This article is an on-site version of our Moral Money newsletter. Sign up here to get the newsletter sent straight to your inbox.
Visit our Moral Money hub for all the latest ESG news, opinion and analysis from around the FT
Hello from the Netherlands, where the head of the Dutch competition regulator has stormed into an antitrust debate that threatens to derail corporate efforts to collaborate on the climate.
The European Commission’s new guidelines on anti-competitive sustainability agreements are too restrictive for the age of climate breakdown, according to Martijn Snoep, chair of the national Authority for Consumers and Markets.
When companies strike deals to lower emissions this can drive up prices for the end consumer — and while this may be a good thing for the planet, it can look bad for competition in the EU’s eyes.
When I met him at his office in The Hague this week, Snoep urged companies to challenge the European Commission at the European Court of Justice in Luxembourg.
In our recent report on cracks in Mark Carney’s climate alliance of financial institutions, major banks cited antitrust concerns in their threats to jump ship. The institutions worried that they could run foul of restrictions on US competition law if they collectively decide to stop financing fossil fuels. It turns out things are not particularly rosy in the EU either.
Also in today’s edition, the Federal Reserve announced it would follow the Bank of England in starting climate-specific stress tests for big banks. Patrick has the details below. (Kenza Bryan)
Fear of covert green cartels hampers European collaboration on climate
In recent weeks, antitrust concerns have disrupted financial net zero alliances committed to lowering emissions — but Dutch regulators claim they have a way to soothe these fears and dissolve the risk of hobbling corporate collaboration on climate change.
“Ultimately, it’s something that’s up to the court of justice,” Martijn Snoep, the Netherlands’ top competition regulator, told me this week, as he encouraged companies to challenge the European Commission’s new guidelines on anti-competitive sustainability agreements.
The issue has come to the fore after the Race to Zero — a UN-backed body that sets the standards for the major corporate net zero alliances — acted on antitrust concerns to remove a mandate that “no new coal projects” should be supported by its members.
In an article published this week, Tom Hale — an Oxford university academic who co-chairs the Race to Zero’s expert panel — gave a withering assessment of the rigid legal framework that meant his team had risked “breaking the law for articulating basic scientific facts” on the need to stop burning coal.
When deciding whether to approve a climate agreement that restricts competition, regulators have to weigh up whether benefits to consumers — for example through reduced carbon emissions or pollution — outweigh any resulting increase in price or drop in quality.
The Dutch competition authority, however, last year pulled ahead of other EU countries when it said it would approve sustainability agreements aimed at limiting environmental harm — even when the consumers who are hit with price rises cannot personally reap all the resulting benefits linked to slowing global warming.
Under Snoep’s watch, the regulator has issued approvals for corporate sustainability collaborations, such as drinks companies and supermarkets reducing plastic in packaging, or garden centres collectively refusing to sell plants grown using illegal pesticides.
“I think the preferred route in our market economy is rivalry among companies to invest in green [things],” Snoep said. “But the reality is, there are also cases where there is no movement because of a first mover disadvantage,” he said. For example, an investment manager that decarbonises its portfolio very rapidly might risk losing market share, if it underperformed the market during a strong run for fossil fuel stocks.
The EU’s draft horizontal guidelines, released in March, introduced a “safe harbour” for some sustainability agreements, protecting them from threats of legal action. But the draft of the new rules — which are due to come into force next year — also requires that consumers be fully compensated for any “harm” arising as a result of agreements it deems anti-competitive.
If, for instance, the asset management industry came together to set net zero targets and used these to market ESG funds that exclude fossil fuels, retail investors could in theory be hit with lower returns without directly benefiting from the fall in emissions. The impact could also be felt in the average household’s electricity bills if the price of coal and gas creeps up as a result.
The EU’s stance is seen by some as a perverse approach to climate deals, whose positive impacts would be felt around the globe. Maurits Dolmans, an antitrust specialist and partner at Cleary Gottlieb Steen & Hamilton, told me the EU had “prioritised administrative convenience over abating climate change” in designing these rules. “The European interpretation has introduced some scope for co-operation to reduce the damage to society from market failures, but does not go far enough,” he said.
Fear of letting a covert “green cartel” slip through the supervisory net are driving the EU’s approach, according to Snoep. In August, for example, the Commission imposed a record €2.9bn fine on long-distance haulage companies for allegedly colluding to pass on the cost of stricter emissions rules to customers. The action sent “a clear message to companies that cartels are not accepted”, Margrethe Vestager, the commissioner for competition, said at the time.
“I think the commission has concerns that if it opens the door for sustainability then the door will be opened for a whole host of other public benefits — unemployment, industrial policy, protection of national champions, who knows what,” said Snoep.
The European Commission did not respond to a request for comment.
Despite some bona fide risk, antitrust is in some cases being used as a “nice excuse towards NGOs and others” for inaction, Snoep says. When he joined the regulator as chair in 2018, an association of Dutch banks told him they would need clarity on competition issues before collaborating on the climate. But, he claims, once he brought in sweeping exemptions on sustainability, they failed to leap into action.
Hale, the co-chair of the Race to Zero expert group, told Simon this week that he was encouraged by the stance that Snoep’s team had taken on this issue. Current antitrust law “might be mobilised and weaponised against things like the Race to Zero” by corporate actors opposed to a rapid energy transition, he warned. “The real solution here is to make sure that antitrust law is actually serving the public interest.” (Kenza Bryan)
Fed to pilot climate stress test for banks
Taking a page from its European counterparts, the Federal Reserve yesterday said it would launch a pilot climate stress test of six big banks next year.
The move comes about two years after the Bank of England kicked off its inaugural stress test of the climate risks facing banks and insurers. The Fed said it would next year publish the details about how it would test the six banks: Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo. The banks declined to comment on this new climate scrutiny.
But clues about how these banks will fare can be gleaned from the BoE’s case. In May, it said UK banks and insurers could suffer a 10-15 per cent drop in annual profits if they failed to manage climate risks.
The Fed’s move was applauded by Huw van Steenis, a senior adviser to Mark Carney when he started drawing up plans for the stress tests as BoE governor.
“The Ukrainian war, energy crisis and political environment has profoundly changed the [energy] transition, van Steenis told me. “But capturing the data is still key.
“In fact, one could argue, the slower and more complex the energy transition, the more high quality data will help make better decisions,” said van Steenis, author of an influential 2019 report highlighting the need for central bank stress testing, which he summarised in this FT article.
Liberals in the US also applauded the Fed. But David Arkush, managing director of Public Citizen’s climate programme, said the stress test was “way overdue.” The Fed should “move swiftly toward measures that mitigate the risks,” he said.
Another interesting recent case study in this field came from the EU, where the European Central Bank in July said its first climate stress test — using self-reported estimates from 41 big eurozone banks — showed potential losses of €70bn. The ECB said that figure “significantly understates” the actual risk. Executive board member Frank Elderson told Moral Money this month that the maiden climate stress test should be seen as a learning exercise, and that the ECB had not yet decided how to factor climate risks into capital adequacy rules.
If central banks impose stringent new capital rules around climate and energy transition risks, this could fundamentally reshape the playing field for major banks. The Fed’s announcement yesterday may look to some US banks like the first step in that direction — and a new incentive to move more quickly in cleaning up their carbon-heavy balance sheets. (Patrick Temple-West)
Millions of Floridians are suffering the devastating impact of the latest hurricane to smash into the state — a hazard that is becoming increasingly severe as a result of climate change.
Global Witness has published a new report estimating that more than 1,700 environmental activists have been murdered over the past decade — an average of nearly one every two days.
Hans Taparia at New York University’s Stern School of Business has written a searing critique of the ESG industry. In a New York Times column, he urges regulators to force ESG rating agencies to properly reflect the costs that companies impose on society and the environment. “The current system for ESG investing,” Taparia writes, “is just regular capitalism at its slickest: ingenious marketing in the service of profits.”
Recommended newsletters for you
Due Diligence — Top stories from the world of corporate finance. Sign up here
Energy Source — Essential energy news, analysis and insider intelligence. Sign up here