As international cooperation on climate action accelerates, it is now widely acknowledged that the public sector alone cannot shoulder the responsibility of combating climate change. This has led to a consensus for private sector involvement, with corporates increasingly adopting environmental, social and governance (ESG) practices. However, ESG is a novel and challenging terrain. Businesses typically fear the ‘first mover disadvantage’ due to uncertain returns on ESG actions and investments, along with perceived limitations of standalone efforts. Sustainability agreements, which facilitate collaborative action among companies against climate change, can mitigate some of these risks by pooling resources and increasing businesses’ collective impact.
Despite their bona fide intent, some sustainability agreements may result in anti-competitive harms to the market. Developing ESG-friendly products and processes requires significant investments, which may be passed on from a company to its consumers. Competition law typically frowns on such outcomes, since the primary benchmark for assessing anti-competitive conduct is the consumer welfare standard, measured by consumers’ access to best prices. Elsewhere, while companies with a larger market share may easily absorb the costs of implementing ESG practices, this may not be feasible for smaller players, which can create barriers to market entry.
These emerging challenges, along with businesses’ growing interest in ESG and increasing legislative mandates on ESG, have prompted competition regulators globally to explore legal reforms to balance sustainability with fair competition. However, the Competition Commission of India (CCI), is yet to foray into the interplay between competition law and sustainability. This is a missed opportunity in harnessing private sector collaborations towards India’s national climate strategy.
International developments
The United Kingdom and the European Union are global frontrunners in supporting sustainability agreements, viewing them through a broadly permissive lens. In 2023, the U.K.’s competition agency, the Competition and Markets Authority (CMA), unveiled its Green Agreements Guidance following extensive stakeholder consultations.
The guidance identifies three categories of environmental sustainability agreements: first, some agreements do not breach competition law, such as non-binding industry-wide targets for reducing carbon emissions or shareholder agreements for promoting environmental sustainability policies. Second, some agreements could potentially breach competition law, that the CMA evaluates on a case-to-case basis, weighing their effect on competition. Third, certain agreements may be eligible for exemptions under competition law if their environmental benefits outweigh potential competitive harm. To earn this exemption, an agreement must demonstrate benefits to consumers, show that its restrictions on competition are indispensable in achieving those benefits, and ensure that it does not eliminate competition.
While the European Commission’s (EC) outlook is similar to the CMA’s, it differs in two key aspects. Notably, the EC recognises only horizontal sustainability agreements, which are among competitors at the same level in the supply chain, while excluding vertical agreements among companies at different levels of the supply chain, such as manufacturers and distributors. In contrast, the CMA embraces sustainability agreements on both the horizontal and vertical fronts. Additionally, the EC defines ‘sustainability’ more broadly than the U.K., by encompassing broader objectives such as upholding human rights, reducing food waste, and animal welfare.
While well-intentioned, the CMA and EC will meet with implementation challenges, particularly in measuring the harm-to-benefit balance in agreements of the second and third categories discussed above. This difficulty stems from the absence of standardised reporting and measurement metrics in the ESG landscape. Additionally, greenwashing concerns, wherein companies misrepresent or exaggerate ESG benefits, complicates impact assessments for such agreements. Cognisant of these hurdles, the CMA adopts an open-door policy, offering informal guidance to businesses interested in sustainability agreements supported by its newly-established Sustainability Taskforce.
In stark contrast to the U.K. and the EU, the United States has taken a hardline stance against recognising sustainability or ESG exemptions under antitrust law. In September 2022, Lina Khan, the Fair Trade Commission Chair, testified before the United States Senate Judiciary Subcommittee on Competition Policy, stating unequivocally that U.S. antitrust laws accord no recognition to ESG exemptions. More recently, in June 2024, Congress was divided on the intersection of sustainability and antitrust. A Republican-led committee report alleged that certain organisations had formed ‘climate cartels’ that hurt consumers, with a Democratic minority counter-report countering that antitrust laws do not prevent private collaborations on climate action. Overall, the U.S. regulatory stance remains cautious seemingly, subjecting ESG agreements to heightened scrutiny.
India’s opportunities
India has set ambitious climate commitments under the Paris Agreement, coined the ‘Panchamrit’ goals. In support of these targets, financial sector regulators, such as the Reserve Bank of India, and recent Union Budgets have introduced legislative measures and schemes to boost private sector participation in climate action. Similarly, the Securities and Exchange Board of India revamped the Business Responsibility and Sustainability Reporting requirement for the top 1,000 listed entities, mandating ESG-based disclosures.
For businesses to meaningfully adopt ESG and capitalise on the growing policy emphasis on climate action, they require regulatory clarity and re-imagined approaches that weave climate action into existing laws. It is an opportune moment for the CCI to align with financial sector regulators by integrating climate action into competition law, including recognition of sustainability agreements.
A practical first step for the CCI, akin to the CMA, could be to offer informal guidance to companies interested in such agreements. This is similar to the CCI’s existing practice of providing guidance before finalising mergers under the pre-filing consultation mechanism. On a broader scale, the CCI should explore evolving international best practices and conduct market studies to evaluate domestic considerations on sustainability agreements. The CCI’s recent market study on Artificial Intelligence demonstrates its interest in engaging with intersections of emerging issues with competition law, which ought to be extended to climate action. The findings from these avenues could pave the way for the CCI to develop comprehensive guidelines for sustainability agreements in India, which strike a balance between sustainability and fair competition.
Urvi Pathak is a Research Fellow, Corporate Law and Financial Regulation, Vidhi Centre for Legal Policy, New Delhi
Published – October 16, 2024 10:10 am IST
