Suyash Pandey
The Authority for Consumers and Markets (ACM) in the Netherlands adopted the final policy on sustainability agreements– agreements between corporations that promote the development of the economy, the environment, society, and human rights. These agreements, inter alia, aim at lowering pollution, restricting the use of natural resources, protecting human rights, and assuring animal welfare. Broadly, these agreements are aimed at achieving Environmental, Social and Governance (ESG) goals.
The policy, adopted in October this year, aims to explain the application of competition rules to sustainability agreements. The introduction of the policy is significant, particularly in light of the growing demand for the integration of ESG goals within the competition policy across jurisdictions. The rise in the effects of climate change, inadequate policy and regulatory responses, and growing evidence of business collaborations to counter climate change are touted as reasons for ESG integration in competition law.
Even the Indian Competition Commission has recently stated that it is exploring ways to harmonise competition policy and ESG. However, it still does not have any guidelines on the issue. Adopting an ESG-friendly competition regime can help to further the 17 sustainable development goals envisaged by the United Nations which have been assented to by numerous countries, including India. In light of these reasons, the Dutch guidelines are important from the Indian perspective. As we shall see, the framework envisaged by the guidelines also addresses the problems that are faced by the Indian Competition regime in dealing with ESG collaborations.
In the present paper, the author argues that there is a need to incorporate guiding principles influencing sustainability agreements within the Indian competition regime due to the association of variable costs and interpretational openness in ex-post determinations. This paper will, first, deal with the intersection of competition law and ESG goals. Secondly, it will deal with the problems faced by the current regime of assessment of ESG collaborations and, finally, it will argue for the adoption of fixed standards and an ex-ante mechanism to deal with the problems previously highlighted.
Competition Law and ESG
The ESG collaborations seem to be at odds with the competition law framework. The reason behind this is that while competition law seeks to eradicate agreements, mergers or actions of market players that affect the interests of the consumers, particularly focusing on the additional costs imposed upon the consumers, ESG collaborations among market players focus on adopting environmentally sustainable practices even if they lead to some increase in the overall prices in that market. This means that while competition law is centred around protecting the price-centric concerns of the consumers from anticompetitive agreements, ESG-based collaborations challenge that understanding by placing the broader environmental, social and governmental implications of such collaborations at the centre.
This can be further understood using an example of a competitive market. In this market, due to the presence of various players, companies would be constrained to limit their prices to a minimum. Let’s say company Y seeks to replace one of its raw materials with a more sustainable, but expensive, material. This replacement will entail an consequent increase in the price of the final good. If Y is the only player changing to a more sustainable means of production, it will lose its consumers, who will shift to other market players. In case Y seeks to enter into a contract with a competitor firm Z, the products of the two companies will become more sustainable, but costlier. If all the market players come together to adopt a more sustainable raw material, the earlier materials impacting the environment will be slowly phased out. However, this will also cause an increase in the market price. Such a resultant increment in market price as a consequence of collaboration among firms might get ousted by the competition framework as it resembles a cartel. Due to the overarching framework capturing collaboration among firms, these genuine efforts towards a more sustainable market are also deemed to be anticompetitive owing to an increase in prices.
Similar competition law provisions relating to abuse of dominance and mergers and acquisitions oust market situations where a dominant firm seeks to move to a more sustainable means of production, or where two or more firms seek to merge to further sustainability goals- both of these situations resulting in anticompetitive assessment of the firms.
Thus, the endeavour of business entities towards ESG goals seems to be facing impediments from the competition policy due to its consumer-centric nature. The competition policy might also be acting as a deterrent to such efforts from businesses. The conflict between ESG collaborations and competition law is also visible in the Indian competition regime. As we shall see, the intervention of the CCI in the Indian framework occurs at a later stage- when the collaboration is already effectuated. This leads to the problem of undoing the agreements already effectuated under the collaboration.
The Problems with the Present Regime
In India, the ESG agreements are dealt with in an ex-post manner. Such ex-post determination of anticompetitive impacts of sustainability agreements imposes variable costs upon the parties. Variable costs are defined as costs that vary more or less directly with the output or activity of the particular department. In a legal system, this means that variable costs will be contingent upon the activity of an institution. So, for example, in cases of adjudication of ESG collaborations, the judicial intervention, along with the uncertainty surrounding the litigation due to the absence of set standards, imposes variable costs upon the parties. These variable costs majorly include the costs of litigation and the problem of unscrambling the existing agreements- for example, the collaborating firms might have already shifted to newer and more sustainable raw materials. Information transfer among parties might be irreversible in cases of mergers and acquisitions.
While there have been few cases relating to ESG agreements, in the few cases that have come before it, the CCI seems to take a more relaxed approach by not imposing penalties on the parties in these cases. However, as explained above, the entire process of litigation, the uncertainty surrounding it, and the prolonged nature of disputes in India cause unnecessary costs to be incurred by the parties.
Another problem with this case-by-case approach by the CCI is that it presents interpretational difficulties. This is because such an approach necessarily entails the exercise of discretion. This discretion poses the risk of personal bias affecting the outcome. For example, there might be a situation wherein the companies collectively decide on lower working hours for their workers. However, since such an agreement might result in higher costs for companies, resulting in increased prices of products, the CCI might deem such a collaboration as affecting the interests of the consumers. The agreement might be characterised as cartelisation due to the increase in costs even though it seeks to enhance social welfare. While the Appellate Authority might be invoked to counter such decisions, such procedures would necessarily entail high litigation costs and delays which may not be feasible from a business perspective. A hypothetical to understand this is when two entities merge for ESG goals but their collaboration is marred by litigation leading to a hiatus in the operations of these corporations and causing financial harm. While it is conceded that a total elimination of discretion from judicial decision-making is problematic for an efficacious competition regime, such discretion can be directed using the adoption of certain standards.
These problems of variable costs due to ex-post determination and interpretational openness are also manifest in some Indian cases revolving around ESG collaborations. One such example is the case of Vipul Shah v. AIFEC. In this case, the Commission was faced with a cartel formed by the craftsmen associations for the benefit of the workers in the filmmaking industry demanding a uniform wage across the industry. The workers came from diverse social backgrounds and a penalty would have been adverse to their interests. Thus, the Commission refrained from imposing any penalty upon these associations.
However, the entire process took around three years to be resolved indicating the high variable costs involved in adjudication and in breaking off the subsisting agreements. Moreover, the absence of any set standards of assessment must have also caused uncertainty around the entire process. Furthermore, while the adjudicating authority in the present case seemed favourable to the workers, in the case of another judge, the matter might have been decided adversely or various penalties might have been imposed upon the worker cartel. This can be understood using another case called Ceat Ltd. v. CCI & Ors. wherein the CCI imposed a heavy penalty on CEAT Ltd. However, when the matter came before the NCLAT, it remanded the matter back to the Commission, asking it to review the excessive penalty imposed since it might adversely impact the industry. Hence, while the CCI considered it appropriate to impose a penalty of Rs. 1789 crores, the NCLAT opined differently considering the situation of the industry.
The CEAT case took around ten years to be resolved highlighting the high amount of litigation costs, time commitments and incidental costs incurred by the parties. Moreover, such differences in the amount of penalty may prove to be detrimental to the industries. These differences can also be reflected in the outcome of disputes. As we shall see, if the Indian competition regime incorporates some of the provisions proposed in the ACM guidelines, the above problems of variable costs and interpretational openness can be relegated to a great extent. We will now argue for the incorporation of fixed standards and an ex-ante consultation mechanism for ESG initiatives in the Indian competition framework.
Fixed Criteria and Ex-Ante Consultation for an ESG-Friendly Competition Framework
The ACM guidelines envisage fixed criteria for the assessment of anticompetitive agreements with sustainable benefits and an informal guidance mechanism that entails cooperation between the competition authority and the parties. Both these measures mitigate the problems highlighted above. By incorporating certain set standards, the ACM guidelines introduce fixed costs in the system. Fixed costs might be defined as one-time costs of incorporating set standards in a legal system. While the incorporation of fixed costs does not imply the exclusion of variable costs, it reduces them. Fixed standards also reduce the interpretational gap in the system. Moreover, such standards limit the exercise of discretion by the regulatory authority.
Furthermore, these standards providing for a more certain regime on ESG collaborations may be supplemented by a mechanism of informal guidance in the guidelines. This ex-ante mechanism provides for consultation with the competition regulator where parties are uncertain.
Fixed Criteria
It is important to have fixed criteria for assessing ESG collaborations as they reduce the uncertainty surrounding the entire process of anticompetitive assessment. Having such standards in place can help corporations self-assess their collaborations. Importantly, this will also provide reasonable certainty to the organisations, precluding the problem of judicial biases coming in at the stage of assessment. The ACM guidelines use the standards from the European Union’s Treaty on the Functioning of the European Union (TFEU). Article 101 of the TFEU deals with anticompetitive agreements. It follows a two-step procedure wherein, at the first stage, it is determined whether an agreement has any real (or potential) anticompetitive effects or an anticompetitive object under Article 101 (1). Paragraph 3 of Article 101 then carves an exception to Article 101(1). It is stipulated that if the agreements offer efficiency gains (inclusive of sustainability benefits), give a fair share of benefits to consumers, proportionally restrict competition for necessity, and do not substantially eliminate competition for the product, they can be permitted even after being anticompetitive.
The adoption of these standards will help the parties to obtain a clearer view of the position of CCI on sustainability agreements. Also, the above guidelines are appropriate since they also consider the accrual of benefits to the consumers. The incorporation of the proportionality test at the preliminary stage itself ensures that the parties are mindful of the cost-benefit analysis between the collaboration and the anti-competitive effects resulting from the same. Finally, while the above four-pronged test provides for set standards, it also does not entirely take away the discretion of the CCI. Such discretion can be exercised to preclude mala fide collaborations aimed at gaining undue advantage. These standards for self-assessment can be further strengthened by the provisions for an ex-ante consultation scheme to be utilised in cases of uncertainty. The CCI can have the final say in situations of disagreement between parties and the CCI during the ex-ante consultation.
Ex-Ante Mechanism
We will now deal with the second suggestion for overcoming the problems highlighted in the previous section. It is suggested that an ex-ante regime of informal consultation between the CCI and the collaborating parties be established. While competition law enforcement revolves around the elimination of negative externalities on the market by imposing costs upon the violating parties, an ex-ante consultation regime can ensure that such negative externalities do not arise in the first place. It can preclude the entire process of post facto assessment by providing for a cooperative approach between the parties and the competition regulator. Combined with the abovementioned criteria, if the parties are unclear about the anticompetitive effects of their collaboration, they can consult the CCI about the viability of their combination. The CCI will only deal with cases where the parties are unsure of the collaboration after self-assessment.
Moreover, a predetermined timeline can be set over such consultations to ensure that the entire process is undertaken swiftly. To limit the workload on CCI, the informal requests can be processed based on the information provided by the parties. The CCI can refrain from additional investigation on their part, except for any publicly available information. However, if it is found later that the collaboration between parties was anticompetitive in its object and purpose, the CCI can reopen the investigation to impose exemplary costs.
A model for such an ex-ante informal consultation regime can be taken from the ACM’s final policy on sustainability agreements. The policy stipulates that the parties are expected to conduct a self-assessment of their collaboration agreements and approach the ACM only in cases of uncertainty. The role of the ACM in such situations becomes to indicate the possibilities and anticompetitive risks, along with a preliminary assessment of the agreement between the parties. The ACM is also expected to help the entities find solutions to the bottlenecks in the agreement.
Therefore, it is suggested that the Indian competition regime can benefit from incorporating such a two-fold standard of fixed criteria and ex-ante consultation for the assessment of ESG collaborations. Having such a framework in place will also exert positive externalities upon the firms to move towards a more ESG-friendly regime, particularly by entering into sustainable arrangements.
Conclusion
In this paper, the author has highlighted the interaction of ESG goals with the competition policy and highlighted the problems inherent therein. It has been explained that the major problem facing the ESG regime and Competition framework relates to the post-facto mechanism of competition assessment and an absence of set standards. To overcome this, it is suggested that a set of guidelines should be adopted which, drawing from ACM’s recently introduced final policy, stipulate for set standards and ex-ante consultation mechanism. If incorporated, the author argues, these suggestions can help India move towards a more ESG-friendly competition regime.
The author is a third year student at National Law School India University, Bangalore.
NUALS Law Journal 