Let’s cut to the Race: Antitrust and sustainability initiatives
The tension between antitrust laws and sustainability goals has come into sharp focus through the course of 2022. An ICC paper, published in the run up to COP27, provides an extensive overview of real world examples of sustainability initiatives which had been thwarted by antitrust laws and cites UN Race to Zero initiatives as an area where “(g)reater consistency and clear guidance” from regulators is deemed to be urgently needed. With news breaking last week that Vanguard has opted to pull out of the Net Zero Asset Manager’s Alliance and significant political developments in the US gathering pace (as we explore further below), the increasingly polarised debate looks set to continue.
Vanguard’s statement regarding their exit from the NZAM explained that they have made the move “so that [they] can provide the clarity [their] investors desire about the role of index funds and about how [they] think about material risks, including climate-related risks — and to make clear that Vanguard speaks independently on matters of importance to [their] investors”. Although not mentioned specifically, Vanguard’s decision – particularly the emphasis on independent action – seems likely to be driven at least in part by concerns regarding potential breach of antitrust laws.
Against this backdrop, we briefly recap on some of the key antitrust issues that climate ambitious companies will be grappling with in 2023.
Why collaborate and is this an antitrust problem?
As demonstrated by the commentary coming out of COP27, reaching net zero (and mitigating the worst impacts of climate change) remains an ambitious feat. Some scientists claim that we have already fallen too far behind to meet the targets set only one year ago at COP26. There is broad consensus, at least within the scientific community, that more needs to be done. Countries which have set ambitious climate targets need a plan to deliver these and many policy makers are looking to leverage the financial system as a key tool to achieve this.
Policy makers, particularly in the EU, are enacting rafts of ESG laws and regulations which operate together to encourage the re-allocation of capital away from carbon intensive activities and towards more sustainable activities: an effective rewiring of the economy. While the regulatory / political framework does not (yet, anyway) go so far as to directly mandate a “green” transition, because of the enhanced regulatory environment and pressure from clients, investors and other stakeholders, businesses often feel compelled to lead the charge. However, this runs counter to the real first mover disadvantages at play in climate change initiatives, which disincentivise necessary change. A critical mass may be necessary, or at least helpful, for industry to move in the right direction for the achievement of climate goals within a desirable timeframe.
There is lively debate in the EU antitrust lawyer and economist community about the framework that should be applied to analyse these sorts of bona fide climate change collaborations. However, the reality is that practical developments have accelerated ahead of this debate. The political landscape in the US has seen State attorney generals take various steps to instigate investigations / threaten litigation in this space. Last month, more than 50 law firms received letters from US senators reminding them of their "duty to fully inform clients of the risks they incur by participating in climate cartels and other ill-advised ESG schemes". Even outside the US, demonstrating compliance with the criteria necessary to satisfy the exemption for agreements which restrict competition in the EU and UK is, at best, an example of a further hurdle and delay for businesses to confidently jump through before pursuing crucial initiatives – necessitating the gathering of appropriate evidence, undertaking econometric analysis, engaging with regulators etc. – and at worst, a bridge too far.
How should companies and regulators navigate this issue in 2023?
The simple fact is that most of the rules prohibiting anticompetitive agreements across the globe were not drafted with this sort of collaboration in mind. Yet a wholesale review of global antitrust laws, which would likely significantly accelerate a dramatic change and revolutionise participants’ approaches to collaboration, looks to be closer to a pipe dream at this stage. In this context, a key challenge for companies seeking to pursue climate change collaboration is avoiding a race to the bottom, where the pace of the most ESG-conservative jurisdiction (or company) determines the progress of an entire initiative.
As detailed further in our Antitrust & Foreign Investment Legal Outlook 2023, there is some room for optimism, at least on this side of the Atlantic:
(a) As one of the first NCAs to publish draft guidelines in 2020, the Dutch ACM made a bold step by taking a liberal position on the criteria which need to be established to justify an exemption from the rule against anticompetitive agreements. Since then, the Dutch regulator has also taken a number of practical steps which may benefit parties hoping to make substantive arguments to other regulators, such as its proactive approach to its case decision making. See further here.
(b) Legislative amendments in Austria in 2021 introduced a legally binding sustainability exemption. While the practical benefit is limited by the fact that this exemption is engaged only where Austrian competition law applies (i.e. in the absence of EU competition laws being engaged), it is nonetheless a comforting step for companies seeking to pursue local collaboration (and may well inspire other NCAs).
(c) The new chapter dedicated to sustainability agreements in the European Commission’s updated draft guidelines for horizontal cooperation agreements has certainly been welcomed and we look forward to the final iteration, which we understand will be available in early 2023. Equally, we look forward to more detailed guidance from the CMA’s sustainability taskforce.
However, the global landscape more broadly is far from ideal for companies. The refrain from some regulators is that they are not convinced that sustainability issues are presenting real obstacles; they claim that companies are not approaching them with concrete examples of such obstacles for them to consider. This is frustrating for business, for instance given the wealth of practical (albeit admittedly anonymised) examples detailed in e.g. the ICC paper.
However, regulators must also recognise that taking the step of proactive consultation undoubtedly presents practical challenges. For example, (i) how should parties (who often may have different familiarity with (or even knowledge of!) competition law) align regulatory engagement strategies (e.g. considering which regulators should be spoken to) between themselves; and (ii) how will parties address inevitable concerns regarding discharging the burden of proof on these issues, given the potential exposure for getting it wrong. These are real and valid concerns which, even in a best case scenario, cause (significant) delay to operationalisation of initiatives.
More publicly available informal guidance and proactive decision making is – in our view – crucial to ensure we avoid a chilling effect on legitimate cooperation and will give companies greater confidence in engaging with regulators. The more information that regulators make available regarding their thinking and approach in this space, the better parties will be able to model their collaboration appropriately (and avoid a race to the bottom as outlined above). More guidance will also give greater certainty in terms of regulatory engagement to parties wanting to pursue bona fide climate change co-operation.
For meaningful change to occur in 2023, ambitious action will need to be seen from regulators. The willingness of regulators to take such steps seems all the more important in the context of (i) mounting pressure from the scientific community and advocacy organizations for industry to take more ambitious action quickly; and (ii) the litigation risk landscape presented to a number of key actors in this space in the US. The absence of unified regulatory changes in this area means that companies, many of whom are playing fundamental and important roles in the climate change transition, are being asked to bear the commercial risk. Given the urgent climate change / net zero goals, this status quo seems unlikely to remain satisfactory for long.