Climate, companies and competition law
What are lawmakers doing to help clarify the rules around collaborating to meet climate goals?
The two biggest climate finance stories of 2022 were arguably two stories about the incompatibility of competition laws and sustainability objectives.
Firstly, there was the potential collapse of GFANZ, the umbrella body for net zero groups in the finance sector. Fellow UN climate body Race to Zero updated its principles to reflect growing consensus that investments into new fossil fuels were incompatible with reaching net zero by 2050, and in doing so landed GFANZ in a tight spot. Aligning with the UN’s main net zero body now meant its members would have to cease making such investments. It was a step too far for some prominent members, who threatened to quit the initiative.
This was seen as a sign that the financial industry was never that serious about net zero. Not if it meant turning down short-term profits. But whether that’s true or not, there was also a big legal problem: adhering to the principles could be seen as a boycott. Joint agreements that result in financial institutions cutting off a sector or company’s access to capital are generally frowned upon under competition law. There are good reasons for this (you don’t want groups of supermarkets threatening to stop buying from certain suppliers, for example, in order to drive down prices), but it’s a problem for climate finance. In the end, GFANZ didn’t collapse, but it did take a big hit to its credibility by accepting that its members could ignore Race to Zero’s new rules.
The second story from last year centred on legal challenges mounted against Climate Action 100+ in the US. The investor group coordinates shareholder engagement on decarbonisation in the belief that unified demands are more likely to influence companies (and are often more cost effective) than disparate ones. Despite most of the evidence suggesting that CA100+ hasn’t actually driven much change so far, some politicians in the US are worried: they argue that teaming up to pressure companies on climate constitutes ‘acting in concert’ - another no-no under competition law.
Headlines have abounded about the existential risks that these two stories pose for climate finance. There has been less attention, however, on the challenges that non-financial companies are facing from these same rules. And about the big moves some regulators in Europe are making to try and tackle them.
This time last year, the UK’s Competition and Markets Authority (CMA) told the government that British businesses needed more clarity about what’s legal (and what’s not) when it comes to collaborating to meet sustainability goals.
Just like CA100+, the thinking is that improving sustainability practices will be easier if firms collaborate. A company that ‘goes it alone’ could put itself at a competitive disadvantage (using pricier green fuels, for example, could increase its cost of doing business), so coordinating with peers to all take the plunge together could really help spur things on. So too could joining forces to work on R&D or standard setting. But all this runs the risk of contravening competition rules.
So this week, the CMA launched draft guidance explaining which activities are fine under current competition law (joint environmental campaigns, the exclusion of unsustainable products from supply chains, developing industry standards etc) and which are probably not (price fixing, boycotting peers).
Importantly, the guidance also looks at areas where exemptions might be granted even if the rules would normally break competition rules. In these instances, a green objective must be untenable to achieve without collaboration, and the benefits to consumers must outweigh the competitive harm.
The guidance is written for corporates, but would apply to investors too - and so goes some way to clarifying the UK’s position on collaborative shareholder engagement and agreements to exclude polluting sectors from lending books and investment portfolios.
The Dutch Authority for Consumers & Markets conducted its version of this process back in 2020. Its guidelines are ambitious and cover broader sustainability objectives than the UK’s, which only relate to environmental issues.
In much the same vein, Europe is reviewing its rules in a bid to reassure companies that they can pursue sustainability goals without undermining competition law. Like the Netherlands, the bloc views sustainability as broader than just the environment and climate change, but the focus remains on how competition rules can “best support” the EU’s overarching Green Deal.
The Commission’s draft guidelines, which a Commission spokesperson said sought “to assist [companies] with the self-assessment of their cooperation agreements pursuing sustainability objectives”, are very similar to those just released by the UK. The examples it cites are vaguer, but it takes the same approach to weighing up the costs and benefits of certain activities on the consumer.
Both jurisdictions are encouraging companies to approach them for further guidance in particular instances. This is unusual: nowadays firms are generally expected to use their own discretion rather than seeking exemptions or bespoke advice - one of the reasons why nerves run high on these issues - but it indicates the importance of the topic to regulators.
The EU’s guidance will be adopted by the summer as part of a wider update to the bloc’s ‘horizontal’ competition rules (those that relate to industry peers or companies on the same rung of the supply chain). It also wants to provide ‘vertical’ guidelines, for companies at different points in the supply chain that want to collaborate on sustainability goals.
The latest version of Europe’s Common Agricultural Policy includes an exemption from competition rules for agreements that improve agricultural sustainability. The Commission is finalising guidelines on how to design such agreements, and they will be published by the end of the year.
The Commission is also looking at how competition law applies to M&A activities. One priority is the monitoring of green ‘killer acquisitions’ - when large companies buy and wind down smaller ones to stop them from becoming competitors or disrupters - but it will also pay more attention to deals with implications for the competitiveness of sustainable business in Europe, even if those deals wouldn’t usually warrant examination.
Speaking about all these reforms back in 2021, Inge Bernaerts, the director of the EU’s competition unit, noted that, while trends such as green taxes and consumer demand will drive companies to become more sustainable, “it’s competition that actually transmits those pressures to the boardroom”.
“It’s the need to compete that pushes companies to do more to meet consumers’ needs, and use less costly resources – changing business models, for instance, or investing in green innovation,” he said.