WINDS OF CHANGE - Competition rules and sustainable goals: not as easy as E-S-G?
Competition agencies are not shying away from looking at agreements between competitors that relate to sustainability objectives, with several active antitrust investigations underway. How can financial services firms be confident that collaboration for sustainability goals will not fall foul of the competition law rules in the UK and EU?
the financial services industry is playing an increasing role in addressing the challenges associated with the net-zero transition
Climate change and the transition to net zero is no longer solely a concern for governments. Combatting climate change alongside tackling other ESG issues have become strategic goals for the private sector, including financial services. From the mobilisation of private finance through green investment and lending, to taxonomy and other standardisations for sustainable activities and investments, the financial services industry is playing an increasing role in addressing the challenges associated with the net-zero transition. This provides much needed support to policy and regulation. Indeed the “first mover disadvantage” dis-incentivises individual action and often means that the only way meaningful change can be achieved is by working together.
As these initiatives grow in scale and urgency, there is increasing debate regarding the potential antitrust risk, particularly where they impact market-facing activities or strategies.
By way of example, a significant achievement from Cop26 in 2021 was the Glasgow Financial Alliance for Net Zero (GFANZ) which has over 550 firms from across the global financial sector that have each committed to the goal of net-zero by 2050. However, recently, a number of members have signalled that they intend to pull out of GFANZ, citing competition law concerns associated with a requirement from the UN Race to Zero campaign that firms commit to restrict fossil fuel investment and financing.
So, is competition law an obstacle to collaboration on sustainability?
As with any coordinated industry activity, collaboration between competitors gives rise to antitrust risk, given the information exchange and potential coordination on key parameters of competition, such as price, quality, output and innovation. Indeed, there have been a number of high-profile antitrust investigations concerning green collaboration between competitors. Currently, there is an open EC antitrust investigation into the luxury fashion sector amid concerns that companies may have been engaging in unlawful coordination relating to sustainability.
Amid increasing calls from industry and other stakeholders, competition agencies globally are consulting on new guidance
At present, there’s no general exemption to the prohibition on anticompetitive agreements for agreements pursuing sustainability objectives and the onus lies with the collaborating firms to self-assess their agreements for legal compliance. With this in mind, how can firms seeking to collaborate for sustainability reasons navigate this risk?
European Agency Guidance
Amid increasing calls from industry and other stakeholders, competition agencies globally are consulting on new guidance to assist firms in assessing whether or not their proposed collaboration might cross the line.
- In the EU, the EC is reviewing its Horizontal Cooperation Guidelines, which include a new section explaining how the existing competition rules will apply to “sustainability” agreements. The draft guidelines do not contain any significant departures from the EC’s existing approach. However, they do provide enhanced guidance on what types of agreement are unlikely to give rise to competition concerns, when the benefits of a sustainability agreement might outweigh its negative effects, and include a ‘soft’ safe-harbour under which sustainability standardisation agreements (i.e. agreements on technical or quality requirements) will be exempt.
- In the UK, the Competition and Markets Authority (CMA) has published a short guidance document and established a “Sustainability Taskforce” that will focus on developing guidance to provide greater clarity on when “environmental” agreements will not restrict competition. Until the new guidance is available, it remains to be seen if the CMA will adopt a substantially different approach to the EC.
A number of practical steps can help minimise competition law risk associated with participation in sustainability initiatives:
- Remember that the rules continue to apply to any competitor collaboration, despite good intentions.
- Ensure that memberships of all sustainability industry initiatives are recorded, and that terms of reference and membership criteria/rules are available for legal review before participation.
- Ensure that collaborations go no further than necessary and do not include the disclosure of competitively sensitive information.
- Seek legal advice before agreeing to participate in any industry wide activities.
In cases of genuine uncertainty, it may be possible to reach out to an agency for guidance. For example, the EC recently adopted a revised Informal Guidance Notice to open the door to providing informal advice in cases of unresolved or novel questions on the competition law rules. It is expected that firms seeking to collaborate will seek to make use of this revised tool.
Although competition law should never be a barrier to sustainability initiatives, as with any competitor collaboration, financial services firms must be alive to the risks. Where firms are unclear if their activities might cross a line, the early involvement of legal counsel is key, particularly as we await further guidance from the competition law agencies.