Competition Laws must adapt to support the ESG mandate

31 Oct 2023
Ira Gayatri Jha

Increasing natural disasters, rising global temperatures, rocketing economic inequalities, surging financial losses, spiralling company collapses, swelling unethical treatment of employees, and growing stakeholder insensitivities are undoubtedly the fallouts of ignoring the Environmental, Social, Governance (ESG) mandate. It is now universally accepted that businesses must implement the ESG framework in letter and spirit to finally inch-in towards the establishment of overall sustainability. There is such a buzz of ESG world-over, that countries are frantically finalising these guidelines in order to ensure responsible investing. European Union, United Kingdom, Australia, China and many others are pushing their corporates to implement the ESG diktat through a number of regulatory changes and required compliances.

National bodies/councils are taking action in addition to ensuring the adoption of new rules/reporting requirements as there is mounting pressure on companies even from investors to make more detailed ESG related disclosures. To be honest, it is surely an uphill task to ensure complete implementation of the overarching ESG mandate. The key question being, how will the companies survive the ESG burden? Will it impact their share value, profitability? Will it impact business and some markets adversely? Or will it be a great opportunity for companies to recast businesses/processes for long term sustained profits? Will markets innovate effectively under this ESG push? Will Governments make better laws to support business as they prepare and collaborate for this mandate? This can be an inflexion point where all stakeholders must align together to re-orient laws, business strategies, technological innovation and customer engagement to pave way for responsible business and sustainable development.

In India, the ESG regulations have been garnering momentum over the last decade and it was in 2012 that the market regulator, Securities and Exchange board of India (SEBI) issued advisories on ESG disclosures to become a part of the annual reports. In 2015, these guidelines were updated and made more detailed with inclusion of water, energy consumption and carbon emissions. In 2020, SEBI took a leap jump and mandated the top 1000 listed companies to report ESG disclosures from financial year 2022 and went beyond the E(Environment)- to focus on S (Social) and G(Governance) aspects also. Diversity, inclusion, board composition, stakeholder interests, employee’s safety etc were now included as a part of ESG disclosures and it even asked for reporting on inter-company engagement on ESG issues. Likewise, the Reserve Bank of India in 2020 asked all banks to disclose ESG related information like - climate risk management, social reporting, sustainable finance etc.

Ensuring ESG compliances is surely not easy as it involves significant costs in new processes, technology and at times may also mean changing of the entire business line. When businesses perish, economy and livelihoods perish as well. Thus, it is the responsibility of the Governments also to make rules that can facilitate this transition of companies with least damage to the business and livelihood opportunities. ESG implementation in its complete ambit would require a multi-dimensional approach with focus on technology transfer, collaboration amongst industry partners and regulatory changes and to achieve all this, the Competition Laws must become more cooperative.

Until sometime back, there was not much attention given to the inclusion of sustainable initiatives within the Competition Laws, but the European Green Deal(2020) has initiated this debate that Governments must make their Competition laws more ESG friendly. Collaborative efforts must be encouraged but caution will have to be exercised in avoiding cartelisation in the name of ESG washing (akin to Green-washing).As a frontrunner, EU has taken concrete steps in revising horizontal guidelines to give space for sustainability agreements and even Austria has amended their Cartel Act in 2021 to incorporate sustainability exemptions.

In India presently, ESG or environmental factors are not directly and specifically addressed by the Competition Act,2002(amended in 2022). Some may draw inference that the Competition Commission of India (CCI) being the regulator may protect such seemingly anti-competitive agreement's/collaborations on the strength of Section 19(3)(f) and Section 20(4)(1) of Competition Act,2002 but major impediments to this are three-fold. Firstly, there is no ostensible reference to environmental factors anywhere in these Competition laws. Secondly, no Law regarding ESG has been formulated yet by the Government or Constitutional courts. Thirdly, it also cannot be wished away that there may be a price increase initially but in the later phase the trend may become consumer friendly. For example, when Minimum Wages Act was contemplated, there was fear that cost of products and services will go up to affect consumers adversely but that didn’t really happen in the long run.

Therefore, implementation of the ESG mandate is surely a multi-pronged/complex problem and the solution definitely lies in effective Policy making that can consider all stakeholders presently and also have the foresight to take into account future consumers and the overall environment. Central Government is empowered under Section 49 of the Act to lay down the ‘Competition Policy’ wherein Section 19 and 20 can be elaborated in light of the ESG mandate. Market intervention strategies like subsidy etc can be proposed to contain the flight of price while incentivising the ESG related production of goods/services like green energy, water treatment plants etc. Regulators and constitutional courts can take cue from this Competition policy to fill the vacant space and pave way for development of laws in India that are in consonance with international benchmarks. European Commission, Dutch and UK regulators have framed guidelines which can be referred to as we embark upon this exercise.

Further, Section 54 of the Competition Act, 2002 has provision for granting exemption in the interest of security of the State or in public interest. Security is not just territorial or sovereign but we must start talking in terms of ensuring, ‘Social, Economic and Environmental (SEE)’ security of the present and future generations. Thus, the Competition Commission of India (CCI) can deliberate and develop these exemptions keeping in mind the overall public interest and SEE security in order to facilitate the implementation of the ESG mandate with an eye on encouraging fair collaboration among competitors.

Here are some possible ways of implementing ESG collaborations while adhering to Indian Competition law:

Contemplation of Non-Price motives: Competition law primarily focuses on preventing anti-competition approach that enhances market prices or affects consumer adversely. However, ESG mandate helps in promoting environmental protection, social responsibility and ethical behaviour. Thus authorities may like to broaden the appraisal criteria and include these non-pricing factors while evaluating potential anti-competitive collaboration.

Sustainability effect & Mergers: The authorities could assess the probable impact of mergers on environmental and social aspects and pave way for such desirable mergers that consequently will reduce more carbon emissions or create more inclusive work force etc.

Innovative ideas and data sharing: Interested companies may collaborate by sharing innovative practices regarding ESG initiatives without sharing financial or client sensitive information. This information sharing will also help build a better narrative across companies and avoid putting anyone at a disadvantage as people will know what others are doing.

Alliance on Ecological Initiatives: Corporates may be encouraged to forge alliances on ecological initiatives like water conservation, waste management, plantation, green energy etc.

Capacity building and Industry Standards: The ESG team of different companies can collaborate and develop ESG standards and ESG certification programs. These programs can help set benchmarks for social and environmentally sustainable practices and ensure that all companies fulfil some minimum requirements.

To achieve exceptionally challenging targets with wide spread societal benefits, some exceptions will surely have to be made. Thus, to achieve the overarching ESG targets, Government must make some exceptions in Competition Laws for effective ESG related collaborations in order to actualise the SEE (Social,Economic and Environmental) security of the present and future world!

Themes
Tags
Corporate social responsibility
Environmental governance
Sustainable development