When chilling contributes to warming : How competition policy acts as a barrier to climate action

The climate change emergency is driving companies worldwide to set increasingly ambitious sustainability targets. As frequently occurs, when regulation lags behind in driving and promoting change, the private sector has stepped forward and taken action. Rising sustainability concerns have created increasing pressure on businesses to make environment-friendly investments, innovations and purchasing decisions.

Business executives and top decision makers are now faced with the dual challenge of becoming the drivers for change, while still delivering good results to their shareholders. Indeed, while business success cannot be put at risk, being the first mover does not give rise to the advantages typically attributed to pioneers, as innovation and change for sustainability purposes do not necessarily mean that pioneering firms will reap the profits generally resulting from early action.

In fact, it may be quite the opposite: actions taken by businesses to advance their sustainability objectives usually require investments in the short term and possibly higher operating costs that often cannot be passed on in the prices charged to customers. Sometimes, this can go as far as companies challenging consumers’ immediate interests when introducing new higher standards, as has been the case, for example, with the termination of plastic bags in supermarkets in a variety of countries.

A head start may therefore mean unhappy shareholders and unhappy customers in the short term, with the pioneers (and their customers) becoming easy prey for competitors. The answer to this puzzle could lie in a collective move: cooperation among competitors. When all, or most, competitors move together and in the same direction, change will occur. What if such change benefits the environment and society, but at the cost of temporarily reducing competition? How much of a reduction of competition are we ready to accept?

In other instances, the answer may not lie in a collective move, but it may have an equal effect on competition. Some unilateral commitments undertaken by the private sector can only be achieved through mergers and acquisitions. For example, becoming carbon neutral by a certain date may require that companies dramatically increase their recycling capabilities in the short term, which could be hard or even impossible to do organically. What if buying out recycling facilities is the answer? Again, how much concentration in the recycling industry are we ready to accept (if any), to achieve a greater good?

The interaction of competition law and sustainability has become a live question for competition agencies around the world, which are being asked to take a position and to say whether they will stand in the way of such initiatives or promote them. The fact, however, is that most competition agencies are taking hesitant positions, in search of the right answer between these extreme positions. Some agencies have been openly supportive of including sustainability elements in their antitrust assessments; others have been reactive to what they see as unorthodox economic analysis, or skeptical about suggestions that a reform of antitrust rules is needed to support sustainability objectives — and fearing that such objectives may be used as cover for anticompetitive practices. At both ends of the spectrum though, agencies have been encouraging the private sector to bring forward real-life situations for concrete assessments.

Businesses are citing a lack of sufficient clarity and comfort around antitrust rules as stifling their sustainability efforts in the context of industry-wide initiatives. At a general level, businesses seeking to participate in Environmental, Social and Governance (“ESG”) initiatives — and in, particular, sustainability initiatives — are frustrated that the antitrust framework internationally is not providing the certainty they require that genuine sustainability-focused initiatives will not be considered to breach antitrust rules.

• They see the responsibility for articulating such a position as falling primarily on governments — and the competition authorities and courts ultimately under their control.
• They are frustrated that, despite some efforts being made and guidance provided in certain jurisdictions regarding sustainability agreements, it remains the case that companies are being asked to accept the burden of proof (and commercial risk) in bringing test cases to establish a precedent on the circumstances in which sustainability benefits from collective initiatives outweigh any effects on competition.
• In particular, businesses see that the lack of an agreed approach among competition authorities globally (e.g. through the International Competition Network) means that the possibility of implementing global sustainability-related initiatives will potentially require engagement with numerous competition regimes, including those requiring pre-approval before initiatives are implemented (which can involve lengthy and costly processes creating material delays for such initiatives).

As frequently happens, when companies are uncertain about the application of antitrust rules, private practitioners have been frequently asked to anticipate how they expect regulators in their jurisdictions to react to initiatives which may result in a reduction of competition (which may often be only temporary) where the benefits accrue to consumers and society more generally in the form of a more sustainable economy. However, competition authority reviews, particularly across numerous jurisdictions, are typically lengthy, costly for the parties involved and can be unpredictable — in particular on complex questions such as evaluation of benefits arising from agreements which might countervail any reductions in competition. Consequently, companies have frequently been reluctant to submit cases to the antitrust authorities for their concrete review. When business communities are faced with legal uncertainty and cost and delay to their plans, many projects are simply abandoned before they are even brought to any hesitant agency.

On their end, and perhaps as a consequence of the above, some agencies have been skeptical as to the degree of pressure that companies are indeed facing, when this has not been reflected in any significant number of cases, requests for guidance or mergers filed for their review.

This is the gap that this paper aims at bridging. In particular:

• the reluctance of many competition authorities to take effective action to ensure that competition law does not stand in the way of business cooperation to fight climate change, whether due to a lack of experience of the issue; scepticism as to the extent of the problem or (usually undue) fear of “greenwashing”;2 and
• the reluctance of businesses to cooperate with competitors for (often unfounded) fear of competition law, and a reluctance to take their concerns or submit sustainability-related arguments to the competition authorities, to seek comfort/guidance.

The rest of this paper is divided into two parts and an Annex:

Part 2 introduces some real-life business cases where companies are looking to cooperate to make a significant contribution to the fight against climate change or where companies are considering sustainability-driven actions, but where fear of competition law (whether well founded or not) is inhibiting progress. In these cases guidance is being sought from private practitioners and, in some cases, the competition authorities.

Part 3 calls on competition authorities to provide more practical help to businesses — both in the form of general practical guidance but also giving guidance/comfort in relation to individual projects in a timely manner and without overburdening those businesses (particularly Small- and Medium-Size Enterprises ‘SMEs’) with excessive information demands. This requires a careful balance if competition authorities feel they need to safeguard against what they fear to be greenwashing. This is a global problem and we call on competition authorities to work together so that projects with effects across multiple jurisdictions can proceed in a timely manner. If we can do this to allow mergers to proceed, we should be able to do it to allow agreements combatting climate change to proceed. In the context of efforts to make dynamic changes to market behaviours, the chilling effect of the need to engage with multiple regulatory processes — involving potentially significant delays and material costs for the companies involved — should not be underestimated.

The Annex identifies the kind of cooperation that is less likely to be problematic under competition law (either not being caught at all or meriting some form of exemption/safe harbour) and sustainability-related arguments that authorities may safely take into consideration in their decisions. It also briefly identifies those aspects of cooperation or other agreements that are more likely to be problematic but calls on the competition authorities to help overcome these where their potential benefits in the fight against climate change are very significant (for example efforts to phase out fossil fuels). It is hoped that this will encourage and help businesses looking to engage in the fight against climate change, but also help those competition authorities with less experience of this issue.