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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
Australia | Publication | juni 2023
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:
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:
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:
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:
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.
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:
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:
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.
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.
In Australia, competition laws generally prohibit conduct similar to that prohibited in the UK, Europe and the US. In short:
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:
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:
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.
Collaboration | Membership | Scope/goals |
Responsible Investment Association Australasia | 500 members from the funds and investing industry in Australia and New Zealand representing US$29 trillion in assets under management |
Champions responsible investing and a sustainable financial system in Australia and New Zealand through education, knowledge sharing and externally verified certification for investments that take into account environmental, social, governance or ethical considerations.3 |
Clean Energy Council ‘Risks of Modern Slavery’ Working Group | Companies who work in and support the clean energy sector in Australia | To support and promote greater industry awareness of modern slavery and start working towards industry-wide approaches to reduce the prevalence of forced labour in Australia’s renewable energy supply chains, including recently publishing a white paper on ‘Addressing Modern Slavery in the clean energy sector’.4 |
Property Council of Australia’s Collective Social Impact Framework | 15 major partners across the Australian property industry | A voluntary reporting framework designed to help Australian property companies assess and quantify their social sustainability programs, promote their social sustainability initiatives, showcase examples of good practice and facilitate continuous improvement.5 |
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.
ACCC, ‘Greenwashing by businesses in Australia - findings of ACCC's internet sweep’, ACCC Publications (Report, March 2023) <https://www.accc.gov.au/about-us/publications/greenwashing-by-businesses-in-australia-findings-of-acccs-internet-sweep>.
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