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Competition and ESG

Date: 01/02/2023 Type: Articles Topic: Competition | Law | Litigation |


Environmental, social and governance (ESG) is high on the agenda of corporates, consumers and regulators worldwide. Many large companies now have a regulatory obligation to report on ESG metrics; consumers are increasingly demanding ESG-friendly products; and regulators are paying close attention to ensure companies are meeting ESG targets, and are not falsely disclosing ESG-related information. A less explored area is the interplay between ESG and competition law – this blog, written by Grant Thornton (Schellion Horn, Partner, and Jake Foad, Manager, Economic Consulting) explores how competition authorities may use their existing powers in relation to ESG.


ESG & dominance

Investment into sustainable practices may present businesses with an opportunity to differentiate their products, increase cost/price margins, aid recruitment and retention, or even obtain favourable lending rates. For example, a recent Grant Thornton survey indicated that lenders offered better rates to firms with a good ESG strategy in place and it has been shown that there can be an ESG-friendly (10%) premium to a firm’s valuation.[1]

However, whilst there are tangible benefits to ESG investments and disclosing ‘green’ credentials, false or misleading ESG-related disclosures can have devastating consequences. False ESG-related disclosures may result in a fine or other penalties being levied by regulators; however, these fines can be dwarfed by the reputational damage caused by an adverse ESG event, which can manifest as a share price impact for listed companies. This ‘stock drop’ impact may be driven through longer-term implications of reduced consumer confidence causing customers to switch to competitors – under the assumption that markets are competitive to begin with. For example, GT research[2] shows that the value lost is disproportionately large when compared with the magnitude of any fines or remedies imposed. Following a regulatory finding of ESG-wrongdoing, the average estimated share price drop for the culpable firm in the two days following the announcement equates to £1.15 billion of value loss for a FTSE 100 firm, compared to average fines imposed of £16.01 million (1%). The magnitude of potential share price erosion provides a powerful deterrent effect for companies seeking to publish false ESG-related information.

In some instances, although an infringement may have occurred, a share price drop is not observed. GT’s analysis indicates that this is usually where the “news” of the infringement is not new, and has therefore already been factored into the share price or where the “punishment” loop is removed. That is, consumers of the product are not able to punish the firm for poor ESG practices by switching to an alternative firm or product, because of the dominance of the firm in the market. For example, GT’s analysis finds that across five key ESG-related adverse ‘events’ by regulated monopolies, there was no deviation between the actual and counterfactual share prices. This compared to similar ESG events for firms in more competitive markets for which a stock drop was observed. This lack of punishment loop and associated share price drop reduces the deterrent effect on companies.

So, what can be done..?

ESG is an important consideration for consumers – separate to the actual product itself. In the absence of competition, consumers preferences for ESG may be weakened. Knowingly mis-leading consumers or pursuing ESG-‘unfriendly’ policies therefore could potentially be found to be an abuse of dominance under competition law. Regulators in these industries may therefore consider taking a dual-approach to ESG monitoring, working alongside competition regulators to ensure ESG activities are aligned with the competitive market. Sufficient deterrent effects will need to be implemented, ranging from more significant fines, to more significant remedial actions. This may include aligning ESG-related penalties for dominant companies with those under anti-trust frameworks, such as fines based on turnover, lower thresholds for damages, and/or direct repercussions for company directors involved, including jail sentences and director disqualification.


ESG: a gateway for collusion?

It’s clear that ESG objectives are important to companies; however, the investment cost required to achieve certain ESG milestones can be significant. By investing into, for example, ‘clean’ factories to lower company-wide greenhouse emissions, businesses will incur additional costs – invariably impacting profits. Consumer willingness to pay for ESG-friendly products can be unclear and therefore businesses may not be able to increase prices to recoup lost profits. If its competitors do not invest similarly, they may achieve a cost- and price-advantage over the first-mover, meaning incentives to invest might be small. A recent example in the UK (and global) market includes the reluctancy of businesses to invest in hydrogen as an alternative to carbon, given the uncertainty in demand for future hydrogen usage.

To avoid the so-called ‘first-mover disadvantage’, companies can agree to coordinate and jointly invest to achieve sustainability goals. Whilst this may have its advantages, it can give rise to competition concerns as a potential avenue for collusive and anti-competitive conduct. Global competition authorities are considering how best to tackle this issue: the European Commission’s revised draft horizontal guidelines includes a specific chapter on sustainability agreements[3]; the CMA, Dutch Competition Authority, and Greek Competition Commission have all published guidance to navigating sustainability agreements and competition law, [4],[5],[6] and the list goes on…

In the UK, the CMA currently assesses cooperation agreements with reference to Chapter I of the Competition Act 1998, which prohibits agreements which can distort UK competition. However, sustainability agreements (currently limited to environmental initiatives) may be permissible if:

  1. The agreement is covered by a block exemption, or is under the ‘safe harbour’ threshold.

Some sustainability initiatives may fall into one of the general categories of agreements (such as research and development or specialisation agreements) which may be exempt. Additionally, if the market shares of the businesses do not exceed certain thresholds, and the agreement does not create serious competition restrictions, it may be exempt.

  1. It is a standard-setting agreement which meets the criteria for standardisation agreements.

When setting standards on the environmental performance of products, access to the standards should be open to all competitors on FRAND terms. The relevant standards should not involve the exchange of commercially-sensitive information (above what is necessary), impose compliance obligations, make it difficult to develop alternative standards, or prevent competitors for entering the market.

  1. The agreement meets the four criteria for individual exemption.

Agreements which restrict competition – but are not exempt – may still be permitted, provided they generate benefits which outweigh the disadvantages of restricted competition and would not be achieved absent the agreement.

Meeting the individual exemption criteria may be difficult: showing that efficiencies from an ESG agreement would not be achieved absent cooperation, would outweigh negative impacts on competition, and would benefit consumers, will include at least a degree of subjective judgement.

Whilst there are no public cases involving anti-competitive sustainability agreements, the CMA has shown its interest and firm stance in the ESG space with notable investigations into electric vehicles and the fashion industry. Going forwards, the CMA needs to strike a delicate balance between being strict enough to dissuade anti-competitive collusion, but lenient enough to incentivise ‘green’ cooperation, particularly where there are clear, demonstrable environmental efficiencies to be realised.



Schellion Horn, Partner, Economic Consulting at Grant Thornton - +44 (0)20 7865 2288 /

Jake Foad, Manager, Economic Consulting at Grant Thornton - +44 (0)20 7865 2288 /



Schellion Horn and Jake Foad - Grant Thornton
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