A regular briefing for the alternative asset management industry.
As a general principle, antitrust laws are designed to prevent independent businesses from collaborating in a way that distorts markets or inhibits fair competition. As the climate crisis and other environmental and social issues become more urgent – and in the absence of effective international law and regulation – many organisations are working together to achieve their common sustainability goals, and to offer mutual support in navigating complex regulations and novel challenges. These collaborations are often supported by an organisation's own stakeholders – including its investors and customers. But when does such co-operation pose competition law risk?
Forums established with ESG objectives, many of which are underpinned by pledges to support specific sustainability goals, have recently been thrust into the spotlight. Mostly that's the result of a sustained campaign by some in the United States targeting banks, investor coalitions and assets managers – and, in particular, their commitments to reduce exposure to fossil fuels to help the transition to net zero.
One allegation is that such specific commitments amount to an anti-competitive collective boycott by independent investors. The campaign has included an open letter to asset managers in March seeking to impact the 2023 proxy voting seasons, and legal threats against firms participating in initiatives such as Climate Action 100+, the Glasgow Financial Alliance for Net Zero (GFANZ), and its constituent sub-groups, including the Net Zero Asset Managers initiative (NZAM).
This public campaign has had an impact: for example, GFANZ has amended its rules so that its members do not have to commit to all of the UN's 'Race to Zero' goals; and 30% of the members the Net-Zero Insurance Alliance (NZIA) have now reportedly left the grouping, many citing antitrust concerns.
It is true that competition law regulators have not given companies and investors a free pass: they have made clear that information sharing and collaboration between competing firms which aims to, or is likely to, materially reduce competition will not be exempt from investigation and sanction. The concern is that ESG considerations will be used to cover-up or "greenwash" cartel-like behaviour.
But it is also very important not to overdo the concerns, which are manageable if certain basic principles are adopted.
For asset managers, one clear area of risk is signing-up to an industry-wide commitment to meet a specific ESG goal. Particular thought must be given to any commitment which is both mandatory – for example, a requirement of membership – and specific, leaving little discretion as regard members' individual commercial decision making.
Caution should also be exercised if firms are seeking to agree on minimum standards for the industry – whether to certify the green credentials of financial products, or to help ensure industry participants comply with regulatory requirements. EU and UK regulatory guidance provides a 'safe harbour' here, provided the standard-setting meets certain minimum criteria. European regulators also recognise that industry collaboration may well be needed to ensure regulatory standards are quickly and effectively adopted.
Many regulators are trying to be helpful, especially in Europe: they have made it clear that they are keen to avoid competition law acting as a barrier to effective ESG action.
But firms will need to tread carefully if that standard-setting is not open to all industry participants – for example, excluding smaller, emerging competitors. If standards are likely to result in a significant increase in the fees ultimately charged to investors, the safe harbour is probably not available at all. Standards must also be carefully worded to make clear that participating firms can opt-out or apply higher standards than any minimum imposed.
As with any competitor-to-competitor discussion, firms will also want to make sure that the level of information exchanged between industry peers is limited to that strictly necessary to fulfil the objective of the ESG collaboration. Any scheme facilitating the exchange of a firm's pricing, cost base or customer list would need to be considered very carefully – as a minimum, additional controls may be needed. Limits on information exchange should be clearly communicated ahead of time and even informal discussions should be documented.
Firms would also be well-advised to try to specify and quantify the expected benefits of their arrangements. Certain regulators, like the UK CMA, have suggested that, to get more flexible treatment, firms may be expected to demonstrate the specific emission reductions they are likely to achieve. Regulators have recognised that ESG outcomes may only be seen in the longer-term, but it might still be challenging for firms to provide evidence of the benefits achieved – particularly if the scheme's aims are broad and subject to change. Thinking about this at the outset might help.
Many regulators are trying to be helpful, especially in Europe: they have made it clear that they are keen to avoid competition law acting as a barrier to effective ESG action. Some have provided greater flexibility, subject to conditions. For example, the European Commission finalised new sustainability specific guidelines over the Summer – asserting that "antitrust rules do not stand in the way of agreements between competitors that pursue a sustainability objective" – and the UK authority has similar guidelines in draft. Both regulators have also said they are open to providing informal guidance for borderline initiatives.
But the scope and level of regulatory flexibility does vary between jurisdictions. US regulators have not provided any specific additional flexibility for ESG initiatives. Dutch, Austrian and UK regulators have taken an arguably more permissive approach than that the EU, potentially offering individual exemptions on the basis of green benefits enjoyed by wider society, but only as regards a subset of agreements specifically targeting climate change. By contrast, the EU and German regulators are showing greater flexibility for a broader range of societal goals. Even though many ESG collaborations are cross-border, there may not be a 'one size fits all' approach to managing antitrust risk.
Competition law risks, and the related litigation risks, are not to be ignored as firms respond to legitimate concerns from key stakeholders. But – with proper risk management and record-keeping, and provided that it does not harm competition between firms – there should be no barrier to industry co-operation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.