Climate Governance Initiative

Does sustainability collaboration in finance, investment, and insurance breach competition law? Not necessarily ...

13 November 2023

Event Summary

Across industries, boards increasingly recognise the importance of collaborating on climate change to avoid first-mover disadvantages, address market failure and externalities and create sector-wide change. Regulation, like the EU Corporate Sustainability Due Diligence Directive, may even require sustainability cooperation. At the same time, however, agreements between competitors can usher in antitrust concerns, and recently global financial alliances focused on addressing climate change have faced challenges due to alleged breaches of competition law. In fact, this webinar illustrated how these alliances and similar sustainability agreements likely do not breach antitrust law if they stay within proper guardrails, and regulators in the EU and UK, and a few other countries around the world, have begun to indicate approval of climate collaborations.

This event for board directors considered why collaboration is crucial for climate change, whether allegations of antitrust infringement hold weight in light of competition law fundamentals and regulatory guidance, and what steps boards can take to seize opportunities to achieve collective climate ambitions.

Top takeaways

  • Climate inaction presents a long-term existential risk for organisations that must be addressed through ambitious action and collaboration. If left unaddressed, the climate crisis will lead to stranded and uninsurable assets, and physical and systemic risks to business. Even the largest financial institutions cannot mitigate this systemic risk on their own, so collaboration across the sector is vital. 
  • Antitrust is not a barrier to many sustainability agreements. Despite concerns, partially fuelled by an anti-ESG political agenda, that climate collaborations fall afoul of competition law, many sustainability agreements are unlikely to breach competition law. Competition regulators in the EU and UK have issued guidelines listing a range of sustainability agreements that are compliant with antitrust rules, or qualify for exemption.
  • Directors can play an active role in shaping effective sustainability agreements. Boards can encourage management to seek out opportunities for collaboration, and challenge misperceptions about the role that antitrust enforcement does and does not play in respect of collaboration aimed at promoting climate action or other sustainability-oriented outcomes. Seeking legal advice is essential before entering into an agreement, so directors must ensure that management also engage their lawyers in a conversation founded on the economic case for climate action.

Climate change as a consequence of market failure 

To begin the discussion, Maurits Dolmans presented climate change as a product of market and regulatory failures.  Specifically, climate costs, which pose direct risks to the wellbeing of society and the financial outcomes of businesses, are not included in the price of goods and services (they are “externalities”).  This means there is not enough market incentives to reduce greenhouse gas emissions. 

“Greenhouse gas (GHG) emissions are externalities and represent the biggest market failure the world has seen […] People around the world are already suffering from past emissions, and current emissions will have potentially catastrophic impacts in the future.”  (Lord Nicholas Stern, 2008)

Universal Asset Owners and other institutions who invest in, finance, and insure assets in all sectors of the economy are particularly exposed to these risks. It is important for these actors to recognise the inability to diversify or finance one’s way out of the climate crisis, and that failing to address this risk may expose them to social and economic destabilisation, which may in turn exacerbate the consequences of climate change. 

Dolmans asserts that, regardless of industry, continued investment in new fossil fuels will have detrimental impacts to assets and introduce unexpected, cascading risks to organisations, their consumers, beneficiaries, and shareholders.   Companies are reluctant to move away from opportunities involving high emissions, for fear that competitors will take advantage. They want and have to more away, but are discouraged from doing so unless everyone does (a “collective action problem”). Transitioning away from fossil fuels therefore requires coordination and systems thinking between market actors to collectively shift risk perceptions and resources away from fossil fuels.

Understanding sustainability agreements and competition law

Competition law has emerged as a perceived barrier, according to Dolmans, driven especially by political action in parts of the United States. This has been a particular issue for the financial sector, as net zero alliances under the Glasgow Financial Alliance for Net Zero (“GFANZ”) have seen some member institutions withdraw due to antitrust concerns. However, allegations that agreements breach competition law often do not have a strong foundation in competition law principles.

In conversation with Karina Litvack, Dolmans explained that many sustainability agreements do not reduce competition in the first place, and so are unlikely to raise antitrust issues. Even then, agreements that do impact competition may still be permitted provided the benefits they bring to consumers or even broader society are evident and outweigh the harms, and these restrictions on competition are necessary to achieving these benefits.

Dolmans walked directors through a traffic light system, categorising examples of sustainability agreement types according to those that are unlikely to infringe competition law, those that require in-depth assessment and legal advice to ensure compliance with competition law (under “rule of reason” or “exemption” criteria), and those that are clearly not compliant with competition law. This traffic light guidance can help boards understand which types of agreements their businesses might pursue; however, competition investigations can be complex, so directors should ensure their management consult lawyers for advice on specific sustainability agreements in the amber or red categories.

Offering broader insight into the role of litigation in advancing climate goals, specifically in the context of directors’ duties claims, Dolmans drew parallels with tobacco and asbestos litigations – noting that even though initial claims against boards have not been successful, this may still be a risk for directors who ignore climate change.  The California action against fossil fuel companies, for instance, could follow the pattern of the tobacco litigations:  a settlement requiring disclosures of internal documents showing firms were aware of climate concerns, which in turn trigger further damage claims, and fiduciary duty claims if boards do not develop effective transition plans.

What role can directors play when raising this topic in the boardroom?  

Some boards shy away from collective action in an effort to stay out of the public view and avoid attracting attention and potential legal action from stakeholders, while others choose to be more vocal and proactively seize opportunities to collaborate. Acknowledging the collective action problem, in which first-mover disadvantage can prevent organisations from taking ambitious climate action, this discussion aimed to reassure directors of not only the legality, but also the immense benefit, of collaborating to address climate change. 

As evidenced in new guidelines, competition authorities in the UK and EU are intent on supporting organisations that collaborate on sustainability issues, which can give boards more confidence when working with competitors, suppliers or customers to achieve climate ambitions. Even in jurisdictions without such guidance, like the US, existing competition law regimes would allow for a wide range of effective climate collaborations. Equipped with this understanding, directors can better support their management in understanding the economic case for cooperating on sustainability, identifying collaboration opportunities, and seeking out the proper legal guidance to ensure that cooperative efforts are aligned with regulation, organisational growth, and public interest. 

The full event recording is available: 

For the full set of slides presented during this webinar, click this link.

Further Resources include:
•    Sustainability and Net Zero Climate Agreements – A Transatlantic Antitrust Perspective
•    Summary of UK Sustainable Antitrust Guidance
•    Summary of EU Sustainable Antitrust Guidelines


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