Environmental, social and governance factors, colloquially known as ESG, is a framework that helps stakeholders understand how an organization manages risks and opportunities related to the environment, society, and its internal governance. Indian companies have started taking steps to further their ESG responsibilities to attract higher investments and valuations.
The rationale behind this move is simple; companies that work towards promoting their workers, customers, shareholders and society are companies that are better run, therefore making them attractive for long-term investments and high valuations. Holistic ESG adoption is on the rise in India, creating value and profit for managers and assuring long-term returns for investors at the same time.
In most cases, a company can better its ESG performance by internal structuring. However, some situations may require a company to collaborate with its competitors to achieve broader ESG goals. Take the example of an airline that wishes to switch to a cleaner jet fuel. To offset the major costs that this will require, the airline (acting alone) will have to increase its airfare, and risk losing a competitive advantage vis-à-vis its competitors. To remedy this ‘first mover disadvantage’, the airline can collaborate with other airlines to adopt the cleaner fuel together, which will result in an increased airfare, spread across the board.
While this collaboration will be a step in the right direction towards a sustainable and environmentally conscious airline industry, it may raise alarm bells from a competition law perspective, inviting allegations of cartelization or anti-competitive behaviour from the Competition Commission of India (CCI).
The CCI would be justified in drawing an inference of potential anti-competitive behaviour from competitor collaborations, considering such collaborations often require key management of competitors to meet, exchange commercial information and regularly communicate with each other. However, in light of increasing ESG-conscious corporate environments, it is important to assess whether the Indian competition framework is equipped to appropriately consider ESG collaborations between competitors.
The intersection between Indian competition law and ESG collaboration has largely remained unexplored due to a general lack of guidance on the issue. There are no guidelines or regulations published by the CCI which address the needs of businesses who wish to collaborate to achieve ESG goals. However, there are several enabling provisions in the Competition Act, 2002 that can be interpreted to facilitate ESG collaborations between competitors.
For example, the preamble to the Competition Act expressly contextualises its provisions within the broader framework of ‘economic development of the country’ and recognises ‘consumer interests’ as one of its goals. Further, under Section 19(3) of the Competition Act, the CCI can assess potentially anti-competitive ESG facilitating agreements in terms of benefits to consumers, improvements in the production/distribution of goods, and promotion of scientific and economic development. Similarly, under Section 20(4) of the Competition Act, the CCI can assess the potential anti-competitive effects of ESG-facilitating mergers in terms of innovation, economic development and benefits of the combination to consumers or society as a whole.
Further, the cartel prohibiting provisions provide an opportunity for joint ventures between competitors to demonstrate efficiencies an rebut the presumption of having an appreciable adverse effect on competition. To justify an efficiency defence, parties should be able to provide clinching evidence of specific efficiencies arising from their arrangement and demonstrate how such efficiencies would be passed on to current consumers, in a foreseeable timeframe.
Despite the above provisions, relying on efficiency defences for ESG-related collaborations under the existing regime poses three challenges.
First, the Competition Act does not expressly allow competitors to collaborate on ESG initiatives. Second, the current framework does not contemplate assessing efficiencies arising out of competitor collaborations for future consumers, and only focusses on current consumers. Third, the Competition Act requires parties to self-assess whether their collaboration can result in any anticompetitive effects, and does not contemplate communication channels with the CCI to seek guidance on such collaborations. Due to the lack of precedent and guidance on the subject, businesses are forced to adopt conservative strategies, to the potential detriment of ESG interests.
The Dutch competition regulator was the first to alleviate stakeholder concerns regarding such issues, followed by regulators in Greece and the United Kingdom. These competition regulators have published substantive guidelines on the application of competition law to ‘sustainability agreements’, paving the way for competitor collaboration where societal benefits outweigh any real or potential disadvantages to competition in the market. Common factors considered in these guidelines to green-light competitor collaborations include clear evidence of sustainability benefits; the users (current or future) of the impacted product or service being allowed a fair share of such benefits; the restriction of competition being necessary for reaping such benefits; and competition in the market not being eliminated substantially.
Such guidelines offer much-needed clarity regarding the position of competition authorities to stakeholders across industries, leading to a boom of collaborative ESG initiatives. Relying on its guidelines, the Dutch competition regulator recently allowed direct competitors Shell and TotalEnergies to collaborate in the storage of CO2 in empty natural-gas fields in the North Sea. It was stated that the collaboration was necessary to reduce CO2 emissions, despite the slight restriction of competition in the market. The same regulator also blessed a joint agreement between Coca-Cola and other soft-drink suppliers to discontinue plastic handles on all soft-drink and water multipacks. By removing plastic handles, over 70% of these multipacks will become more recyclable and consume lesser plastic.
While the CCI has not yet reviewed the impact of conduct intended to further environmental and governance principles in its decisional practice, it has shown some sensitivity to broader economic and social goals in some decisions. In Vipul Shah v. AIFEC and Ors, the CCI refrained from imposing penalties on film associations for alleged cartelisation since they were formed by daily-wage earners and craftsmen. In FCI v. SAPPL & Ors, the CCI again refrained from imposing a penalty on small/medium offending enterprises, taking note of the fact that the micro, small and medium enterprises (MSME) sector in India was under stress due to the economic situation caused by COVID-19. In , the National Company Law Appellate Tribunal (NCLAT), while remanding the matter to the CCI, directed the Commission to review the excessive penalty amount and consider a reformative penalty rather than putting the industry in weak health.
The above examples highlight that the CCI, though facilitative of economic growth and competition in the market, currently lacks the powers to expressly consider or approve ESG collaborations between competitors in the present regime. To remedy this situation, the CCI can offer positive formal guidance as to what businesses can do in this area, or alternatively open channels of communications for businesses to approach the CCI with their collaborative proposals. This effort will have to be combined with legislative support to expressly incorporate provisions that promote collaborative ESG initiatives.
The Competition Act is facing a revamp with the proposed Competition (Amendment) Bill, 2022, which is yet to be further debated in Parliament. While the CCI has not exercised its existing mandate to issue guidance on ESG collaborations, the Bill also misses out on incorporating express provisions to bolster the ESG framework. Considering the upward trend of companies desiring to better their ESG score, along with the corporate social responsibility (CSR) and net-zero carbon emission targets regularly committed to by the government, it is imperative for the CCI or the government to open the door for ESG collaborations to align India’s competition regime with international best practices.
Rohan Arora is a Partner and Shivek Sahai Endlaw is an Associate in the Competition Law Practice at Shardul Amarchand Mangaldas & Co, New Delhi.
The views expressed in this article are personal. They do not purport or reflect the opinions or views of SAM & Co or its members.