EU, UK guidance provides relief to embattled net-zero alliances

New antitrust guidelines in Europe aimed at easing collaboration on sustainability should bring some comfort to the embattled Net-Zero Insurance Alliance and similar initiatives across the financial sector.

The European Commission's new guidelines on cooperation between competitors in June, which included a new chapter on sustainability agreements, are designed to clarify that the bloc's antitrust rules "do not stand in the way of agreements between competitors that pursue a sustainability objective," the EU's executive arm said. The UK Competition and Markets Authority (CMA) published similar draft guidance in February, though with more focus on environmental sustainability, with the final guidance pending analysis of consultation responses.

"The EU and the UK guidelines protect initiatives like the Net-Zero Insurance Alliance (NZIA)," Maurits Dolmans, a partner specializing in competition law at law firm Cleary Gottlieb, said in an email to S&P Global Market Intelligence. The alliance "has good chances to survive any scrutiny under EU and UK competition law in particular, in light of the new guidance," Jörg Karenfort, global head of competition and antitrust at law firm Dentons, said.

On the other side of the Atlantic, 23 US state attorneys general said in May that NZIA member commitments to cut greenhouse gas emissions in their underwriting portfolios to net-zero by 2050 may violate federal and state antitrust laws, triggering an exodus of high-profile insurers. The alliance now only has 11 members, down from 30 at its peak before the end of March 2023.

"The commission is aware of recent developments in other jurisdictions concerning net-zero initiatives in the financial services sector and is ready to provide ad hoc guidance in case undertakings are nevertheless uncertain as regards the compatibility of specific initiatives with EU competition rules, recognizing the important role this sector plays for financing and enabling the green transition," the commission told Market Intelligence.

Strong defenses

The antitrust accusations have so far stemmed solely from the US, where there is little guidance on collaboration for environmental sustainability goals. And the attacks on alliances are considered to be driven more by anti-environmental, social and governance sentiment than competition considerations. "The concerns in the US are mainly politically inspired. The issue has become embroiled in identity politics," Dolmans said.

The alliances set targets to meet the goals of the Paris Agreement on climate change, which is a "legitimate objective aligned with public policy," Dolmans said, adding that the alliances are "necessary and proportional to achieve that" and so can be exempted or cleared under the European Commission guidelines.

Even if alliances were to go further than they have and impose restrictions on dealing with new coal projects, these actions could still not be subject to competition law. The mitigating factors would be if there was no appreciable impact in practice; if the behavior was excluded by the Wouters doctrine; or if it was exempted under Article 101(3) of the Treaty on the Functioning of the European Union, Dolmans said.

The Wouters doctrine states that collaborations that restrict competition can be exempted from antitrust law if they fulfill a public policy objective. Article 101(3) grants exemptions if the advantages to consumers outweigh the harm from the restriction of competition.

In addition, investigating climate alliances has just not been a priority for European antitrust enforcers, Paul Henty, a partner at law firm Beale & Co, said in an interview.

No easy path

While the commission's updated guidance is "welcome," it still champions competition goals over sustainability objectives, according to Ronan Scanlan, a Dublin-based antitrust lawyer with Arthur Cox LLP and former deputy director of the CMA. "Any collaboration that results in a restriction of competition, or excludes competitors, customers or suppliers from markets, will find little protection in the guidance and could lead to harsh penalties," Scanlan said in an email. "This is true even if the objectives fall within the Paris Agreement, unless and until those objectives have the force of domestic law."

The new guidelines provide greater scope for sustainability benefits to wider society to offset any detriment to the specific group of consumers, but the commission will still require a "substantial overlap" between the two groups, according to David Little, a partner specializing in competition law at Latham & Watkins. "You still need some way for the direct consumers … to realize a significant part of the overall gain," he said in an interview. "You need to do the work of attempting to measure the detriment to certain groups of consumers versus the benefits to others," Little said.

But proving any benefits may be difficult given the challenges of attributing emissions reductions to a specific company's or sector's efforts.

The main concern for regulators with such agreements, according to Karenfort, is whether too much competitively sensitive information is being shared. Other tests include whether any cooperation is necessary to achieve the benefits being touted, and whether the association is accessible to all companies in a sector.

The NZIA, in common with other Glasgow Financial Alliance for Net Zero alliances, has been designed to avoid falling foul of competition laws. It established a framework for target setting and gave deadlines for disclosures but leaves it up to members how to get to net-zero. The statement of commitment NZIA members sign states that they "will refrain from disclosing competitively sensitive information and be particularly careful in not reporting information that may negatively affect competition in the concerned markets."

The alliance has also put a heavy emphasis on insurers working with customers to reduce their greenhouse emissions rather than withdrawing their cover.

Even so, the NZIA has recently softened its rules. The alliance announced July 5 that it would no longer require members to set or publish targets and that its target-setting protocol, launched January 2023, would instead act as a "voluntary best-practice guide." The NZIA declined to comment for this article and did not respond to a question about why it had changed its requirements.