Disciplined ambition: Fair-trading and competition law in ESG

Introduction

Proactively championing environmental, social and governance (ESG) goals is increasingly popular with companies seeking to take a moral course for employees, customers and communities and as a way to create value for shareholders.

In the context of the energy transition, this is often focussed on the “E”. However, global investment in all types of ESG strategies and assets is growing. ESG investment reached USD35.3 trillion across five major markets including Australia and New Zealand in 2020¹, and the Australasia region is among the fastest growing regions, with 25% growth in this space from 2018 to 2020. ESG-focused funds are growing their market share aggressively and ESG strategies are increasingly ingrained in the way companies do business.

Industry-wide initiatives are also gaining popularity with companies around the world contemplating the extent to which they can collaborate in order to share or manage risk and improve outcomes.

This pursuit comes with interlinked competition and consumer law risks around:

1. ”virtue washing”; and
2. balancing the desire to move faster or more decisively than competitors in areas of ESG (especially those that may not be aligned with short-term profit-making), with the desire to not “go it alone”, and therefore seeking to collaborate with competitors.

Regulatory risk where aspirations exceed achievements

Increasing upside to companies whose stakeholders place weight on ESG-related achievements, may create a temptation to make claims that overstate the reality, or for which they have insufficient supporting evidence. The spectrum of ESG investment is broad and in many sectors, adequate certification and audit options for companies to support their ESG claims are absent. For example, there is no single, settled way in which achievements in the areas of diversity and inclusion, ethical supply chains, sustainability or net zero targets should be measured.

While the term “greenwashing” relates primarily to environmental and sustainability claims, the same risk applies to ESG claims more broadly in what we term “virtue washing”.

The penalties for making ESG claims that are found to be false or misleading are significant. The maximum penalty for making false or misleading representations in the promotion of goods or services is the greater of $50 million, three times the value derived from the breach, or, (if the value cannot be determined) 30 per cent of the company’s turnover during the period of breach. In addition to the financial impost and the resources and costs of defending an Australian Competition & Consumer Commission (ACCC) investigation, serious reputational damage is also a major risk.

In making ESG representations, companies should have:

• clear and accurate claims;
• sufficient recent, credible information to support those claims, which will often be assisted by independent certification and/or audit processes;
• even where independent certification is available, confidence in the quality of those reviews and care in how the relevant certification is then promoted; and
• in relation to future stated ESG aspirations – clear plans to achieve them – including setting measureable goals, identifying practical changes required to achieve the goals, actively monitoring progress and reporting on achievement over time.

ACCC is focused on optimal outcomes through the energy transition

The ACCC has recently established a new internal taskforce focused on sustainability. It is building expertise in the area, informed by global best practice. This will aid it to:

• assess the legitimacy of consumer-focussed claims from a fair trading standpoint and take action against those involved in “greenwashing”;
• understand emerging markets; and
• understand and assess potential public benefits that parties might claim in support of an application for authorisation to collaborate on an industry initiative or acquire a rival, as outlined below.

Greenwashing is a real and significant focus of our regulators. The ACCC has identified this as an area of focus for its compliance and enforcement activities in 2023 and beyond. A 2022 sweep by the ACCC of 247 business websites revealed that 57% of the sample raised concern, including by:

• using vague or unclear environmental claims, or exaggerating benefits;
• referencing third-party certification (or logos that appear to be certification marks) in a confusing way;
• referencing environmental goals or aspirations without clear plans for achieving them; and
• not providing sufficient evidence for their claims.²

Of course “virtue washing” enforcement action is not new for the ACCC. We have seen a broad variety of cases over the years prosecuting overstated product quality or benefit claims including in relation to flushable wipes, the health value of food, “free range” products and a variety of “renewable” and “green” claims in sectors including power and motor vehicles.

Regulatory scrutiny of ESG claims, whilst a risk for business, is also positive, as it will help mitigate the “profit risk” associated with being a legitimate first mover in ESG initiatives. It should mean that companies that genuinely commit to and achieve their ESG goals in a transparent manner are able to differentiate themselves accordingly.

Why collaborate on ESG?

It is an inconvenient truth that some ESG initiatives are not aligned with short-term profit goals, despite expectations that this will be outweighed by long-term financial benefits (as well as broader public benefits). For example:

• the practical steps required for a company to achieve a net zero target are likely to come at a short term financial cost due to higher costs of clean energy and low-emission supply chains;
• reducing social risks in supply chains, where not strictly required by local law, such as improving working conditions in developing countries, will often increase manufacturing costs; and
• choosing to reduce reliance on revenue from certain sectors can mean other competitors are able to corner those profits instead.

Potential upsides are hard to quantify when “going it alone”, and this can manifest in companies seeking to understand approaches taken by peers.

Collaborations of these types can be a positive and necessary element of many ESG work streams as they help companies:

• work together to establish legitimate, evidence-backed standards and benchmarks which can be used to support ESG claims;
• facilitate efficiency and consistency within industries in achieving ESG goals; and
• have certainty that their competitors are working towards the same ESG goals, and as such they are less likely to experience financial disadvantage as a result of the steps they are taking to achieve those goals.

Competition law risk arising from collaborations

However, would-be collaborators and competition regulators across the world must distinguish between collaborations that are helpful tools to achieve ESG objectives, and those that constitute illegal breaches of competition law and could damage markets and economies.

Regulatory approach to ESG collaboration varies across jurisdictions

Regulators in the UK and European Union (and some individual EU member states) have published guidance indicating a flexible approach, whereby sustainability objectives will be taken into account when assessing horizontal cooperation agreements that genuinely pursue sustainability objectives. Our European colleagues have analysed the EU approach here.

This position can be contrasted with a stricter approach in the United States, where neither the Antitrust Division of the Department of Justice nor the Federal Trade Commission has indicated that it will offer flexibility in the way it applies the law in order to further sustainability objectives. The US position has been analysed by our US colleagues here.

Australian regulatory position

In Australia, competition laws generally prohibit conduct similar to that prohibited in the UK, Europe and the US. In short:

• Any arrangement between competitors to fix prices, restrict supply or acquisition, allocate markets or customers, or rig tender processes will be cartel conduct and prohibited regardless of the effect on competition.
• Any form of cooperation between firms that has the purpose or effect of substantially lessening competition is also prohibited.

These are broad prohibitions. Helpfully, though, the ACCC can grant immunity from prosecution by granting “authorisation” for collaborative conduct where the anti-competitive detriments of the conduct are outweighed by public benefits likely to accrue. Obtaining authorisation involves submitting a detailed public application to the ACCC outlining likely benefits and the ways in which the conduct is likely to affect competition. The ACCC has recently used this power to allow:

• companies in the battery industry to increase prices in order to administer a responsible battery disposal scheme;
• the major supermarkets to collaborate on a short-term solution to manage the soft plastics stockpile and to facilitate the resumption of in-store collection for recycling; and
• the establishment of joint renewable energy buying groups, whereby members will pool their electricity demand and conduct a joint procurement and negotiation process for the supply of renewable electricity, so as to support the development of renewable generation projects.

Nonetheless, the ACCC is eager to ensure that it is not allowing collaborations that are detrimental for current or future competitive dynamics. Examples where regulators may be concerned include coordinated agreement, formal or informal, that:

• reduces the ambitions of industry or inhibits progress;
• reduces the intensity of competition on ESG grounds;
• restricts the acquisition of products or services from, or the supply of products or services to, certain companies, based on their characteristics, e.g. their emissions profile or sustainability achievements;
• standardises terms of dealings, e.g., agreements relating to any part of the price at which products or services will be sold to customers;
• amounts to “green hushing” (withholding information on climate strategy to avoid greenwashing risk); and
• that, through mergers, removes innovative competitors (killer acquisitions).

Non-binding agreements, protocols and codes of practice, and the formation of industry groups aimed at developing certification standards can present a lower risk profile than the above examples. However, these will all still require assessment of the extent to which they may have the purpose or effect of substantially lessening competition. Structuring and implementation of internal protocols to manage the extent of coordination and information sharing are also critical.

There are a number of examples of collaborations of this nature, across a range of industries in which companies around the world have been participating to further ESG goals. Importantly though, they will have been developed in careful compliance with competition law and sought to not traverse into the “danger areas” identified above. Some local examples are set out below.

Be on the front foot

To properly manage competition law risk, it is necessary to identify types of collaboration that could pose a competition law risk before any competitively sensitive information is shared or understanding is reached with other would-be collaborators. Advice should be sought early on structure and approach in order to forestall competition law concerns. In addition, or in the alternative, authorisation could be sought where the public benefits outweigh any anti-competitive downside.

The ACCC has indicated that it is “open to engagement” on the topic of authorisation in the name of sustainability. You can expect a genuine reception from the ACCC where there is legitimate merit in an initiative. However, you can also expect to be required to substantiate any ESG benefits that a collaboration is expected to manifest.

The same messaging applies to claims around sustainability or other attributes of your business – ensure that the impression created by any claim is aligned to the facts.

We regularly work with clients to help them manage these issues on an Australian and global basis. Please get in touch if you need assistance.