8 August 2023

Misguided antitrust arguments must not diminish the transition

For institutional investors to fully support the energy transition they must not be discouraged from collaborative efforts by antitrust regulation, says Nathan Fabian

In many ways, responsible investment is not a new concept. Over recent years, it's become increasingly clear that all the factors that weigh on investment performance cannot be captured purely through historical financial analysis - which explains why we're seeing a growing number of prudent investors consider governance issues and environmental and social sustainability as essential within their investment risk and return profile.

Nathan FabianIn 2023, it is beyond argument that issues such as rising sea levels due to climate change and the impact on coastal real estate, or workplace safety, or a company Board that is not able to make informed and independent decisions, are governance or sustainability risks that eventually affect the balance sheet.

As the threat – both human and economic – of climate change advances, now more than ever we need to find solutions and mitigate risks. Whereas companies face a lot of pressure to produce short-term results, asset owners invest over long-time horizons to meet the needs of their beneficiaries. One of the most effective ways to enable markets - and therefore long-term returns for investors – is for investors to come together to develop frameworks and encourage progress on the most pressing threats to the interests of their clients and beneficiaries. Rather than companies being asked to consider a diverse set of frameworks or questions from a variety of investors all aimed at addressing this potential mismatch in time horizon, collaboration creates the potential for more simplicity and efficiency for companies.

That's why we have seen a slate of European authorities publishing guidance to clarify that the existing anti-trust rules around investor collaborations should not be seen as an inherent barrier to collaborative arrangements on sustainability practices.

Recently, the European Commission published anti-trust guidelines on green initiatives offering certainty to businesses that their collective ESG arrangements, on issues such as fossil fuels or plastics, do not breach anti-trust rules. The guidelines help companies assess their sustainability initiatives under EU competition law and shape EU regulatory environments to protect companies that pursue these initiatives. The European Commission is encouraging investors to submit their collaboration plans for discussion and review.

Across Europe, national authorities are also issuing guidance clarifying that regulation should not be interpreted by institutional investors as a barrier to collaborative engagement on ESG. Legal guidance highlights that, at a minimum, collaborative engagement activities like sending joint letters and having joint meetings with companies regarding ESG issues would be very unlikely to trigger regulatory consequences, pending usual due diligence and risk assessments.

To cite one example, The Netherlands' anti-trust agency states that it won't issue fines relating to the European Commission's proposed exemption from competition rules for sustainability agreements in the agricultural sector. Further, the UK's Competition and Markets Authority has published a draft proposal to greenlight climate collaborations, ensuring competition law is no unnecessary barrier to companies seeking to pursue environmental sustainability initiatives.

In Germany, the Federal Financial Supervisory Authority has published guidelines on collaborative engagement for investor cooperation on sustainability issues, and the Austrian Federal Competition Authority has published its guidelines on sustainability cooperation agreements between companies too.

While US regulators have not yet addressed sustainability-related collaborations specifically, the Federal Trade Commission and Department of Justice have longstanding joint guidance - "Antitrust Guidelines for Collaborations Among Competitors" from April of 2000 - that provides relevant considerations for certain collaborations. In the absence of specific action though, a small group of US political actors are using the public sphere to intimidate companies cooperating over ESG goals, stating such initiatives breach anti-trust rules. These efforts have global ramifications.

By discouraging investors from collaborative arrangements, the current actions of some US policymakers risk interfering in the investment decision process and creates undue operational complexity for investors that operate across multiple territories. This, in turn, causes undue cost and ultimately makes such organisations less competitive on the world stage. The global regulatory shift should be towards harmonization on sustainability risks in markets, not disparity.

Many governments and regulators understand that addressing social and environmental sustainability will provide real economic benefits for both investors and the wider global economy. However, vested interests seem aligned in their efforts to slow progress on the transition to a low-carbon economy – a transition that the scientific consensus says is necessary not just for the health of global financial markets, but for human survival.

"While an earnest reading of the rules should be enough to quell the organised opposition, regulators around the world can take the step of clarifying the current rules"

It is unfortunate that a small group of influential individuals can take minimal action that has cascading impacts across global financial markets. What is fortunate, though, is that regulators are taking decisive action in some of the largest financial markets in the world to clarify that these threats are without merit and that the current rules allow investors to collaborate in certain circumstances.

While an earnest reading of the rules should be enough to quell the organised opposition investors are seeing, regulators in the US and around the world can take the step of clarifying the current rules, or, at minimum, holding that the current rules stand.

What we need is a regulatory environment that appropriately balances the legitimate requirements of investors with the need to place limits around anticompetitive behaviour. Investors want the freedom to navigate sustainability risks, empowered as fiduciaries, with the ability to use the tools at their disposal to deliver returns well into the future.

Nathan Fabian is chief responsible investment officer at the Principles for Responsible Investment