Legal challenges threaten net-zero pledges

The legal risks associated with voluntary climate action to transition to net-zero emissions are becoming real for companies as they face the possibility of prosecution for antitrust violations. To guarantee the effectiveness of their net-zero pledges, firms are now calling for a more stable and predictable legal environment.

According to Net Zero Tracker, almost half of the world's largest firms have set net-zero commitments. Among them are banks, asset owners and insurers. Different net-zero financial alliances were established in the lead-up to COP26 to mobilize the financial sector around the goals of the Paris Agreement. Financial institutions recognized the long-term business risks of climate change and understood the commercial value of collaborating towards net-zero. But we know that pollution is an environmental externality. In the absence of regulatory sticks or financial carrots to reduce emissions, firms are incentivized to emit greenhouse gases without restraint, leading to the everlasting tragedy of the commons. 

There are two reasons for firms to cooperate on sustainability. The first is preventing climate free-riding. Industry-wide coordination is essential to prevent laggards from taking advantage of voluntary commitments by early movers. Countering the risk of bringing back divested assets and renewing the financing and insurance of new carbon-intensive activities requires a united approach. 

Second, we need uniform standards for target-setting, reporting, and monitoring progress, which are crucial to allow investors and stakeholders to assess climate performance across firms accurately. This consistency will minimize the risk of greenwashing, ensures the credibility of climate commitments, and provides a basis for comparison across firms. 

But as the need to address climate change becomes more urgent, companies now face the threat of legal and reputational risks associated with voluntary climate action. 

The possibility of antitrust prosecution for sustainability collaborations looms large and risks depressing corporate engagement. A month ago, 23 U.S. state attorneys general requested records from the Net-Zero Insurance Alliance (NZIA), an association of insurance companies working towards a net-zero economy. They raised concerns about potential violations of U.S. antitrust laws. These prosecution threats have been taken seriously, resulting in the departure of almost half of the alliance's members.

Meanwhile, firms also face public accusations, investigations, and lawsuits for potential climate deception if their net-zero pledges are seen as insufficient or lacking concrete action. An example of this is the recent $1 billion class action filed against Delta Airlines regarding its carbon neutrality claims. In Canada alone, the Competition Bureau has launched at least four investigations into greenwashing in the past year, three of them focusing on voluntary corporate claims about greenhouse gas emissions.

These risks are already harming corporate transparency. According to a survey conducted in 2022, out of 1,200 global firms with net-zero targets, 23% of respondents said they would not publish their climate progress to avoid accusations of greenwashing, a behaviour known as "green-hushing." Some companies believe that the reputational and legal risks associated with voluntary climate commitments outweigh the benefits, especially as these commitments are losing value due to widespread public skepticism. In June, Deloitte released a study indicating that 57% of Canadian consumers do not believe “green” or “sustainable” claims by brands.

To prevent green-hushing and ensure the longevity of corporate engagement on climate, regulators must step in to provide greater legal certainty surrounding the risks associated with voluntary climate commitments. 

Some jurisdictions have already started to move in that direction. The U.K. and Dutch competition watchdogs have issued guidelines on sustainability agreements between competitors. The European Commission updated its guidelines on horizontal collaborations earlier this month to "clarify that the antitrust rules do not stand in the way of agreements between competitors that pursue a sustainability objective." The European Commission is also working on an antitrust exemption that would permit certain sustainability agreements in the agri-food sector.

A similar regulatory movement is also under way regarding environmental claims. The French Environment Code was expanded a year ago to indicate which information must be disclosed by advertisers willing to make carbon neutrality claims. The European Commission recently proposed a green claims directive indicating how firms must substantiate and communicate categories of sustainability claims. Finally, some jurisdictions have issued guidelines on the application of their existing laws to green claims, such as the U.K., Australia, and the U.S. 

The Canadian government has initiated the Net-Zero Challenge, a program that establishes a comprehensive approach for setting targets and reporting progress without competitors engaging in direct communication with one another. However, the Competition Act does not include particular exemptions for sustainability agreements (such provisions existed before 2009) and the Competition Bureau has not issued specific guidelines on this topic. Also, it does not indicate what information, specifically, must be disclosed to substantiate climate-related claims. There are no extensive green claims guidelines available on the Bureau's website. 

To address these issues, private-sector stakeholders have advocated for amendments to the Competition Act and new enforcement guidelines to grant greater legal predictability to firms willing to collaborate and communicate on climate. TELUS has argued that the Bureau's approach towards forward-looking "green" commitments was unclear, noting the importance that "environmentally conscious businesses be rewarded for their efforts and for making in some cases very substantial investments in environmental sustainability." Along the same lines, the Canadian Jewellers Association has asked the Competition Bureau to adopt a new guide for the industry and advertisers on environmental claims to "reflect the latest standards and evolving environmental concerns." Private sector lawyers Neil Campbell and Sarah Stirling-Moffet have recommended introducing "a robust defence to the conspiracy offence for agreements that protect the environment or promote sustainability," which would "fully address the uncertainty and potential chilling effects on sustainability collaborations of the criminal conspiracy offence and the related private right of action to recover damages." 

We'll see whether these proposals will be incorporated into Canada's competition law framework. The government may also shift the focus away from voluntary initiatives and informational standards towards more prescriptive policies, like emission caps and environmental taxes. However, pursuing such policies requires substantial political will, which brings us back to why voluntary net-zero commitments were made in the first place. We must fill the gap left by governments struggling to implement ambitious environmental reforms. Ultimately, cooperation between private and public action is likely necessary to safeguard net-zero commitments' future.