Competition barriers to collective sustainability initiatives by investors expected to be lowered.
Regulators will soon provide investors with clearer guidance on the acceptable boundaries of collective action to achieve net zero and other sustainability objectives, according to competition lawyers.
But investor alliances and other industry groupings may still need to explain to regulators why collaborative efforts are more effective than competitive forces to meet shared sustainability goals.
They should also continue to consider competition law when agreeing frameworks and tactics, such as engaging with investee firms and setting targets for reducing portfolio emissions.
Latest estimates suggest clearer guidance on sustainability-related anti-trust exemptions could be issued by the European Commission in April or May.
“We can expect the European authorities to give more guidance on the horizontal and vertical block exemptions in relation to sustainability issues. Other local competition authorities will follow suit,” said Daniela Seeliger a Partner in the Antitrust and Foreign Investment Group at Linklaters.
Last month, Bloomberg reported that the UN-convened Net Zero Insurance Alliance (NZIA) had dropped from membership rules a commitment to exit coal underwriting, on advice from lawyers citing anti-trust grounds. To keep within existing laws, which ban discussion between competitors about the risks they’re willing to underwrite, members have agreed to reach net zero by 2050 using common timelines and principles, but implemented by individual means.
“Conditions of membership are often problematic from a competition perspective,” said Katherine Kirrage, a Partner at Osborne Clarke. “But much depends on the circumstances of who is imposing the commitment and how and why.”
NZIA includes more than 20 large insurance and reinsurance groups, such as AXA, Alliance and Aviva, which are also involved in other collaborative initiatives aimed at helping asset owners and asset managers to decarbonise investment portfolios.
The insurance sector has faced mounting pressure to reduce its exposure not just to coal, but also to the oil and gas sector. Earlier this month, Dutch non-profit research group campaign group Profundo highlighted the holdings of large insurance firms in oil and gas companies operating in the North Sea.
Bloomberg reported that NZIA members have initiated discussions with the Commission on possible ‘carve-outs’ to allow environmental priorities to supercede competition concerns.
Regulators promise legal certainty
Competition authorities across the UK and Europe have acknowledged the need to reexamine legal barriers to collective action on sustainability and to provide clearer guidance.
“The Commission has been quite open about wanting to see competition as a tool for delivering sustainability goals,” said Kirrage.
Following a consultation initiated in September 2020, the Commission has accepted the need to provide clarity on the circumstances in which cooperation on sustainability-related objectives is permissible. According to a policy briefing published last September, it intends to provide such guidance “in the context of the on-going revisions of its guidelines on horizontal cooperation and vertical agreements”.
In November, the Commission outlined its overall strategy for how competition policy should support Europe’s green transition, covering state aid and M&A policy as well as anti-trust. Its communication on a ‘competition policy fit for new challenges’ promised “guidance and legal certainty to enable cooperation” in pursuit of sustainability, within updates to its horizontal block exemption rules.
Ahead of their expected Q2 publication, the Commission has encouraged organisations to come forward with proposals for sustainability-led cooperation “to inform the policy revision and ensure that guidance can be as concrete as possible”.
Until new guidelines are issued, says Seeliger, groups will need to justify cooperative approaches to sustainability in terms of efficiency. “It’s not easy to provide an efficiency rationale because that involves proving consumer benefit,” she said, pointing out the potential for tension between short-term consumer interests, including costs, and longer-term sustainability goals.
At a national level, Germany’s Federal Cartel Office is seen as treating green cooperative initiatives on a case-by-case basis. In the UK, the Competition & Markets Authority (CMA) gave detailed guidance in January 2021 to businesses and trade associations on the treatment of sustainability agreements under UK competition law.
Asserting that competition policy should not “create an unnecessary obstacle to sustainable development”, the CMA guidance included advice on standard-setting agreements, which warned against the sharing of commercially sensitive information beyond that necessary for setting a standard, or imposing obligations on firms not wishing to participate.
In September, the CMA issued a consultation to help inform its advice to the UK government on how competition and consumer regimes can better support the UK’s Net Zero and sustainability goals, including preparing for climate change.
Limits to power of collaboration
Collective action has become an increasingly accepted element of investors’ efforts to encourage investee companies to embrace more sustainable business practices and to reduce emissions in particular. Asset owners argue that joint action is critical to influencing the behaviour of firms that regularly ignore views of shareholders expressed individually.
At COP26, the Glasgow Financial Alliance for Net Zero (GFANZ) – an umbrella body which includes the NZIA and other sub-sector groups – announced that firms with US$130 trillion AUM had committed to reducing their financed emissions to net zero by 2050, to achieve the goals of the Paris Agreement.
As well as the NZIA, GFANZ member organisations include two groupings aimed at asset owners, the Net Zero Asset Owner Alliance (NZAOA) and Paris Aligned Investment Initiative (PAII), established by the Investors Group on Climate Change. The PAII’s Net Zero Asset Owner Commitment requires signatories to commit to 10 asks, but also notes the “range of methodologies and approaches available to investors” to set targets and implement strategies.
NZAOA members are expected to cut carbon emissions in line with a recently updated protocol, which sets a 49-65% target for reductions from a 2020 baseline.
An NZAOA spokesperson said members routinely examine their business activities for compliance with all applicable anti-trust laws. “In the context of climate change, collaboration between stakeholders is not only important, but crucial to success; climate action is a societal challenge that no single company can tackle alone. The NZAOA will achieve its goals and support the net-zero-transition in full compliance with all laws, including anti-trust laws,” the spokesperson added.
While investors are finding increasing success in challenging corporate policy on sustainability issues, The Economist recently reported on the mixed impact to date of collective pressure on listed fossil fuel firms to reduce emissions.
According to its analysis, private equity firms have snapped up oil, gas and coal assets worth US$60 billion over the past two years, many divested by listed firms in response to the environmental concerns of institutional investors. Many of the private equity firms pursuing such ‘brown’ assets are backed by pension funds, the publication noted, claiming that the discrepancy presents a “flaw in the reasoning” behind sustainable investing.
A proven need for the whole market to move as one in order to achieve a specific public good, such as limiting climate change, would potentially justify exemption from competition law, say experts.
“Regulators don’t want competition to be seen as an impediment to collaboration where it is necessary in order to deliver goals. There are circumstances where you need the market to move together or it won’t move,” said Kirrage.
“If you make a particular commitment and there’s no other way to achieve it, it’s quite likely that you could go to a regulator and say, ‘Look, this is absolutely necessary for us to all act as one and so we’ve got to do that’.”
Acting in concert to meet a regulatory obligation could serve as a justification for collective action on sustainability issues, said Seeliger. “Everybody needs to be in line with the regulator. That over-rules everything else.”
During the pandemic, competition authorities in the UK and Europe showed their willingness to forgo normal practice and principles in exceptional circumstances, potentially setting a precedent.
“The CMA came out with some guidelines on collaboration for Covid-19 purposes, but they were very targeted, around continuity of supply, getting food on shelves, for example,” said Kirrage.
A number of industries, including the automotive sector, sought and were granted permission to act jointly by the European Commission in response to supply chain shortages. Exemptions came in the form of “comfort letters” or legislative changes depending on circumstances.
Lawyers say clients across sectors are currently being asked to walk a fine line. Although this may get clearer both through dialogue and new guidance, they advise industry groupings to lean toward achieving joint ends by setting broad frameworks and principles, rather than more rigid requirements or exclusions.
“There’s less likely to be problem over groups setting a minimum commitment that can be outperformed by members,” Kirrage added.
In 2020, a Linklaters client survey found that 57% of businesses had decided against participating in cross-industry environmental initiatives for legal reasons. Over 90% of respondents wanted changes and clarification of competition rules to encourage collaboration on sustainability; a similar number said they wanted to work closely with peers in responding to climate change.
More than a third (36%) were in favour of an exemption from competition rules for sustainability, while just under a third (32%) called for explicit guidance from competition authorities to distinguish lawful from unlawful cooperation.