Global Bank Review: Clearing the fog – does your ESG agenda raise competition concerns?

As ESG rises up corporate agendas, competition authorities face a challenge in supporting progressive collaboration without allowing harm to competition. A lack of clear guidance leaves more questions than answers.

This article is part of our 2021 Global Bank Review – ESG: Creating a purposeful future, an annual publication by our Global Banks Sector Group which brings together our people who live and breathe banks.

It has long been clear that banks can be prime players in fostering the spread of meaningful ESG policies. Through levers of lending and investing, coupled with wide relationships with customers, clients and communities, banks are increasingly collaborating on issues like developing green products, improving environmental reporting, diversity and upholding human rights.

Partnering with peers and clients can help align investment and drive knowledge sharing as well as foster a sense of industry-wide credibility, creating momentum for initiatives and solutions to issues. Equally, collaboration can easily trigger competition concerns. Information sharing on green products, or coordinated action on industry practices, for example, may be viewed as anti-competitive or a prelude to cartel behaviour. This is especially so if such collaboration occurs alongside discussion of sensitive information such as prices, costs or product launches.

Nonetheless, antitrust authorities have recognised that competition law risks are becoming an obstacle in the pursuit of ESG goals. In response, several agencies are consulting on how the law or enforcement policies can be clarified to provide companies with certainty on which modes of ESG collaboration are likely permissible. While this wider dialogue is ongoing, companies should consider how the nature of their industry collaboration and current arrangements will likely fare in the future.

ESG and competition policy – A global primer

In Europe, a major driver for ESG is the European Green Deal, which commits to making the EU’s economy carbon-neutral by 2050. A number of EU authorities, including the European Commission (EC), and several EU member state authorities have conducted research into the interaction between competition law and ESG initiatives, as has the UK Competition and Markets Authority (CMA).

Some agencies have progressed further in their analysis than others. In January 2021, the Dutch competition watchdog published revised draft guidance on the compatibility of sustainability initiatives with competition law, closely followed by similar guidelines from the CMA. In September 2021, the EC published a policy brief summarising key points raised in the debate in Europe, signalling proposed reforms.

The Dutch guidelines are more granular than the UK equivalent, and provide comfort that companies that follow the guidance in good faith will not be subject to penalties. The EC has yet to publish formal guidance but has proposed reforms to address clashes between sustainability aims and competition law, providing broad indications of how environmental initiatives can be crafted under the existing framework.

Key themes do emerge from European work to date. Notably, there is some uncertainty as to whether wider social benefits from sustainability cooperation can be enough to  offset anti-competitive effects such as increased prices. This uncertainty exists because competition law has traditionally looked at the impact on consumers in specific markets, and the benefits to those consumers specifically must outweigh the harm they suffer. The economic value consumers place on sustainability will also be key. As the EC puts it, “if consumers do value sustainable products, profit-maximizing companies are expected to offer such products independently”.

On the other side of the globe, the Australian Competition and Consumer Commission (ACCC) has been considering applications for authorisation to permit firms to collaborate on ESG initiatives.

The relevant threshold test for the ACCC is whether the conduct will produce public benefits outweighing any anti-competitive potential. Earlier this year, the ACCC considered granting authorisation to an Australian bank and project developers seeking buyers to enter into power purchasing agreements to support the development of a new wind farm. The ACCC gave interim authorisation, recognising benefits of reduced greenhouse gas emissions would be generated above those achieved without cooperation, or could only have been achieved at higher cost. The ACCC justified the move as constituting a public benefit and the final determination was due in October 2021.

Proceed with caution

Despite some EU member states taking clear steps to provide greater confidence to parties on ESG collaboration, there remains considerable uncertainty until the EC makes a clearer policy statement. The stance the EC takes is also likely to have an impact globally, guiding authorities in other jurisdictions with regimes based on European principles, particularly in Asia.

In jurisdictions such as Australia, where parties may seek approval from watchdogs for specific arrangements, companies should evaluate the case for seeking such certainty.

Beyond that, banks should still approach ESG collaboration with caution. The EC’s hesitance to issue robust guidance on collaboration reflects the difficulty in balancing sometimes conflicting objectives of encouraging ESG and protecting competition. That leaves parties to collaboration agreements to navigate complexities and uncertainty when considering such ventures. For now it is best to take a conservative stance on potential competition breaches and leave a paper trail behind any collaboration that can stand up to robust external scrutiny, should the need arise.

As part of such a conservative approach, banks should reflect on whether less restrictive forms of collaboration, are available for achieving the same ESG objectives. The principle of proportionality applies equally to ESG collaboration as to other forms of collaboration, and the EC and Dutch competition authority have both emphasised that non-collaborative efforts should be made wherever possible. Collaboration will be most clearly justifiable where industry-wide scale is required.

In such circumstances, collaborative ESG initiatives should be open to all comers, and not leveraged as an opportunity to improve the market position of some banks only. Excluding market participants without reasonable justification could both undermine the rationale for collaboration, and be considered a form of cartelisation. 

Lastly, banks should carefully consider what benefits are achieved through collaboration, and who most directly enjoys those benefits. Collaboration that leads to direct and tangible benefits for the same class of customers affected by the collaboration, is more likely to be compliant with competition law than collaboration leading to broader-based (and more subjective) benefits.