By - King Stubb & Kasiva on May 16, 2023
Environmental, social, and governance (“ESG”) factors have grown in importance in the business world. Businesses that prioritize ESG initiatives not only help to create a more sustainable future but also attract more investments and have a higher market value. The use of holistic ESG practices is increasing in India, which benefits managers and ensures long-term returns for investors. When competing companies work together to achieve ESG goals, however, questions about the potential effects of competition law arise. Let us look into the relationship between ESG collaborations in India and competition law.
Internal restructuring frequently enables businesses to improve their ESG performance. However, to achieve broader ESG goals, competitors must sometimes collaborate. For example, an airline that wants to switch to cleaner jet fuel may have to pay a significant amount of money, which could result in higher airfares and a potential loss of competitive advantage. To overcome the “first mover disadvantage,” the airline can work with other airlines to adopt cleaner fuel, thereby spreading the increased costs throughout the industry.
While collaboration among rivals to achieve sustainable and ecologically sensitive aims appears to be good, it poses difficulties under competition law. Such agreements may be viewed as potential cartelization or anti-competitive behaviour by the Competition Commission of India (“CCI”). Competitor cooperation frequently entails top management people meeting, exchanging commercial information, and communicating regularly, which can raise concerns.
The intersection of Indian competition law and ESG collaboration has mostly gone unexplored due to a lack of direction. The CCI has not set clear regulations or criteria for ESG collaborations. However, some provisions of the 2002 Competition Act can be interpreted to permit such collaborations.
Per Section 19(3) of the Competition Act, the CCI can assess whether ESG-enabling agreements are anti-competitive based on how they affect consumers, improve the production and distribution of goods, and advance economic and technological advancement. The CCI may also assess potential anticompetitive implications of ESG-facilitating acquisitions in terms of innovation, economic growth, and consumer or social benefits under Section 20(4) of the Act.
The restrictions that prevent cartels allow collaborative ventures between competitors to demonstrate their efficacy and dispel the assumption that they will harm competition. Nonetheless, depending on efficiency defences for ESG partnerships under the current system raises three concerns:
Other international competition authorities have addressed similar issues and guided how to apply competition law to sustainability agreements. For example, competition regulators in the Netherlands, Greece, and the United Kingdom, consider sustainability benefits, equitable benefit distribution among users, the need for competition constraints, and the limited elimination of competition when allowing competitor collaboration.
While the CCI has shown an interest in broader economic and social aims on occasion, it lacks express jurisdiction to analyse or approve ESG agreements between rivals. To bridge this gap, the CCI may develop lines of communication for joint proposal submissions or offer enterprises official guidance on ESG cooperation. Incorporating provisions that encourage cooperative ESG initiatives within the Competition Act also necessitates legislative backing.
The Competition (Amendment) Act of 2022 makes no specific mention of the inclusion of ESG-related clauses. Given the rising trend of businesses aiming to improve their ESG scores and the government’s commitment to net-zero carbon emission targets and corporate social responsibility, the CCI or the government must align India’s competition regime with global best practices and make room for ESG partnerships.
The CCI has not yet explored how actions made to advance environmental and governance principles have influenced its decision-making processes, but it has demonstrated some concern for broader economic and social goals in specific cases. The CCI declined to penalize film associations for suspected cartelization in the matter of Vipul Shah vs. AIFEC and Ors since they were founded by workers receiving minimum pay and skilled labourers. Due to the difficulties in the MSME sector as a result of the COVID-19-related economic crisis, the CCI opted not to impose penalties on small and medium-sized offenders in FCI vs. SAPPL & Ors.
Even if the CCI encourages market competition and economic progress, the current structure does not give it the specific authority to assess or ratify ESG agreements, as illustrated by the aforementioned examples. To address this, the CCI could either provide efficient communication channels for firms to approach the CCI with their collaborative proposal or establish positive official rules on approved ESG cooperation acts.The interaction between ESG partnerships and competition law is a significant and evolving topic in India that demands consideration.
As organisations place a larger emphasis on ESG activities, the competitive environment must encourage and make transparent cooperation that advances sustainability and social aims. India can establish a favourable climate for enterprises to contribute to a sustainable future while ensuring fair market competition by adhering to global best practices and enacting legislation that supports joint ESG efforts.
The possibility of cartelization or other anti-competitive behaviour raises competition law concerns when competing companies collaborate on ESG initiatives. Nonetheless, given the benefits to consumers and advances in production, distribution, and economic development, the provisions of the Competition Act can be interpreted to allow such collaborations.
The current competition law framework makes efficiency defences in ESG partnerships difficult. First, the Competition Act expressly prohibits competitors from collaborating on ESG projects. Second, rather than focusing on potential future customers, the emphasis is on evaluating efficiencies for current customers. Finally, parties to collaboration are expected to independently assess potential anti-competitive effects without the assistance of CCI’s established channels.
To address the lack of clear regulations and guidance, the CCI should either establish efficient channels of communication through which businesses can approach it with their collaborative proposal or provide formal guidance on what actions are acceptable for ESG collaborations. Incorporating provisions into the Competition Act that encourage collaborative ESG initiatives and align India’s competition regime with global best practices will also necessitate legislative support.
King Stubb & Kasiva,
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