top of page

Drive Towards A Sustainable Competition: Lessons From Other Regulators

The author is Sanidhya Bajpai, a third year student at Dr. Ram Manohar Lohiya National Law University, Lucknow.


Introduction


With countries worldwide accepting the deterioration of the environment and the real dangers of climate change, Environmental, Social, and Governance (“ESG”) factors have become essential for investors in mergers and acquisitions. The call for a more sustainable and healthy commitment by governments and businesses toward environmental goals is imminent. Governments are pledging to reduce their carbon footprints, but sustainable growth is a mirage without camaraderie between the public and private sectors. To mitigate the first mover’s risk and high cost of environmentally efficient technologies, businesses prefer collaboration with other competitors, bringing forth the associations under antitrust scrutiny. This piece concerns the critical competition issues that have emerged from ESG collaborations across various jurisdictions and proposes a headstart for the Indian antitrust regulator regarding ESG collaboration.


European Commission & Other Antitrust Regulators’ Approach Towards ESG Collaboration


Article 101(1) TFEU of the European Commission (“EC”) states that the EC primarily assesses whether the sustainable agreement in question affects ‘parameters of competition,’ including price, quantity, quality, choice, or innovation, and does not prima facie restrains all agreements and combinations between parties. The EC’s approach favours agreements that do not affect competition while championing sustainable goals. The European Union has published exemptions for agricultural producers and products indispensable to sustainability standards. However, this is only a sector-specific exemption under the EU antitrust. In cases where the agreement’s prime objective is sustainability, but it also affects competition, the EU will not refer to it as unlawful per se but will assess its effect on competition from other factors. The factors on which the agreement would be evaluated are intertwined with complexity and ambiguity. The loose wording of the assessing factors like ‘the nature and content of the agreement,’ ‘the nature of the goods or services affected,’ and ‘the extent to which the parties individually or jointly have or obtain market power through their agreement’ will make the combination process tedious. The EC has established that antitrust regulations will not be restrictive if the agreement’s prime object is championing sustainable goals. Still, its effects on the competition would be assessed.


The EC’s recently revised horizontal Guidelines proposed a “soft safe harbour” for the agreements whose prime object is sustainability. The said harbour delineates six cumulative conditions for the agreements to satisfy to be outside of the scope of Article 101(1). The conditions placed by the EC to be exempted from restriction under Article 101(1) contain obscure verbatim like “significant increase in the price” and “undertakings should be able to adopt stricter methods”, which leaves investors and other stakeholders in ambiguity.


For the agreements inclined to have a negative appreciable effect on competition and benefit from the exemption under Article 101(3), the stakeholders need to prove four prerequisite conditions. The third condition herein concerns consumers receiving a fair share of the purported benefits when the gains have been higher than the restraint on competition. In its revised guidelines, the EC explained that the “fair share” consumers stand to receive is the direct and indirect benefits that the consumer derives from the product, like paper straws and organically grown things, which directly benefits the consumer through “individual use” and indirectly benefits them through “individual non-use” (according to the EC’s fair share criteria) as they are eco-friendly, less polluting, and cause lower supply chain disruption.

In its explanation of “fair share” projects, the EC focuses on individual-specific sustainability; however, time is up for this narrower perspective. Including a more encapsulating sustainable approach that talks about the “fair share” of the population, like in a few other jurisdictions (which is discussed later), would have been a head start in attaining sustainable goals.


The EC has initiated efforts towards increasing sustainable cooperation, but its approach leaves businesses in muddy waters. An efficient and comprehensive way of increasing sustainable collaboration between companies would be to ensure that agreements whose prime objective is championing ESG goals and whose overall benefits in the larger environmental context outweigh the competition concerns, should not be restrained by antitrust authorities. This can be achieved by instilling confidence among businesses through alterations in guidelines. However, the complex and ambiguous approach of EC antitrust authorities regarding ESG agreements instead of instilling confidence is likely to deter companies as they will be cautious about attracting antitrust liabilities.


Progressive Approaches Towards ESG Collaborations


The UK antitrust authority has released a framework for regulating combinations between competitors on sustainability agreements. The threefold guidelines issued include, firstly, the examples of the agreements that are not likely to raise antitrust scrutiny. Secondly, they describe the agreements that could distort competition by price fixing or consumer allocation as their objective is to restrict the competition. Thirdly and most importantly, it recognizes exemptions for the agreements that could have violated antitrust law otherwise, but their potential sustainability benefits outweigh the harm. The UK authorities have also placed certain conditions under the exemption’s ambit. Unlike the EC approach, the UK antitrust authorities have laid down a framework that acknowledges various concerns of the stakeholders and provides a booming ground for sustainability agreements. The threefold framework laid down by the UK authorities entails step-by-step compliance for the businesses engaged in sustainability agreements and provides guidelines for the agreements that are not likely to affect competition and further for agreements that might be anti-competitive but their overall benefits outweigh the harm.


Section 2(1) of the Austrian Cartel Act provides for an exemption from the ban on agreements that restrain competition on the ground that the said agreements meet the cumulative conditions. While laying down the conditions, the Austrian regulators took a more imminent step when focusing on efficiency gains contributing to a greener economy rather than individual consumer benefits.


The Dutch antitrust regulators have also taken progressive steps while assessing the sustainability agreements. Under the Dutch regulatory guidelines sustainability agreements that do not affect competition may be permitted. Even if the agreement restrains competition, the agreement can be permitted if the gains of the sustainability agreement outweigh the restraint on competition. The fair share criteria introduced by the Dutch regulators focuses on offsetting the environmental damages than other sustainability norms and it does not per se mean that the immediate consumers will be fully compensated for the effects on competition, it would be enough if the environmental goals are fulfilled and in this it is distinctive and just what is needed. The Dutch authorities, by approving the agreement placed before them by the system operators for a uniform CO2 settlement price, are leading the way for the antitrust regulators to endorse sustainability-conscious agreements, which not only offsets the “first mover’s disadvantage” but also promotes competition in tandem with sustainability.


Predicaments of Favoring ESG Collaboration in Mergers and Acquisitions


The major roadblock in front of legislators and antitrust regulators is greenwashing by companies. Companies masquerade their agreements as sustainable and energy-efficient to lure investors and customers and deceive antitrust regulators. 22 State Attorneys of the USA recently sent letters to insurance companies informing them that their ESG strategies might violate antitrust provisions. It is believed that a blanket exemption or even an exemption with a caveat would still induce much greenwashing from corporations. Companies can manoeuvre their agreements to come under the said ESG exemptions and pose a real threat to competition by manipulating price, output, and supply chain.


Another roadblock the regulators will need to navigate is cartel formation or Climate Cartel. The collaborative efforts for sustainable growth, which the regulators will be inclined to promote, can transform into a cartel, which will have dire consequences from restricting technology to changing the quality of products, rigging price, output, and supply chain. The most resonating example is of EU antitrust regulators imposing a €875m fine on various motor vehicle manufacturers. It was found that the stakeholders involved had a technology to reduce the harmful emissions of gases beyond the required standards. Still, they colluded and decided not to exhaust the potential of the technology.


The practice of greenwashing and climate cartel formation both pose a risk to efficient sustainable collaborations. The Companies can either represent a false narrative with regard to their objectives for collaboration or withheld information to benefit from collaborations with competitors and distort the competitive market which is evident from the EU’s example above. So, to ensure that the said collaborations are for championing environmental goals and not for distorting competition, a task force can be incorporated by the regulators to assess the actuality of the objectives of the collaborations.


Is India and Indian antitrust law ESG ready?


The Indian Competition Act, though, does not contain express provisions relating to ESG assessment; the existing framework of assessment of agreements having A.A.E.C (Appreciable adverse effect on competition)under Section 19(3)(d) and 19(3)(f), which talks about the promotion of technical, scientific and economic developments and accrual benefits to consumers, respectively is equipped to smoothly accommodate the ESG assessments in sustainable collaborations. The joint venture provisions can be amended for sustainable collaboration, however detailed guidelines are imminent from the Indian regulators to make a head start.


The analysis of the ESG guidelines from other regulators and their impact shows that to make headway for such collaborations, the commission needs to instil confidence among businesses that agreements with the objective of championing ESG goals will not be restrained if their potential gains outweigh the competitive harms and while doing this the commission also needs to ensure that the agreements are true to their objectives and are not masquerading as ESG collaborations.


The Competition Commission of India needs to issue guidelines that carefully delineate firstly, the extent and kind of exemption to agreements and whether it is the sector or relevant market-specific; secondly, in case of restrain of competition due to agreements, the stipulated criteria and conditions which the companies need to fulfil; and thirdly, the recourse which the commission will take in case of greenwashing, climate cartels or other anti-competitive practice.

121 views0 comments
bottom of page