of shares in 'Chapter 6' entities, which include listed companies, unlisted companies with more than 50 members or listed registered schemes, will not require notification if the acquirer’s voting power remains at or below 20% post-transaction.

ACCC authorisation for ESG collaboration

In light of the potential competition risks associated with ESG-related collaboration, some companies have opted to seek authorisation from the ACCC before engaging in joint sustainability initiatives. Under the CCA, the regulator may authorise conduct that would otherwise contravene competition law if it is satisfied the public benefit likely to result from it outweighs the likely public detriment. In undertaking this assessment, the ACCC has broad discretion and may consider a range of public benefits, including environmental benefits, human rights improvements, transaction cost savings and other economic efficiencies.² Authorisation can be sought for both merger and non-merger conduct, and gives the applicant parties statutory protection for the authorised conduct, including actions brought by the ACCC and third parties.

The regulator has explicitly recognised it may take into account sustainability benefits (see its sustainability guide, as mentioned above), and has demonstrated its willingness to do so in a number of cases. For example:

The ACCC's authorisation process, including as to potential environmental benefits, is also relatively unique on the world stage—though there are similar processes in New Zealand. In any event, while all jurisdictions are grappling with how best to accommodate the pursuit of ESG goals within competition frameworks, Australia’s authorisation regime offers a relatively clear and proactive pathway for businesses seeking legal certainty.

Summary of potential competition risks and mitigants

While ESG initiatives may be well intentioned, they must be carefully structured to avoid potential competition law risks. As such, businesses should keep the following principles in mind:  

Other considerations for Australian businesses

Fund managers and their duties to members

The Texas v Blackrock proceeding also raises interesting considerations for fund managers and trustees in the context of their duties to members. In Australia, trustees of superannuation funds are required to perform their duties and exercise their powers in the best financial interests of their members under s52(2)(c) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act). Similar 'best interests' duties apply to responsible entities of registered managed investment schemes under s601FC(1)(c) of the Corporations Act and to other trustees exercising investment discretions generally, under general law.

In addition to these duties, superannuation trustees must comply with a myriad of other obligations relating to investment decisions, including to promote the financial interests of members, in particular net returns to members, under s52(12) of the SIS Act, and to ensure any expenditure decisions are for the purpose of the sound and prudent management of the trustee's business operations under Prudential Standard SPS 515 Strategic Planning and Member Outcomes.

Superannuation trustees and responsible entities (and other trustees for that matter) must ensure when participating in collective industry initiatives, including ESG-related initiatives, that there is a clear and demonstrable nexus between any expenditure of the fund (eg paying membership fees associated with ESG collective initiatives) and expected financial returns to members. Otherwise, such expenditures would not be appropriately made from trust assets. Trustees must also ensure that the use of ESG considerations and strategies in the investment of fund assets is consistent with their best interests and other duties.

A similar but perhaps narrower duty to act 'solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries' of a plan is provided for in s404(a) of the Employee Retirement Income Security Act of 1974 (USA) (ERISA). In a recent US case, Spence v American Airlines Inc, (ND Tex, No 4: 23–CV–00552–0, 10 January 2025), the United States District Court for the Northern District of Texas found that American Airlines and its Employee Benefits Committee breached this duty in the management of the employee retirement plan when investing employee plan assets towards ESG objectives. BlackRock was the investment manager of this plan. Caselaw in the US has established that the 'benefits' of participants and beneficiaries referred to in this section of ERISA are financial benefits. 

It remains to be seen whether the best financial interests duty in Australia would be interpreted by an Australian court in a similar way as the ERISA duty was interpreted in Spence v American Airlines Inc. 

Next steps

In a climate of continued regulatory scrutiny from the Australian Securities and Investments Commission and the ACCC in relation to potential greenwashing conduct, companies, including investment and asset managers, must ensure their participation in collective ESG initiatives, and any commitments made as part of them, are backed by evidence of realistic strategies and processes in place to deliver on those commitments.