ESG And Competition Law In Cross-Border M&A: A Contemporary Shift In Corporate And Commercial Regulation

Cross-border mergers and acquisitions (M&A) evaluations have been significantly altered due to the rise of Environmental, Social and Governance (ESG) considerations. The integration of ESG considerations in M&A has scaled new height shaping global settlement and risk assessment. ESG factors are increasingly treated as inputs to and outcomes of competition analysis. They are no longer confined to voluntary commitments or investor reporting. To ensure merger clearances, the authorities are also prepared to accept or require remedies and commitments to target the objectives of sustainability.

ESG has become a quasi-regulatory parameter in the merger control phenomenon. The Competition authorities now need to assess not only traditional price and market-structure effects but also sustainability outcomes. This approach represents a contemporary shift in corporate and commercial regulation. The bone of contention is: If ESG now shapes merger outcomes in the same manner as competition law, can such regulatory power be exercised without the procedural safeguards and legal certainty that traditionally legitimise antitrust enforcement?

Competition Law and Cross-Border M&A: Traditional Framework

Conventionally, the core apparatus or main tool for modulating cross-border mergers is competition law. Its provisions include:

i) Preventing excessive market concentration

ii) Protection of consumer welfare

iii) Preservation of the competitive market structure

In India, combinations are evaluated for their appreciable adverse effect (AAEC) on competition under the Competition Act, 2002, by the Competition Commission of India (CCI). The evaluation is primarily an economic exercise, and the prominent factors that are given importance are market shares, concentration levels, entry barriers, and competitive constraints, primarily in terms of price, output, innovation, and consumer welfare. Under the EU Merger Regulation, transactions meeting turnover thresholds must be notified to the European Commission and are assessed under clear procedural and substantive rules. While contemporary merger analysis recognises the role of non-price considerations such as innovation and quality, competition policy remains more comfortable assessing the impact of prices than the intangible, long-term damage.

The said framework ensured that, while cross-border M&A is regulated, it also remains rule-based and legally disciplined. However, recent regulatory initiatives in India, including SEBI's and RBI's disclosure frameworks, demonstrate a growing institutional focus on ESG reporting standards. ESG has entered this domain without a comparable statutory structure. Nevertheless, ESG poses increasingly similar regulatory effects.

The Functional Takeover: How ESG Mimics Competition Regulation

1. ESG as a filter for Market Access

Determining market entry and its control is one of the most prominent and core functions of competition law. ESG, in juxtaposition, has quietly begun to perform the same function. In cross-border M&A transactions, acquiring entities are now scrutinised for environmental records, labour standards, supply-chain practices, and governance structures. These conditions are independent of traditional competition concerns.

When an acquirer's ESG profile is deemed inadequate, the impugned transactions undergo enhanced regulatory resistance, prolonged approvals, or clearances. Such fencing operates as a non-price barrier to entry. These barriers affect firms in jurisdictions with divergent developmental priorities and regulatory capacities. Unlike competition law, ESG-based exclusion does not rely on objective dominance thresholds.

2. ESG as a Behavioural Remedy Mechanism

Competition authorities have typically relied on behavioural remedies to solve the issues arising from the market in a very specific way. Those are, among other things, supply commitments and restrictions of certain kinds of behaviour. In merger situations, ESG is now bringing about similar effects, even in cases where no anticompetitive effects were found.

Post-merger ESG commitments may require a company to implement emissions cuts, alter its workforce, change its governance, or undertake extensive sustainability reporting. These commitments affect corporate decisions, shaping processes long after the completion of the transaction. They determine the firm's operations, its investments, and the way it plans commercially.

3. ESG as Soft Power Protectionism

The underlying controversy regarding the integration of ESG factors into cross-border M&A activities centres on the environmental protectionist aspect. This is because a large number of ESG rules are developed in a richer, more developed setting, which is a result of capital-intensive compliance processes and are not necessarily within the reach of all. By applying these rules to cross-border transactions, companies in developing nations may be subject to greater scrutiny or even be effectively barred.

This functional expansion is reinforced by the Brussels Effect, through which EU ESG standards shape cross-border M&A by compelling global firms to align with EU norms as a condition of market access. While this is couched in lofty moral language, the actual impact is the exclusion of local markets, as was the case with the application of competition law for protectionist purposes. The difference is important because ESG interventions are not as transparent or accessible as the latter.

The Regulatory Gap: ESG Without Legal Safeguards

The problem is not whether ESG restriction exists, but rather in the use of unconstrained exercise of regulatory power. The competition law in India lacks published CCI guidance on ESG collaborations, leaving firms to self-assess anticompetitive risks. This absence of procedural formality leads to a 'Regulatory Black Hole': business actors are subject to a system in which standards are unclear, and enforcement is scattered across various institutions.

Even though the existing competition law framework is sufficiently broad to take into account the sustainability effects through innovation or economic development. However, at present, there is neither an explicit statutory provision nor detailed guidance by CCI on ESG collaborations. Therefore, the companies are left without formal regulatory criteria. In fact, this lack of procedural clarity is not only in India. In the United States, long-standing safe harbour guidance that helped competitors engage in cooperative initiatives, including sustainability collaborations, has been rescinded by both the Department of Justice and the FTC. Thus, resulting in companies having no practical antitrust guidance on how to collaborate on ESG objectives without violating competition laws.

As a result of the substitution of the Rule of Law by the Rule by Metrics, the legal certainty, which is the foundation of commercial law, is jeopardised. Furthermore, by bypassing judicial control, ESG enables regulators and financial gatekeepers to reshape global markets without the procedural formalities. The Competition authorities of the Netherlands, Greece and the United Kingdom were among the first regulators to circulate detailed guidance on the reciprocity between competition law and sustainability agreements; on the other hand, India has yet to formally develop similar guidance.

Actually, the Competition Commission of India has not yet set down clear rules and guidelines on how to take ESG collaborations into account under the Competition Act. Thus, it is not clear to companies whether sustainability collaborations between competitors are legal. The discretionary nature of ESG enforcement leads to unpredictability in cross-border transactions. Different ESG standards in various jurisdictions lead to regulatory fragmentation, which increases compliance costs and legal uncertainty for global companies.

Reintegrating ESG into Formal Regulatory Framework

It is pertinent to note that the article does not take a stand against the ESG objective. Appropriate targets for ensuring regulation are the needs of the hour. Adherence to Environmental protection, social responsibility and good governance is the goal to be achieved. The issue comes when ESG is used as a de facto competitive regime without the authority of law. The solution does not lie in the dismantling of the system but in regulated integration. Competitor and corporate governance frameworks enlighten the foundational bedrock of ESG.

A clear line should be drawn to achieve statuary power, standards of review, procedural review, and proportionality-based assessment. "Proportionality-based assessment" would also allow a court to strike down an ESG-based merger block. In case the "environmental benefit" is outweighed by the "economic harm" to consumers, the proportionality-based assessment doctrine becomes the beacon. Unlike India, the EU and Austria have adapted competition law to accommodate sustainability agreements.

A solution involving integration would provide a trajectory that would safeguard the normative value of ESG as well as restore legal certainty. Moreover, it would help to lessen the scope of distortion of the arbitrary market, thus ensuring accountability.

The author Ayush Kapoor is a lawyer and Rajat Srivastava is a Law student. Views are personal