Where is India Inc. in the Race for ESG and Where are the Road Bumps?
India Inc. has been adopting a bullish approach to integrating ESG policies within sourcing, governance, manufacture and impact frameworks. This goes above and beyond mandatory reporting requirements and extends to viewing ESG as a crucial consideration in company management.
For example, a recent study where over 85 percent of respondents were from companies with annual revenue of over $1 billion, found that 65 percent of Indian businesses are engaged in ESG reporting compared to 62 percent in Singapore, 53 percent in Hong Kong, and 41 percent in China. For a comparatively developing economy, these numbers indicate that ESG reporting is proactively being integrated into the corporate DNA.
In another study, a survey was rolled out to 150 organizations across the country (of which, more than 70 percent were listed, 67 were multi-national corporations, and 7 percent were public sector undertakings) and responded to by top management. The study found that 88 percent believed sustainability regulations will directly impact their businesses. More than 75 percent agreed that ESG is a boardroom discussion and nearly 90 percent believed ESG reporting will improve brand reputation. Interestingly, it was also reported that only 15% of organizations’ suppliers are ESG ready.
In fact, even amongst startups, focusing on ESG strategy is gaining momentum. Investors no long look solely at financial viability of the startup, but also consider long-term returns based on ESG parameters. India's ESG investments have grown from $330 million in 2019 to $1.3 billion in 2023, and consumers are increasingly favoring socially conscious brands.
Yet, India ranks 176 in the Environmental Performance Index and 133 in the Climate Change Index. India generates 5.5 million tons of single-use plastic waste despite banning the use of certain types of single use plastic. It also lags behind the global average of 23.3% women directors in the boardroom, in terms of governance. Further, in FY 2023, companies corporate social responsibility budgets grew slower than their annual profits.
These statistics display an opportunity for India to grow into an ESG powerhouse. However, for industries to come together and take collective action, there needs to be a roadmap and initiative from associations and key firms to alleviate concerns for businesses who fear falling prey to a ‘first mover disadvantage’. These issues may be better tackled through industry-wide initiatives, rather than simply waiting for regulatory mandates to trickle down to the supply chain.
Can the CCI Intervene?
Several competition / antitrust authorities have taken stock of ESG collaborations and issued guidance or protocols for private firms. This includes the European Commission (EC), and national authorities in the UK, France, The Netherlands, Australia, and Greece.
Despite India Inc. implementing ESG initiatives, the CCI has not issued any such guidance or protocols as yet. We believe that such guidance and protocols from the CCI and possible amendments to the Indian Competition Act, 2002 (Competition Act) may help encourage initiatives to collaborate on ESG policies at an industry-wide scale.
Interpreting the Competition Act: Section 3 of the Competition Act presumes agreements or arrangements between competitors to be anti-competitive. The burden of proof is on the defendant to prove otherwise and is rarely met in practice. A limited exception to anti-competitive horizontal agreements is entering into an efficiency enhancing joint venture.
Although the Competition Act itself does not provide guidance on what may qualify as an “efficiency enhancing joint venture”, certain provisions may be read expansively to include a consideration of ESG policies. For example, Section 18 of the Competition Act iterates one of the duties of the CCI to protect the interests of consumers. Further, Section 19(3) of the Competition Act outlines factors to consider whether agreements cause an appreciable adverse effect on competition – some of these factors include improvements in production and distribution of goods and promotion of technical, scientific and economic development. Even Section 20(4) of the Competition Act sets out certain positive factors such as innovation, economic development, and benefits of a combination to consumers and society as a whole which can be taken into account while assessing ESG-enabling combinations.
One may argue that incorporating ESG guidelines into the Indian antitrust regime would lead to the promotion of technical development by encouraging adherence to ‘cleaner’ industry standards, and eventually consumer interest by accounting for beneficial environmental / social practices. Such initiatives could also be in the larger interest of the State.
Having said that, it would be interesting to observe how a competition authority such as the CCI (which is cognizant of ever-changing landscapes) would account for collaboration on account of ESG initiatives and weigh that against the statutory test for cartelization.
Consideration of non-statutory factors by the CCI in its decisional practice: While integrating ESG principles into the existing framework is untested, the CCI has previously accounted for non-statutory factors in several cases, especially while assessing penalties. The CCI has been cognizant of the economic impact faced by the industry, costs of raw materials, profile of employees, low margins, etc. while assessing conduct. For example, in various decisions:
- the CCI noted that the MSME sector was already under stress, which had worsened due to the COVID-19 pandemic, and thus in the interest of justice, refrained from imposing any monetary penalty.
- interestingly, in a case concerning cartelization in the paper industry, the CCI adopted a sympathetic approach and imposed a nominal penalty on firms, noting that during the COVID-19 pandemic most of their customers moved to virtual modes, reducing the need for paper and thereby affecting the paper business significantly.
- the CCI refrained from imposing penalties on film associations for alleged cartelization since they were formed by daily-wage earners and craftsmen.
- the CCI has also considered factors such as lessening per capita demand, rising input costs, low value of products, low margin/ profit in sale of the product, and competition from cheap imports, as mitigating factors when determining penalty amounts.
Even the National Company Law Appellate Tribunal has considered the economic hardships faced by the domestic tire industry in the face of rising input costs, while remanding a matter to the CCI to re-consider penalties.
These examples outline how the CCI has continuously been cognizant of on-ground circumstances. While the CCI may not consider such factors sufficient to condone a legal violation, the CCI has recognized their impact and their commercial viability. While the CCI has not explicitly discussed the impact of ESG policies in assessing enforcement matters, while considering mergers and acquisitions, the CCI has taken account of how ESG policies may impact the market. For example, while approving the proposed acquisition of NFCL Assets and 100% shareholding of ZeroC by AMG India, the CCI accepted submissions that an ESG mandate may impact whether green and non-green ammonia may be substitutable.
Despite its consideration of non-competition parameters, the CCI remains bound by the Competition Act. While one may argue that efficiency defences may be invoked for implementation of ESG-related collaborations, there are several challenges which plague such an approach. To encourage industry-wide collaboration for ESG initiatives, simply expecting a reduction in penalty upon scrutiny by the CCI is not enough.
COVID-19 guidance: During the COVID-19 pandemic, the CCI was cognizant of the need for competitors to collaborate to deal with the ongoing crisis. Therefore, to alleviate concerns, for the first time, the CCI issued a notice stating that competitors may collaborate to address the ongoing crisis.
However, it also clarified that businesses looking to make collaborative arrangements should not exploit the crisis situation for violating any provisions of the Competition Act. The advisory further stated: “These provisions will inform the decisions of the Commission. However, only such conduct of businesses which is necessary and proportionate to address concerns arising from COVID-19 will be considered.”
Therefore, the CCI has, in fact, considered the need for competitor collaboration to enhance efficiency, albeit in an exceptional circumstance. It could be argued that there is precedent to extend that logic to ongoing ESG concerns and similarly consider the need for such collaboration to alleviate environmental, sociological and governance issues that may eventually result in better industry practices and consumer welfare.
Concerns Around Greenlighting Potential Collusive Practices
The CCI has been cognizant of changing environmental policies, social landscapes and governance initiatives. In fact, the current Chairperson of the CCI has also previously remarked on the importance of ESG by stating that the CCI must keep its eyes open to ensure that enterprises build green businesses without facing anti-competitive barriers. Additionally, the Chairperson also highlighted the importance of having a clear framework for assessing agreements that have a sustainability dimension to them and iterated that the regulatory response to trends such as ESG must be deliberated to encapsulate a blend of soft law mechanisms and binding orders.
However, a concern weighing on the CCI, is perhaps the fear of ‘green lighting’ potentially collusive antitrust practices, under the umbrella of such initiatives. For example, a set of manufacturers could collude to boycott a particular supplier or set of suppliers citing sustainability concerns, in which case they would technically be limiting supply and access to the market for such upstream firms. Or in another instance, the industry may decide to use only a particular solution for a product for environmental reasons, reducing access to the market to all other developers and suppliers of competing solutions, and resulting in a consequent monopoly as a result of this collective action.
In 2011, in a case involving the airline industry, the CCI found that the top three travel agents had entered into an anti-competitive agreement to collectively boycott an airline due to its commission policies, resulting in a dip in the airline’s sales. Today, if the CCI were to consider a collective boycott on account of the emissions generated by the airline, it would be difficult to attribute the conduct to ESG considerations without overwhelming evidence, especially if the undercurrent of division in commissions (or other such commercial considerations) was still ongoing.
Further, cases involving firms coming together to understand how to tackle regulatory and government dynamics under the umbrella of ESG could also be seen to pressurize such bodies to pass resolutions with directions in their favour. Should the CCI find such arrangements kosher, it may send an indirect yet strong message to such governmental and regulatory departments and authorities.
In addition, finding such practices to be legal would also be a partial divergence from precedent. For example, the Beer Cartel case involved industry firms often coming together through the industry association to lobby against various state governments and excise authorities regarding tariffs. The CCI, based on leniency applications filed and evidence on record, found such practices anti-competitive. Should the CCI now take a view that such collective lobbying for industry-wide initiatives such as ESG is justified, it may lead to a slight divergence from precedent, subject to other facts involved in the case.
Separately, the general risks surrounding industry association meetings (and potential ground for anti-competitive discussions) continue to be at play. There is always a risk that members may discuss their supply strategies, profit margins, granular details regarding their products etc. during such meetings, which may lead to exchange of commercially sensitive information. Accordingly, a competition authority may not want to presume such meetings to be competitive simply because they are being held under the banner of ESG. It is important to remember that these meetings take place between key representatives of competing companies, who have the knowledge and the power to make decisions impacting competitive dynamics.
Approaches available for the CCI to consider
As a result, substantive guidance or a protocol may be helpful to encourage firms across industries to consider collaborative initiatives to further a common ESG goal.
Publishing guidelines: One approach for the CCI to consider would be to publish a guidance note on collaboration for ESG initiatives. This could act as a blueprint for industries to self-assess whether any discussions on ESG initiatives at an industry-wide scale could be viewed as anti-competitive. This is similar to guidelines published by the competition authorities in the UK or The Netherlands.
The CCI itself is no stranger to such a process and has previously published a guidance note on non-compete agreements which parties considered while self-assessing such arrangements. The note contained broad yet comprehensive guidance on the duration of such agreements, scope, territory, products, and parties covered, that the CCI would not consider worthy of additional scrutiny.
The guidance note for ESG could be similar and may include broad parameters under which such discussions may take place. It could include a broad scope of discussions, guidance on items that should not be discussed (for example, granular price, supply, and vendor details), term of such arrangements, parties that be covered, etc.
Such guidelines are likely to have several benefits. For starters, they will provide much needed clarity regarding the CCI’s position to stakeholders across industries and are likely to facilitate a boom of collaborative ESG initiatives.
An advantage of issuing guidelines or a guidance note is that it need not necessarily be brought about by way of an amendment and can even be introduced as standalone regulations, making it speedier to execute.
Consultation mechanism: A second option is that the CCI can open channels of communications that enable industries to approach it with their proposals and seek clarifications on a case-by-case basis. This is similar to the pre-filing consultation process introduced for combinations, where parties can approach the CCI and seek guidance on their proposed transactions.
The EC has also committed to providing informal guidance on measures and issues which raise novel questions. Moreover, the EC has also clarified that sustainability agreements should be subjected to an effects assessment rather than being considered anti-competitive ‘by object’. Similarly, the French competition authority invites companies wishing to collaborate on sustainability initiatives to submit their proposals for informal guidance within four months. Through this mechanism, an ‘open door’ has been created for companies who can easily consult with the authority and seek guidance on their endeavors.
Such a consultation process will allow the CCI to examine each arrangement on a case-by-case basis and provide guidance to parties within the specific contours of the arrangement. It will also help the authority in terms of not being bound by parameters set-in-stone and provide comprehensive advice that is not necessarily curtailed by precedent.
The key disadvantage of such a mechanism is that it will require additional capacity training at the CCI to holistically understand and appreciate the benefits of such collaborative arrangements, while equally being mindful of the principles governing anti-competitive agreements and the limitations of the statute. It will also mean that the CCI will have to consider each arrangement on a standalone basis, which may result in being a burdensome process.
Amendment to the Competition Act: Finally, an amendment to the Competition Act itself can be recommended, to create a statutory foundation for ESG collaborations and to open the door for ESG collaborations to align India’s competition regime with international best practices. However, any such amendment would have to be flexible to account for the innovative collations that firms may enter into and not hamper potentially creative collaborations.
Conclusion and Way Forward
Though many firms have benefited from the CCI’s holistic and considerate approach highlighted above, it is undoubted that there may be countless benefits from the implementation of: (i) ESG – competition guidelines, or issuance of a guidance note; (ii) a case-by-case consultation process; or (iii) formal amendments to the Competition Act. Implementation of these practices would help bring much needed clarity on how collaborative agreements with ESG with sustainability dimensions are to be assessed.
Having the above stated measures in place would enable certain industries to switch to more sustainable practices, which currently cannot be implemented for fear of antitrust action being taken against firms. For example, the use of plastic straws was banned eventually only through government direction in 2022. However, had industry firms had the opportunity to consider more sustainable measures through consultations under the Competition Act, such changes could have been brought about sooner. Authorities such as the CCI may be able to nudge changes through their guidance mechanisms, that at least allows firms to consider collaboration without assuming that such arrangements may be in violation of the Competition Act.
A key industry that could benefit from such initiatives is airlines. Several measures are being taken but on an individual basis. Should the industry collaborate on ESG initiatives, we could expect more fuel efficiency, better flight routes, less weight, and efficient flying techniques. Another industry which stands to benefit from ESG-competition guidance is health care. Having ESG collaborative measures in place could help firms collaborate on measures to reduce medical waste by reducing usage of single use products, at an industry wide level.
Having ESG-friendly measures would provide guidance on how to interpret collaborative agreements with ESG dimensions would enable firms in any industry switch from current wasteful practices to more sustainable measures. The CCI may potentially be the pivot in India’s ESG story by providing guidance or consultation mechanisms to encourage such collaboration.
