1. Sustainability Goals of Chinese Society
1.1 Chinese Government in Pursuit of Sustainability Goals
The interaction between nature and social governance has long been a theme in Chinese culture, rooted in its agricultural civilization. The concept of ecological ethics, which seeks to balance human beings and nature, has been constantly advocated by great philosophers. Addressing climate change and sustainable development has become a global issue, with ESG emerging as a response to various societal problems. Chinese regulators have incorporated sustainability concepts into policymaking for a long time, marked by the issuance of the "Guiding Opinions on Fulfilling Corporate Social Responsibility of Central SOEs" in 2008, encouraging central regulated SOEs to regularly publish corporate social responsibility/sustainable development reports.
In 2020, China announced its Carbon Peak and Carbon Neutrality Goals, aiming for carbon dioxide emissions to peak by 2030 and achieve carbon neutrality by 2060. ESG has become buzzword and is increasingly used as a toolkit by various Chinese departments to evaluate the sustainability level of enterprises, supplementing the single metric of financial success.
1.2 China’s Path Towards Sustainability
(1) Sustainability Standard Incorporated into the Amended Company Law
On December 29, 2023, the amendment to the China Company Law was adopted, taking effect on July 1, 2024. The Amended Company Law specifies that in business operations, a company shall consider the interests of its employees, consumers, and other stakeholders, as well as the protection of the ecological environment and other public interests, to shoulder its social responsibilities. It also encourages all companies to publish social responsibility reports, which essentially include ESG responsibilities.
(2) China Securities Regulatory Commission (CSRC) Requirements
In 2018, the CSRC issued the “Code of Corporate Governance for Listed Companies”, setting out framework guidelines on sustainability disclosure requirements for listed companies. It specifies that “listed companies shall actively practice green development concepts and incorporate ecological and environmental protection requirements in development strategies and corporate governance processes.” In 2022, the CSRC issued the “Guidelines for Investor Relations Management by Listed Companies,” which provides that sustainability information of listed companies should be critical content of investor communication.
(3) Stock Exchange Policies
On April 12, 2024, the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and Beijing Stock Exchange (BSE) issued three “Guidelines on Corporate Sustainability Reporting for Listed Companies (Trial),” each a “CSR Guideline,” effective May 1, 2024. The CSR Guidelines aim to integrate the concept of sustainable development into public companies’ daily operations and unveil a new era of ESG disclosure.
Mandatory ESG disclosure requirements are imposed on listed companies that are part of major indexes of SSE and SZSE, with the first disclosure due by April 30, 2026. BSE-listed companies and other listed companies are encouraged to make voluntary disclosures. These CSR Guidelines take a double-materiality approach to sustainability disclosure, requiring companies to identify and disclose topics that impact financial performance (Financial Materiality) and ESG (Impact Materiality).
(4) Advocates of Other Chinese Authorities
On May 27, 2024, the Ministry of Finance began soliciting opinions on the “Sustainability Disclosure Standards for Business Enterprises – Basic Standard” (SDS), aiming to unify corporate sustainability disclosures and establish a nationwide standard by 2030.
With policy support and regulatory pressure, sustainability development, especially ESG, is rapidly progressing in China. More companies are disclosing ESG-related information to stakeholders, and corporate managements are incorporating ESG factors into their decision-making processes.
2. Sustainability Consideration from the PRC Anti-Monopoly Law
2.1 Sustainability Exemption of Monopoly Agreements
The Anti-monopoly Law of the People's Republic of China (“PRC AML”) prohibits business operators from reaching and implementing monopolistic agreements. However, Article 20 of the PRC AML allows for individual exemptions if a suspected monopoly agreement would realize public interests such as energy conservation and environmental protection.
Monopoly agreements are per se illegal, but exemptions can be granted under specific circumstances.
According to Article 20, a limited scope of monopolistic agreements could be exempted where: a) The agreement is for improving technologies, researching, and developing new products; b) The agreement is for improving product quality, reducing costs, improving efficiency, unifying specifications or standards, or carrying out professional labor division; c) The agreement is for improving operational efficiency and enhancing the competitiveness of small- and medium-sized undertakings; d) The agreement is for realizing public interests such as energy conservation, environmental protection, and disaster relief and aid; e) The agreement is for mitigating serious decreases in sales amount or obviously excessive production during economic recessions; and f) The agreement is for safeguarding legitimate interests in foreign trade or foreign economic cooperation.
Monopoly agreements for energy conservation and environmental might be exempted from penalties under the PRC AML, subject to case-by-case scrutiny. The undertakings involved need to prove that such agreements will not substantially restrict competition in the relevant market and that consumers share the benefits arising therefrom, in addition to passing necessity and efficiency tests.
2.2 Sustainability Factors in Merger Control Review
On June 17, 2024, the State Administration for Market Regulation (“SAMR”) released its “Draft Guidelines for the Review of Horizontal Mergers” to solicit public opinions. Article 81 of the Draft Horizontal Merger Guidelines explicitly sets out how sustainability factors will impact SAMR’s assessment of a horizontal merger.
If an undertaking can prove that a horizontal merger has a positive impact on public interests, such as promoting employment, protecting the rights and interests of small and medium-sized undertakings, energy conservation, environmental protection, and disaster relief, SAMR may not prohibit it even if the merger may eliminate or restrict competition.
SAMR will focus on whether the following conditions are met: a) Whether the horizontal merger will have a substantial positive impact on public interests; b) Whether there is a causal link between the horizontal merger and the positive impact on public interests; and c) Whether, in the absence of the horizontal merger, there would have been no positive impact on the aforementioned public interests.
Although the Draft Horizontal Merger Guidelines are not final, they are expected to be implemented soon. However, sustainability factors in merger control reviews should only be regarded as a theoretical framework, as SAMR does not disclose detailed assessments of a transaction's positive impact.
3. Potential Antitrust Risk of Sustainability Agreements: ESG Cooperation as an Example
The emerging ESG mandate in corporate governance presents a new challenge for Chinese companies. ESG efforts, particularly the “E” aspect, are emphasized in China, evidenced by government attention and policy focus. While unilateral conduct by a single firm to accomplish ESG compliance rarely leads to antitrust concerns unless the firm possesses significant market power, collaboration between competitors in joint pursuit of ESG goals might raise questions about the compatibility of ESG-related conduct and antitrust rules.
Certain pro-competitive efficiencies are embedded in ESG requirements, such as environmental efficiencies. For example, agreements to voluntarily set common ESG objectives, including reducing greenhouse gas emissions, without binding effects on each party’s contribution, are generally pro-competitive. Agreements to improve product quality to phase out polluting products, without joint price increases or choice cutting can also realize both objectives. However, cartel greenwashing, where sustainability ambitions reduce participants’ incentives to invest in environmental-protection initiatives, can be anticompetitive.
Despite the underlying interests of antitrust law and ESG compliance not being inherently incompatible, divergences may arise. ESG efforts are usually costly, and the competitive advantage they bring may not be immediately apparent. First-mover disadvantages exist for companies willing to engage in sustainability movements or bring about greener products. Some may perceive that sustainability goals are better achieved through competitors’ collaboration, but the societal benefits must outweigh the harm of anticompetitive coordination.
Under the PRC AML framework, competitors are supposed to act on their initiative. However, first-mover disadvantages may lead competitors to collaborate in ESG-related movements, raising potential risks of information exchange and horizontal monopolistic agreements. It is extremely difficult for ESG-related arguments to succeed in fighting for exemptions. Business operators should avoid agreeing on or exchanging competitively sensitive information, such as price, and production, and refrain from joint boycotting for ESG purposes. For less “hardcore” issues, the effect on competition must be thoroughly considered before any action.
4. Practical Dilemma: Difficulty for Article 20 Exemption to Apply
In practice, there are few cases where Article 20 exemptions have been successfully applied, and parties bear a high burden of proof. One notable case is Shenzhen Huierxun Technology Co., Ltd. v. Shenzhen Pest Control Association, ruled in 2012. In this case, Shenzhen Pest Control Association entered into a price-fixing scheme with its members, setting restrictions on the price of pest control services. The association claimed its conduct was to prevent unfair competition and protect public interest, applying Article 15(4) of the AML (now Article 20 of the PRC AML). The court accepted the defendant’s argument and ruled that the agreement did not violate the PRC AML.
From current antitrust enforcement and court rulings, the judgment of this case could be controversial. The judgment did not detail the positive effects/purposes claimed to be realized by horizontal agreements, the benchmark price mechanism’s impact on competition, or consumer benefits from the benchmark price fixing. Other cases have seen applications for exemptions rejected by courts with more discussion on these aspects. No ESG-related arguments have been effectively argued in front of SAMR, though attempts have been made.
5. Conclusion
In the wave of sustainability development, Chinese authorities are imposing more sustainability requirements (e.g., ESG) on corporate governance. With disclosure pressure, Chinese companies will pay more attention to sustainability developments, and ESG cooperation between competitors will likely increase. Unlike other jurisdictions, such as the UK, China has yet to issue specific antitrust guidelines on ESG-related or sustainability agreements. Companies must remember that sustainability considerations are not an excuse or automatic exemption for anticompetitive agreements. Antitrust risks in sustainability agreements need to be prudently evaluated, and close monitoring of antitrust enforcement practices is necessary.
