Temperature still rising: US antitrust backlash continues against insurers’ climate initiatives

1. Introduction

In our previous article, we explored the challenges insurers face in achieving cooperative climate action while adhering to competition law compliance. Notably, two leading insurers withdrew from the NetZero Insurance Alliance (NZIA) due to concerns surrounding competition law implications. However, recent developments have raised additional concerns for UK-based businesses regarding antitrust laws and environmental, social, and governance (ESG) initiatives, particularly in light of US actions.

As detailed below and in our previous article, part of the perceived problem has emerged from insurers’ refusal to cover climate unfriendly customers or industries (or to offer less favourable terms). In the United States, a refusal to supply certain classes of customers can potentially violate the Sherman Act, which prohibits anti-competitive agreements and practices. In the European Union, similar concerns arise under Articles 101 and 102 of the TFEU, which address restrictions on competition (e.g. agreements between insurers to collectively boycott customers or suppliers) and abuse of dominance, respectively.

Under both US and EU antitrust laws, agreements which are on balance considered pro-consumer may still be legal.  In the US this test is known as the “rule of reason”.  In the EU and UK a similar “balancing test” is set out at Article 101(3) TFEU and s 9 of the Competition Act 1998.  However, applying this test in the context of sustainability initiatives can get horrendously political, depending on whether or not one accepts the reality of climate change.   Climate deniers may view refusals to supply (or other restrictive initiatives) as impermissible and anti-competitive, while proponents of climate action may argue that such refusals benefit society as a whole and support necessary sustainability efforts.

Ultimately, antitrust authorities and courts would assess the market dynamics, potential anti-competitive effects, and justifications for the refusal to supply in order to determine whether a violation has occurred. The interpretation of antitrust laws therefore depending on whether or not a particular prosecutor or regulator believes climate change to be real.

2. Antitrust warning from US Attorneys General and its Impact on international insurers

It was reported in the Gazette on 16 May that approximately 22 attorneys general in the United States have commenced antitrust related investigations into the sustainability related initiatives of insurers. These attorneys general, primarily led by Utah Attorney General Sean Reyes and Louisiana Attorney General Jeff Landry, have sent a letter to 28 insurance companies affiliated with the Net-Zero Insurance Alliance and Net-Zero Asset Owner Alliance.

The attorneys general are seeking documentation and communication records from these companies to investigate their involvement with the two alliances and any potential commitments made. By focusing on the commitments given to the NZIA, prosecutors may be considering whether they can argue that insurers have acted in concert, forming an anti-competitive conspiracy contrary to S 1 of the Sherman Act 1890. If insurers have jointly agreed on requirements for customers to meet certain climate related conditions (e.g. commitments to reduce emissions) they may also seek to characterise this as an unlawful concerted practice. The concern may ultimately be stated to that these alliances, which advocate compliance with the Paris Agreement’s climate change objectives, are incompatible with US antitrust laws.

To European commentators, this may appear odd.  Surely it can only be a good thing that the Paris Agreement is observed by all businesses?  Isn’t peer pressure (i.e. refusing to insure violators) a desirable (if not necessary) way to achieve this?  It must be remembered that within the US, many Conservative Republicans are highly sceptical of climate change.  Leaving to one side the near incontrovertible scientific evidence, polls show the majority of Americans believe that climate change is real. Nonetheless, it was not so long ago that the Trump administration withdrew the USA from the Paris Agreement (a move reversed by the Biden administration by executive order in January 2021).

3. Implications for UK-Based Businesses and Global Coordination

While the focus of this warning is in the United States, its impact can be felt globally due to the nature of cross-frontier businesses. Insurers coordinate their commercial policies on an international basis, aiming to avoid any actions that could lead to penalties in any jurisdiction where they operate. Therefore, developments in the US regarding antitrust concerns have reverberations for UK-based businesses as well.

4. UK and EU Antitrust Initiatives in Support of Climate Action

In the UK and the European Union (EU), antitrust regulators have shown support for sustainability agreements and initiatives aimed at combating climate change. Both the UK’s Competition and Markets Authority (CMA) and the European Commission have published draft guidelines that highlight the potential benefits of such agreements. These guidelines recognize the advantages of promoting sustainability, such as a cleaner environment and more efficient resource utilisation. Many businesses welcomed these moves, stating they wished to work together with competitors on climate action but had previously feared legal consequences.

As we reported in our previous article, the UK CMA goes as far as stating in its draft guidance that “an agreement not to provide support such as financing or insurance to fossil fuel producers” is an example of a “climate change agreement” whose benefit is likely to outweigh any competition concerns.   The CMA has said that it “will not take enforcement action against environmental sustainability agreements, including climate change agreements, that clearly correspond to examples used in [the CMA’s Sustainability] Guidance”.   That is obviously a marked contrast to the approach of the 22 attorneys general.

Whilst the CMA’s guidance may provide some reassurance, the potential impact of US developments cannot be overlooked even when businesses are operating outside of the US. Transnational businesses, including insurers, operate within a complex web of regulations and jurisdictions. When one jurisdiction displays hostility towards cooperative efforts, it can hinder effective coordinated action among corporations that are best positioned to prevent environmental harm.

For instance, let’s consider a hypothetical scenario where a UK-based insurer, operating globally, provides insurance coverage to renewable energy projects in both the UK and the United States. While the insurer adheres to UK and EU competition laws and actively participates in sustainability initiatives, US antitrust regulators may view their cooperation and alignment with climate-focused alliances as an antitrust breach. In this case, the US jurisdiction may claim that the insurer’s actions infringe upon US competition regulations, despite the insurer’s compliance with competition laws in other jurisdictions.

Likewise, what would be the position if a US based fossil fuel business were refused coverage for operations in Europe by an insurer that had given commitments in the NZIA? Could there be exposure for the insurers if it was headquartered or had a business presence in the USA?  An attorney general may consider that while the location of the risk was in the EU, an antitrust “harm” may have been suffered in the US, thereby giving jurisdiction.

It follows that an insurer could find itself subject to an investigation by US authorities, facing potential penalties or legal challenges in the United States. This scenario highlights the challenges faced by cross-frontier businesses as they navigate the varying regulatory landscapes and potential conflicts between jurisdictions.

5. Navigating the Intersection of Climate Action and Competition Law

As UK businesses navigate the evolving landscape of climate action and competition law, it becomes imperative to engage in constructive dialogue with regulators, policymakers, and industry stakeholders. This dialogue can help shape a cohesive framework that supports cooperative efforts to combat climate change while ensuring compliance with competition regulations.

To maintain a global outlook on sustainability initiatives, businesses must seek alignment across jurisdictions and carefully assess the potential legal implications of their actions. While UK and EU regulators are taking positive steps to support climate action, developments in the US underscore the need for businesses to consider the broader international implications of their cooperative efforts.

As UK businesses strive to promote climate action while adhering to competition law, the antitrust warning issued by US attorneys general raises concerns about the global coordination of sustainability initiatives. In the insurance context, it appears to be the fact that insurers may be working in concert (e.g. in the NZIA) which is the concern. While UK and EU antitrust regulators have shown support for such initiatives, transfrontier businesses must navigate potential conflicts between different jurisdictions and ensure compliance on a global scale.

To effectively address climate change, it is crucial to foster collaboration between regulators, businesses, and policymakers at both national and international levels. By working together, stakeholders can establish a cohesive framework that balances climate action goals with competition law considerations, enabling a sustainable and responsible approach to business operations in the face of global challenges.

This underscores the need for insurers to carefully assess and manage the potential risks and legal implications of their operations across multiple jurisdictions to avoid running afoul of any jurisdiction’s laws, including the United States.  Any such coordinated approach appears unlikely to emerge, at least in the near-term.  In the US, positions around climate change have become polarised and matters will only deteriorate further as the country heads towards a potentially febrile presidential election in 2024.

There are however mitigation strategies that can be taken, considering the risks within the different markets.  Considering such strategies is well worthwhile, insurers can remain proactive in their cooperative climate action efforts while staying within the bounds of relevant competition laws.