While international cooperation on climate action is accelerating, it is now recognized that the public sector alone cannot fulfill its responsibility to combat climate change. This has led to a consensus for private sector involvement, with companies increasingly adopting environmental, social and governance (ESG) practices. However, ESG is a new and challenging terrain. Businesses typically fear ‘first mover losses’ due to the uncertainty of ESG action and investment returns, along with the perceived limitations of independent efforts. Sustainability agreements, which facilitate collaborative action between companies against climate change, can reduce some of these risks by pooling resources and increasing the collective impact of businesses.
Despite their bona fide intentions, some sustainability agreements can cause anti-competitive harm in the market. Developing ESG-friendly products and processes requires significant investment, which can be passed on from companies to consumers. Competition law usually does not like this result, because the main benchmark for assessing anti-competitive behavior is the standard of consumer welfare, measured by the consumer’s access to the best price. Elsewhere, while companies with a larger market share can easily absorb the costs of implementing ESG practices, this may not be possible for smaller players, who may create barriers to market entry.
These emerging challenges, together with growing business interest in ESG and increasing legislative mandates on ESG, have led global competition regulators to explore legal reforms to balance sustainability with fair competition. The Competition Commission of India (CCI), however, has yet to engage with the interaction between competition law and sustainability. This is a missed opportunity to leverage private sector collaboration into India’s national climate strategy.
International development
The UK and the EU are global leaders in supporting sustainability agreements, viewing them through a permissive lens. In 2023, the UK’s competition agency, the Competition and Markets Authority (CMA), unveiled Green Deal Guidelines after extensive stakeholder consultation.
The guide defines three categories of environmental sustainability agreements: first, some agreements do not violate competition law, such as non-binding industry targets to reduce carbon emissions or shareholder agreements to promote environmental sustainability policies. Second, some agreements have the potential to breach competition law, which the CMA evaluates on a case-by-case basis, considering their impact on competition. Third, certain agreements may be eligible for exemption under competition law if their environmental benefits outweigh potential competitive disadvantages. To obtain this exemption, the agreement must demonstrate a benefit to consumers, show that the restriction of competition is essential to achieving that benefit, and ensure that it does not eliminate competition.
While the outlook of the European Commission (EC) is similar to that of the CMA, it differs in two main aspects. In particular, the EC only recognizes horizontal sustainability agreements, which exist between competitors at the same level of the supply chain, while excluding vertical agreements between companies at different levels of the supply chain, such as manufacturers and distributors. In contrast, the CMA embraces sustainability agreements both horizontally and vertically. In addition, the EC defines ‘sustainability’ more broadly than the UK, encompassing broader objectives such as upholding human rights, reducing food waste, and animal welfare.
While well intentioned, the CMA and the EC will face implementation challenges, particularly in balancing the harm to benefit in the second and third category agreements discussed above. This difficulty is due to the lack of standard reporting and measurement metrics in the ESG landscape. In addition, concerns about greenwashing, where companies misrepresent or exaggerate ESG benefits, have led to impact assessments for these agreements. Recognizing these obstacles, the CMA adopted an open-door policy, offering informal guidance to businesses interested in sustainability agreements supported by the newly established Sustainability Task Force.
In stark contrast to the United Kingdom and the European Union, the United States takes a hard line against recognizing sustainability or ESG exemptions under antitrust law. In September 2022, Lina Khan, Chairwoman of the Fair Trade Commission, testified before the United States Senate Judiciary Subcommittee on Competition Policy, emphatically stating that US antitrust laws do not recognize ESG exemptions. Most recently, in June 2024, Congress was divided at the intersection of sustainability and antitrust. The Republican-led committee’s report said certain organizations have created a ‘climate cartel’ that is harming consumers, with a minority Democratic counter report arguing that antitrust laws do not prevent private collaboration on climate action. Overall, the US regulatory stance remains cautious, subject to ESG approval for heightened scrutiny.
India’s opportunity
India has set ambitious climate commitments under the Paris Agreement, making it a ‘Panchamrit’ goal. To support these targets, financial sector regulators, such as the Reserve Bank of India, and the recent Union Budget have introduced legislative measures and schemes to boost private sector participation in climate action. In addition, the Securities and Exchange Board of India revised its Business Responsibility and Sustainability Reporting requirements for the top 1,000 listed entities, which mandate ESG-based disclosures.
In order for businesses to use ESG meaningfully and expand their policies on climate action, they need regulatory clarity and a reimagined approach that integrates climate action into existing legislation. This is the right moment for the CCI to align with financial sector regulators by integrating climate action into competition law, including the recognition of sustainability agreements.
A practical first step for the CCI, similar to the CMA, may be to provide informal guidance to companies interested in the agreement. This is similar to CCI’s existing practice of providing guidance before finalizing mergers under the pre-filing consultation mechanism. On a broader scale, CCI should explore emerging international best practices and conduct market studies to evaluate domestic considerations of sustainability agreements. CCI’s new market study on Artificial Intelligence shows its interest in participating in the intersection of emerging issues with competition law, which must be extended to climate action. Findings from these methods could pave the way for CCI to develop comprehensive guidelines for sustainability agreements in India, which strike a balance between sustainability and fair competition.
Urvi Pathak is Researcher, Corporate Law and Financial Regulation, Vidhi Center for Legal Policy, New Delhi
Published – 16 October 2024 10:10 IST
