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Net zero group cites antitrust threat — legal experts don’t buy it

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The anticipation of a long August recess often focuses minds in the US Capitol. Deals are done, lawmakers fly away and Washington becomes a ghost town for the month.

But this summer’s last-minute dealmaking caught everyone off guard. One week ago, obituaries were written for US carbon emission cuts and Paris agreement targets. This week, in a shocking volte-face from West Virginia senator Joe Manchin, the environmentalists’ villain has struck a deal to get US climate spending back on track. At the time of writing, the agreement includes billions of dollars for home energy efficiency and clean technology manufacturing.

But the heat remains on environmental, social and governance (ESG) investing. Florida’s Republican governor and likely 2024 presidential candidate Ron DeSantis this week proposed to ban pension fund managers from considering ESG. In West Virginia, the state Treasurer on Thursday banned BlackRock, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo from banking contracts due to alleged boycotting of energy companies.

Today, we have news linked to Washington’s other big event this summer: the January 6 committee investigating the siege on the Capitol in the waning days of Donald Trump’s presidency. A group of prominent business figures have come forward to say that “American democracy is in crisis” and that corporate leaders must not ignore this. Please read Andrew Edgecliffe-Johnson’s report on this below.

But first, Kenza has a follow-up report to her piece last week on the antitrust threat to climate action. Please read on. (Patrick Temple-West)

Last week we flagged a possible new antitrust threat to climate action.

The Net Zero Insurance Alliance, which brings together the likes of Axa, Allianz and Munich Re, told us it could not require its members to stop insuring new thermal coal projects because of legal advice that this could leave it open to collusion accusations.

Given the NZIA is part of a $130tn strong coalition premised on the idea that businesses must collaborate to meet net zero targets — the Glasgow Alliance for Net Zero — this seemed like a pretty big deal.

We asked leading legal experts to help us figure out whether this argument is a fig leaf for inaction or whether it reflects a genuine problem with outdated competition law.

Maurits Dolmans, an antitrust specialist and partner at Cleary Gottlieb Steen & Hamilton, described the advice received by the NZIA as a “conservative”, “knee-jerk reaction”, and said this approach to competition law remains a barrier to effective collective action on climate change issues. He said companies should go to regulators directly to ask for individual exemptions for peace of mind.

Another prominent ESG law professor attacked the “exaggerated” idea that competition law prevents businesses from acting on the climate and argued instead that fossil fuel interests may have contributed to the concern.

Professor Paul Watchman is special legal adviser to the NZIA and to the United Nations Environment Programme (UNEP) Financial Initiative.

Speaking to Moral Money in a personal capacity, Watchman compared the antitrust argument to lobbyists’ misleading arguments in defence of the tobacco and fossil fuel industries. “When they can’t play the science, they play the mind,” he said.

The idea that Margrethe Vestager, European Commissioner for Competition, could intervene against alliances that bring in exclusion policies was laughable, he added: “How could you go to the president of the European Union saying, ‘I’ve taken action against insurance companies because they’ve clubbed together to reduce their carbon footprint’? She would say ‘find another job’.” 

Back in 2005, when the ESG acronym had just been coined by UNEP, Watchman wrote an influential report for the UN group, dubbed the Freshfields Report, laying out how sustainable investing could be incorporated into the legal framework on fiduciary duty.

Some jurisdictions appear to be acting on this logic, clarifying that competition law designed to prevent companies from colluding to make undue profits, or to restrict output, should not apply to agreements on sustainability.

One of the first examples of such an exception can be found in a 1999 European Commission ruling, which concluded that washing machine companies could agree to stop producing inefficient washers (for example those that took less than 3kg of clothes or had a spin speed lower than 600 revolutions per minute.)

Flash forward to today, and the Commission has drafted guidelines, due to enter into force in January, to give sustainability agreements an explicit get out of jail card provided they have a clear “collective benefit” to society.

If the agreement leads to a rise in prices, this increase must be proportionate to the wider cost to society of carbon emissions and must come with “long-term spillover benefits”. This in theory suggests that insurers would be allowed to collectively exclude coal only if they could prove that anyone affected by an increase in the price of energy as a result of their boycott would also benefit from the climate impact. That is a potentially tricky ask.

Similar sustainability opt-outs are being crafted in the UK and around the world. Austria amended its cartel act to exempt some sustainability-related agreements last year. China’s anti-monopoly law already has a specific exemption for environmental protection agreements.

In the United States, however, the Federal Trade Commission’s appetite for competition actions against sustainability agreements is an open question and could be affected by the rising backlash against ESG, lawyers have said.

“There’s a trade-off between effectiveness that we would like to see from a climate change point of view, and what is acceptable from competition authorities,” said Simon Holmes, a competition law expert and visiting professor at Oxford university. “Competition authorities and people like me are telling businesses it is essential they come forward and ask for these exemptions.”

Questions about the capacity of collective action extend far beyond the insurance sector. GFANZ, which claims to have a combined $130tn assets under management, was founded on the premise that businesses can help halve global emissions by 2030 by setting common goals and standards.

The UN-convened Net-Zero Asset Owners Alliance, a group which is now part of GFANZ and includes Aviva, Legal & General and BNP Paribas, ruled out investment in thermal coal assets, in principle, in 2020. But it was careful to say that members should carve out their own individual pathways to net zero.

Dolmans said: “Market failure and inadequate regulation means co-ordination is the only way remaining to eliminate the first mover disadvantage.”

A cultural shift towards thinking about the long-term environmental consequences of legal advice is under way, Watchman argued. “Lawyers should be giving moral counsel as well as general counsel,” he said. “You are not a hired gun.” (Kenza Bryan)

What the January 6 investigation means for business

Ken Chenault, former chief executive of American Express
Revelations about efforts to deny Donald Trump’s election loss have shaken a group of investors, including Ken Chenault, former chief of American Express © AP

Washington’s hearings on the events of January 6 2021 have been gripping and alarming viewing, but the investigation has not been much of a business story. Until now.

The revelations about efforts to deny Donald Trump’s election loss have shaken a group of top investors.

Ken Chenault, former chief executive of American Express; Reid Hoffman and Alexis Ohanian, co-founders respectively of LinkedIn and Reddit; and hedge fund managers including Seth Klarman of Baupost are among those making those concerns public in a new open letter.

“American democracy is in crisis, and whether we like it or not, that crisis will darken the future prospects for American businesses,” they wrote.

Some companies which cut political spending after January 6 have since “backtracked”, they note, but acting as if it is business as usual “would be a mistake”.

Some of these executives signed another statement before the 2020 election, warning that economic stability was at risk if Americans could not trust that their votes would be counted.

Again today, they point to the financial risks of any threat to the rule of law. But the new letter captures a very different moment in the debate about what role business should play in society.

As I wrote this week, partisans are now dragging US companies into unwinnable culture wars. As campaigners push brands to weigh in on politics (and geopolitics — see last week’s call from the b4Ukraine coalition) the pushback is making some chief executives more wary.

Richard Edelman, an influential PR counsellor, noted that pressure this week, but said that business involvement in societal issues had become “mandatory” — at least on matters that are core to their business.

This week’s letter is a reminder of companies’ self-interest in encouraging political moderation, and of the deep concern that has turned some executives into activists.

As the authors write, “while January 6 was the first time that many of us felt the need to forcefully speak out in support of free and fair elections in America, we must prepare ourselves for the fact it will almost certainly not be the last.” (Andrew Edgecliffe-Johnson)

Smart watch

  • Is green hydrogen the key to a low-carbon economy? It’s widely tipped as a crucial avenue for carbon-intensive industries chasing net zero targets. But as Sylvia Pfeifer explains, regulatory and infrastructure challenges may hinder progress towards a hydrogen-fuelled future.

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