From red tape to green gains

A key theme of this year’s COP conference will be asking nations to strengthen their commitments to reducing greenhouse gas emissions so that we can globally limit climate change to 1.5°C. This could mean renewed policy recommendations from governments and increased regulatory effort to incentivise private sector contributions. Under growing government pressure, businesses may find it increasingly attractive to collaborate with industry peers to tackle their environmental impact, particularly where going it alone wouldn’t work.

Over the past couple of years, there has been a flurry of activity from competition authorities across the globe, seeking to delineate how firms might take action to promote sustainability by collaborating with rivals without breaching antitrust law. The European Commission (EC) published its Revised Guidelines on Horizontal Agreements with a new chapter on this topic in July 2022. Numerous national competition authorities have since issued their own guidance.

Practitioners and businesses in Europe have welcomed this guidance. But the big question now is whether greater clarity on how competition rules will apply to sustainability agreements is paving the way for developments on the ground. So far, it has been a mixed bag. The UK’s CMA, for example, published its first informal guidance (addressing the Fairtrade Foundation) in December last year and its second (addressing WWF-UK) soon after. In the EU, on the other hand, progress has been slower. In this article, Rachel Keyserlingk takes a look at the legal, practical and political dynamics which might prompt firms to decide to take the plunge.

Increasing pressure on companies to act: the stick and the carrot

Aside from increasing regulatory obligations, there is mounting public pressure on companies to address environmental problems. The emphasis has been on the urgent need to decarbonise production, but a firm’s failure to tackle environmental harms caused by its activities can badly tarnish its public image. A case in point is the recent outcry in the UK following revelations that water companies have been discharging pollutants into rivers. Neglecting environmental obligations could even cost an errant company valuable customers or investors.  

In addition to reputational harm, recent lawsuits have served as a reminder that damage to the environment can result in huge financial liabilities. For example, in November 2023 New York State sued PepsiCo for contributing to plastic pollution along the Buffalo River that allegedly contaminated the water and harmed wildlife. Climate change litigation is already well established and is a growing trend. The landmark Milieudefensie/Shell ruling in 2019, which required Shell to reduce emissions by 45% by 2030, has just been overturned after a long battle for Shell at the Hague Court of Appeal. Nevertheless, such cases may become a template for copycat claims in other jurisdictions as campaigners seek to hold businesses to account for environmental ills.

Fear of the sort of risks outlined above may act as a proverbial stick and spur companies into action. As we have discussed in previous articles, collaborative approaches represent an important way forward when free-rider problems or other market failures exist, such that companies can’t effect change when going it alone.

At the same time, the recent guidance from competition authorities – and particularly the ‘open-door’ policies they have adopted – may act as a carrot, encouraging businesses to propose agreements. By creating a sandbox that allows firms (with appropriate guardrails) to explore the potential benefits and harms of collaborative approaches without fearing legal repercussions, competition authorities can mitigate the risk of such initiatives. From a reputational perspective, such an arrangement might be a ‘win-win’ for businesses: if their proposals get the green light, they will enjoy the positive publicity from having taken concrete measures to improve the environment; conversely, if the agreement is rejected, then the firms will have an excuse for not acting.

Challenges ahead

Despite the improved clarity of the rules, two challenges remain which may deter businesses from collaborating to reduce their impact on the environment.

Fear of the unknown

Although national competition authorities have issued informal guidance in a few relatively straightforward cases, they have yet to handle more complex dossiers requiring detailed assessments. This may be because a key challenge lies in how to quantify environmental benefits, which to many might represent an abstract concept that is new to competition policy. Boards may be uncertain about the methods involved and sceptical about spending money on a type of analysis which has not been commonly deployed in antitrust investigations until now.

As Frontier argued in its Response to the CMA’s public consultation on its Draft Guidance on environmental sustainability agreements, there is no need for a costly reinvention of the wheel. Methods for quantifying environmental benefits may be unfamiliar to practitioners of competition policy, but they are by no means new to economics. Economists in other policy areas, such as utility regulation, have been using these techniques for years to help companies assess investments in nature or emissions-reducing technologies. Furthermore, governments have developed a range of simple off-the-shelf tools for evaluating environmental outcomes in order to assist companies in fulfilling their regulatory obligations. With care, these tools can be used cost-effectively in other contexts, including competition policy.

Further practical pointers from competition authorities on ways of valuing the benefits of sustainability agreements would be a welcome complement to the formal guidance on how to interpret the rules. Such assistance may help to bridge the knowledge gap that exists and give companies extra confidence to come forward with proposed agreements.

Mixed messages

Beyond these practical considerations, a particular challenge for companies operating across the EU is navigating the different policy stances taken by various countries - which may explain why the EC has not yet been approached on this topic. This is especially true when it comes to showing that consumers will enjoy a fair share of the projected benefits.

Some national competition authorities – such as those in Austria, the Netherlands and (in the case of climate change agreements) the UK – have explicitly recognised that some agreements may give rise to benefits for wider society, rather than just the consumers in the markets to which the agreements apply; furthermore, they have signalled that they will take these benefits into account when assessing relevant proposals. The EC, by contrast, has taken a much tougher line, indicating that it will consider only benefits accruing to consumers in the affected markets. Such inconsistency risks sowing confusion and may deter businesses with operations in multiple European countries from submitting proposals for fear of falling foul of the EC’s stricter approach.

Moreover, some non-EU policymakers have adopted much less supportive positions in relation to sustainability agreements. In the US, where sustainability issues are especially politically charged and there are no 'safe harbour’ provisions for such agreements, cooperation between firms on climate change and other environmental initiatives looks especially perilous. For example, the House Judiciary Committee wrote in December 2022 to Climate Action 100+, an investor-led initiative pressing companies to decarbonise and cut greenhouse gases, suggesting that sustainability agreements could breach antitrust rules. The committee threatened a formal investigation, which would risk huge fines and potentially criminal punishment. And in 2023, a number of leading financial services companies withdrew from a UN-backed coalition of financial firms ‘committed to accelerating decarbonisation of the economy’ after a group of Republican attorneys general warned that their participation in this group might violate antitrust laws.

Such developments are likely to pour cold water over moves by US-based and international businesses to involve themselves in sustainability agreements. By the same logic that pan-European companies will be bound by the EC’s rules rather than national ones, firms operating globally risk violating the antitrust regulations of other jurisdictions even if their proposals are approved in Europe.

Who’s up next?

The question now is who else will step up. Given the challenges outlined above, we might expect further pioneers of sustainability agreements to possess two characteristics:

1. They may already have conducted assessments of their environmental impact and analysed the environmental risks or attributes of their activities in another (e.g. regulatory) context, making them familiar with the methodologies involved; and
2. They may be localised companies that sell predominantly into national markets, and so need not fear that what they do in one market might get them into hot water in other jurisdictions..  

Since the Fairtrade Foundation’s and WWF-UK’s proposals in the UK built on existing initiatives and applied only to UK grocery retailers, they arguably ticked both of the boxes above. Any other takers?