- Competition law has emerged as a potential obstacle to cooperative climate action, with some firms in the Glasgow Financial Alliance for Net Zero arguing the coalition entails cartel-like behaviour.
- Another financial collective, Climate Action 100+, has also been accused of violating antitrust law by encouraging signatory firms to engage with companies on decarbonisation strategies.
- Some market participants argue that antitrust legislation should be reformed to facilitate sustainability efforts, but doing so risks loosening rules around an already difficult-to-enforce area of law.
Governments must take action to ensure that competition rules do not derail private-sector collaboration on climate action, say lawyers and market participants, after some sustainability-focused financial coalitions have been accused of cartel-like behaviour. Investor networks such as Ceres have taken substantial legal advice on this issue in light of concerns over the risk of competition-related lawsuits and investigations.
Such fears are adding to the already-multiplying challenges facing global cooperation on tackling climate change. And experts do not envisage a quick resolution to the issue, especially in light of the widespread anti-ESG backlash, particularly in the US, where Republicans are seizing on any opportunity to attack efforts on climate action or the sustainability theme in general.
The launch of the Glasgow Financial Alliance for Net Zero (Gfanz) and its various sector-specific offshoots was arguably the biggest achievement of the Cop26 climate summit last year. But major players in these initiatives have raised concerns around antitrust and competition rules, with some threatening to back out.
In total, at least 450 financial firms – from banks to asset managers to pension funds, holding an estimated $130trn in assets between them – have joined Gfanz since November 2021, to much fanfare. The aim is that members of each alliance meet criteria set by the UN’s Race to Zero initiative to support the goal of halving global emissions by 2030 and achieving net zero by 2050.
However, cracks began to emerge in Gfanz in early August when Race to Zero said it would require members to exit all unabated fossil fuels and specified that there be ‘no new coal’ financed. This position is shared by the International Energy Agency and the Intergovernmental Panel on Climate Change.
Many member firms have since raised antitrust concerns and some – including investment consultancy Meketa and two pension funds – have left their respective sub-alliances, for varying reasons. Several banks have reportedly threatened to do the same.
Race to Zero has subsequently softened the language around coal divestment and stressed that members should act individually rather than in concert. It also aims to address complaints made by some banks that it has set unrealistic targets without prior consultation, as Capital Monitor revealed last week.
Antitrust law differs slightly everywhere, but typically it applies certain tests to such cases. First, did the parties come together privately to agree to take a certain action? And second, did the agreement to take action result in a market distortion of some kind? If the answer to the second question is yes, the parties must prove that the benefits of the agreement outweighed the harm – and that can be difficult.
“My read [of ‘no new coal’] is that this constitutes an agreement between competitors to reduce competition, because buyers agreeing not to purchase from or lend to coal producers creates a distortion in the market, however small that is,” says a lawyer advising one of the Gfanz sector alliances on antitrust issues.
If a highly polluting company finds this agreement has had an impact on its business, it could bring a suit against Gfanz, the lawyer adds. More likely, though, is that action could be taken by competition authorities or other government agencies, potentially prompted by complaints or lobbying from companies, he says. That’s because companies bringing litigation directly would likely get a hostile reaction from the media and NGOs, incur more costs, and face the risk of losing and setting an unhelpful precedent from their perspective.
There is certainly a huge amount of capital at stake. US fund managers BlackRock and Vanguard alone have some $200bn invested into coal assets between them, according to German non-profit Urgewald’s Global Coal Exit List 2022 (see chart below). And 376 commercial banks provided a total of $363 billion in loans to the coal industry between January 2019 and November 2021, by Urgewald figures.
Still, for the time being, “as far as I know, there isn’t a lawsuit and no one has actually threatened one”, says Tom Hale, co-chair of the independent Expert Peer Review Group of the Race to Zero campaign.
Reform of competition law?
Nonetheless, there have been calls in some quarters for reform of antitrust rules or at least clarification that an agreement made to support sustainability would not result in enforcement action from competition authorities.
Race to Zero’s Hale wrote late last month that “the fact that anti-competition law, created to safeguard the public interest, could be manipulated to work against it shows the need for urgent reform”.
Meanwhile, others, such as Martijn Snoep, chairman of ACM, the Netherlands’ competition authority, have called on the European Commission to clarify its position.
“There are various ways of presenting the case, but … at the moment nobody wants to get dragged into an investigation or lawsuit, so companies are being a bit cautious and trying to get some reassurance as to where they stand,” adds the lawyer advising Gfanz.
European regulators have been the most proactive in this regard. Austria has gone the furthest, with an outright change to the law in September last year. It exempted “cooperation for the purpose of an eco-sustainable or climate-neutral economy from the cartel prohibition”. Meanwhile the EU, Dutch and British competition authorities have all published guidance to give companies comfort that climate-specific initiatives would not land them in hot water. Authorities in France, Germany and Greece are working on similar guidance.
Risks rising in US
While such moves provide clarity, they do not sufficiently protect banks, insurers or investment firms that operate and have customers globally. An investigation or suit could hypothetically be brought anywhere. It is complicated to confirm that a global initiative complies with all international competition rules, says the Gfanz lawyer.
After all, there is no shortage of influential parties who appear keen to bring such lawsuits – as is clear from the burgeoning anti-ESG movement. In the US, accusations have been levelled at the $60trn-backed Climate Action 100+ (CA100+), which is primarily an engagement initiative to pressure investee companies to reduce their emissions.
In a now infamous letter, Arkansas senator Tom Cotton wrote to BlackRock in July over its involvement in CA100+, arguing that its “anti-drilling coercion threatens our national security, hurts Americans struggling to buy a tank of gas, and appears to violate antitrust laws”.
It is with such risks in mind that lawyers have been consulted at every stage of the development of CA100+ and Net Zero Asset Managers initiative, says Kirsten Spalding, senior investor network director at Ceres. The non-profit organisation manages the legal aspects of CA100+’s US chapter and acts as secretariat for the NZAMi.
“We were always very concerned about concerted action – the whole initiative is structured to ensure investors don’t strike close to that line,” Spalding tells Capital Monitor, pointing to disclaimers on the websites of both CA100+ and NZAMi setting out this position.
“Our language is all about the science and the pathway,” she adds. “It’s not a prohibition, boycott or collusion of any kind around driving specific action. It’s about the intention of decarbonising the economy, focused on the science.”
Race to Zero, meanwhile, appears to have averted an immediate crisis by rephrasing its criteria. Without reform, however, climate initiatives of this type will test the limits of antitrust rules time and time again, lawyers say.
In such cases, regulators must weigh up a tough decision. Giving companies exemptions from antitrust rules, even on the basis of climate benefits, runs the risk of weakening an already difficult-to-enforce area of the law, which can be very damaging for consumers and societies when it fails.
In any case, waiting for hundreds of antitrust authorities to provide clarification would take time that scientists say the planet does not have.
One solution might be that governments set out a position on antitrust law, says the lawyer advising Gfanz. World leaders meeting in Sharm El Sheikh next month for Cop27 could add a line to a future agreement committing to amending their national legislation to ensure antitrust rules do not frustrate broader climate goals, he suggests.
After all, there is a broad consensus that much faster collective action on climate is needed and that companies are not moving fast enough on emissions reduction to meet the Paris Agreement goals.
But competition authorities are asking companies why they need global climate agreements and argue they can just decarbonise on their own, the Gfanz lawyer says. That increasingly seems to be wishful thinking.