Sustainability Agreements and Competition Law

As environmental, social and governance (ESG) goals become a growing business priority, competition law is, in some ways, adapting to encourage or facilitate collaboration between competitors that promote these objectives.

On 1 June 2023, the European Commission (Commission) published its revised guidelines on horizontal cooperation (Guidelines), which includes a chapter on sustainability agreements. The UK’s Competition and Markets Authority (CMA) publicly consulted on draft guidance on the application of Chapter I of the Competition Act 1998 (1998 Act) to environmental sustainability agreements (Draft Guidance) between 28 February and 11 April 2023 (Chapter I deals with anti-competitive arrangements). Draft guidance has also been published by the Netherlands Authority for Consumers and Markets (ACM), which has since stated that it will bring its own draft guidelines in line with the Commission’s Guidelines due to the cross-border effects of most sustainability initiatives.

These EU guidelines provide a framework for companies to assess whether their agreements could infringe on competition law but also highlight some important differences in approach between competition authorities.

Definition of sustainability agreements

The Commission’s Guidelines include a broad definition of sustainability, which encompasses activities that support economic, environmental and social development (including labour and human rights development). Similarly, sustainability agreements are defined as “any horizontal cooperation agreement that pursues a sustainability objective, irrespective of the form of the cooperation”.

In contrast, some competition authorities have identified a sub-set of sustainability agreements which aim to reduce greenhouse gas emissions.

The CMA’s Draft Guidance is mainly based around the broad concept of ‘environmental sustainability agreements’ (ESAs) but also identifies ‘climate change agreements’ as a special sub-set of ESAs, namely those that contribute towards the UK’s binding climate change targets under domestic or international law. Such agreements will typically reduce greenhouse gas emissions, with the Guidance giving several examples, including an agreement between delivery companies to switch to using electric vehicles. These would benefit from a more permissive application of the exemption provision set out in the 1998 Act, reducing the likelihood that they are found to infringe UK competition law. The ACM takes a similar approach and identifies a separate set of ‘environmental damage agreements’, which aim to reduce damage to the environment caused by the emission of greenhouse gases.

Consultation with the Commission or other authorities

Companies collaborating to achieve sustainability goals have been apprehensive due to the lack of legal certainty around how authorities would apply traditional competition law principles to multi-party initiatives that could negatively affect some consumers (e.g., limiting choice excessive pricing). The Commission’s Guidelines open the door for companies wishing to enter into a sustainability agreement to seek informal guidance from the Commission through its Informal Guidance Notice regarding novel or unresolved questions on individual sustainability agreements to ensure compliance with EU competition rules.

Similarly, although slightly broader in scope, the CMA, in its Draft Guidance, establishes an “open-door policy”, whereby parties would be encouraged to approach the CMA for informal guidance on actual or contemplated ESAs. The ACM encourages businesses to contact the ACM at any time to discuss the potential anticompetitive risks of sustainability agreements they wish to make.

Assessment of sustainability agreements

Agreements which fall out of the scope of Article 101(1) of the Treaty on the Functioning of the European Union (TFEU)

The Commission’s Guidelines looks at whether the agreement in question affects competition parameters (e.g., prices, quantities, quality, choice or innovation). While much will still depend on the many details involved, agreements that do not relate to these issues will generally fall outside the scope of Article 101 TFEU and, on that basis, be less likely to raise issues from a competition law perspective. An example would include agreements to create databases with general information on suppliers that have sustainable value chains (for instance, suppliers that respect labour rights or pay living wages).

Restriction of competition by object/effect

Where sustainability agreements negatively affect one or more parameters of competition, they have to be assessed under Article 101(1) TFEU. Sustainability agreements will be treated as restricting competition by object (i.e. harm to competition can be assumed), if a sustainability objective is used to disguise price fixing, market sharing or customer allocation, or a limitation of output or innovation. An example would include agreements where parties agree how to pass on to customers increased costs resulting from a sustainability initiative.

Where the main purpose of the agreement is a sustainability objective and is not suspected of masking a severe restriction of competition, the agreement will instead require an assessment of the effects and efficiencies generated. Factors to be taken into account include the market power of the parties, the degree to which the agreement limits the decision-making independence of the parties, the extent to which commercially sensitive information (CSI) is exchanged and whether the agreement results in an appreciable increase in price or an appreciable reduction in output, variety, quality or innovation.

Assessment of sustainability agreements under Article 101(3) TFEU

In general, when assessing whether an agreement producing appreciable negative effects on competition may benefit from the exemption provided by Article 101(3) TFEU, the parties have to prove that the agreement meets certain conditions.

One of the requirements is that consumers receive a fair share of the purported benefits. This has proved difficult in the context of sustainability agreements, where benefits may accrue to society as a whole rather than specifically to consumers of the relevant product or service. The Commission has, however, specifically set out that it takes a broad view of the benefits that are relevant to the competitive analysis, including:

• Individual use benefits: Consumer benefits typically derive from the consumption or the use of the products. This would include improved product quality, product variety or price reductions (e.g., vegetables that are cultivated using organic fertilisers may have better taste and/or be healthier for consumers).
• Individual non-use benefits: Consumer benefits from sustainability agreements may not only comprise direct benefits from the use of a sustainable product but also indirect benefits resulting from the consumers’ appreciation of the impact of their sustainable consumption.
• Collective benefits: Consumer benefits for a broader sector or even society at large. However, this is only permitted in circumstances where consumers in the relevant market substantially overlap with (or are part of) the beneficiaries outside the relevant market.

Both the CMA and ACM have taken a broader approach for particular categories of agreement (‘climate change agreements’ and ‘environmental damage agreements’) to allow a wider class of consumer benefits to be taken into account.  

For climate change agreements, the Draft Guidance states that the CMA would interpret a “fair share” of the benefit to consumers more broadly. In particular, the CMA would likely take into account the totality of the benefits to all UK consumers arising from the climate change agreement, rather than following its general approach of taking into account only benefits that accrue to consumers within the markets affected by the agreement.

Similarly, the ACM states that when assessing ‘environmental-damage agreements’ consumers may not need to be fully compensated where such agreements comply with an international or national standard or help realise a concrete policy goal.

Conclusion

Ireland has yet to issue guidance on the topic.  In respect of cross-border trade within the EU, Ireland would be bound by the European Commission guidelines, but the question is whether it could adopt different rules which did not undermine the EU regime.

The Guidelines are a positive as they provide somewhat helpful guidelines for businesses on the interaction between collaboration on sustainability initiatives and the boundaries of EU competition law. It remains to be seen whether businesses will (or will be able to) avail of this and make use of the consultation process offered by the Commission.

For further details regarding the Sustainability Agreements and competition law, please contact Vincent Power, Alan McCarthy, Anna-Marie Curran, or your usual team EU, Competition & Procurement contact.

Date published: 27 September 2023