The commission takes a step in the right direction with respect to sustainability agreements under competition law

The European Commission has adopted new horizontal guidelines for applying competition law to cooperation agreements between competitors. The horizontal guidelines will enter into force once they are published in the Official Journal of the European Union.

The most significant reform compared to the previous guidelines is that the new horizontal guidelines include guidance on the competitive assessment of competitor cooperation in pursuit of sustainable development.

Competition rules do not prevent competitor cooperation in pursuit of sustainability objectives

Pursuant to the horizontal guidelines, sustainability agreements refer to any cooperation agreements between competitors that pursue sustainability objectives, irrespective of the form of cooperation. These sustainability objectives include many types of goals concerning climate change, the environment and human rights, such as reducing greenhouse gas emissions, preventing pollution, paying living wages and improving animal welfare.

The premise is that sustainability agreements are allowed under Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), provided that the agreement does not have the object or effect of restricting competition.

The horizontal guidelines give examples of sustainability agreements between competitors that do not fall within the scope of the cartel prohibition and illustrations of allowed sustainability agreements between competitors:

  1. The guidelines allow agreements that aim solely to ensure compliance with legally binding international treaties, agreements or conventions, whether or not they have been implemented in national law. It is possible to agree on compliance with such obligations or prohibitions, for example, by preventing, reducing or eliminating the production or importation into the EU of products contrary to such requirements or prohibitions.

    Such agreements may be an appropriate measure to enable undertakings to implement their corporate sustainability due diligence obligations under EU law, among other things. Agreements can also form part of wider cooperation schemes to identify and prevent adverse sustainability impacts in the value chains of undertakings. This is a significant reform that enables efficient cooperation between competitors in respecting human rights and implementing certain environment-related obligations.

  2. Agreements that do not concern the economic activity of undertakings but their internal corporate conduct are also allowed. By utilising such agreements, competing undertakings can seek to increase the sustainability of their industry and agree, for example, on measures to eliminate single-use plastics from their business premises or to lower the ambient temperature in their buildings.

  3. The Commission also allows setting up databases for the purpose of sharing general information about the sustainability of suppliers’ value chains. The databases can be used to share information on the sustainability of production processes or raw materials. However, the agreements cannot not obligate the parties to purchase from such suppliers or to sell to such distributors, and the sharing of information that would impact the competition behaviour of the parties is not allowed within the cooperation framework.

  4. The guidelines allow the organisation of industry-wide campaigns to increase the customers’ awareness of environmental impacts, among other things. 

Sustainability standardisation agreements may benefit from the soft safe harbour in future

In addition to the examples above, the new horizontal guidelines allow certain sustainability standardisation agreements with respect to the EU competition rules. Competing undertakings can use sustainability standardisation agreements to agree on adopting and complying with certain sustainability criteria in order to pursue sustainability objectives. Adopting and complying with sustainability standards may involve, for example, an environmental label.

Sustainability standardisation agreements can be used by competing undertakings to agree, among other things, on replacing non-sustainable products, such as fossil fuels, with sustainable ones, harmonising packaging materials to facilitate recycling, harmonising packaging sizes to reduce waste or purchasing raw materials that have been manufactured in a sustainable manner.

It is recognised that sustainability standardisation agreements usually have positive effects on competition. The horizontal guidelines state that sustainability standards are unlikely to produce negative effects on competition and shall fall within the soft safe harbour, provided that the standards meet the following cumulative conditions:

  1. The procedure for developing the sustainability standard must be transparent: All interested competitors must be able to participate in the process leading to the selection of the standard.

  2. Voluntary participation: The sustainability standard must not impose on undertakings that do not wish to participate in the standard any direct or indirect obligation to comply with the standard.

  3. The possibility to apply higher sustainability standards: In order to ensure compliance with the standard, binding requirements can be imposed on the participating undertakings, but they must remain free to apply higher sustainability standards.

  4. Restricting the exchange of information: The parties to the sustainability standard must not exchange commercially sensitive information.

  5. Effective and non-discriminatory access to information: The outcome of the standard-setting process must be available to all parties in an effective and non-discriminatory manner. Furthermore, undertakings that have not participated in the process of developing the standard must be able to adopt the standard at a later stage.

  6. The sustainability standard must satisfy at least one of the following two conditions: The standard must not lead to a significant increase in the price or a significant reduction in the quality of the products concerned or the combined market share of the participating undertakings must not exceed 20% on any relevant market affected by the standard.

In practice, the soft safe harbour for sustainability standards will enable a great deal of cooperation between competitors and is a significant step in the right direction.

Even sustainability agreements that restrict competition can be allowed on a case-by-case basis

Pursuant to the EU competition rules, agreements that restrict competition can also be allowed under certain circumstances if the agreements fulfil the cumulative conditions of Article 101(3) of the TFEU, i.e. the efficiency argument. Regarding sustainability agreements restricting competition, the following must be taken into account with respect to applying the efficiency argument:

  • Improving efficiency: Implementing less polluting production and distribution methods and launching sustainable products on the market more quickly are mentioned as efficiency gains of sustainability agreements. The gains must outweigh the competitive harm caused by the agreement.
  • Indispensability: A sustainability agreement restricting competition must be indispensable to achieve efficiency gains. This could be the case, for example, when a pioneering undertaking would be at a disadvantage with respect to competing undertakings (first mover disadvantage) in pursuing sustainability objectives by itself.
  • Passing efficiency gains on to consumers: Consumers must receive a fair share of the benefits so that the overall effect on the consumers is at least neutral. The benefits may take the form of individual use value benefits, i.e. direct benefits (sustainably produced food may have better taste, for example), indirect benefits (consumer goods of customary quality manufactured using a more environmentally friendly method valued by consumers, for example) or even collective benefits (more expensive fuel that is less polluting and improves the air quality of the living environment, for example). Assessing collective benefits in particular seems challenging as the fact that gains benefiting a large consumer base (such as reduced greenhouse gas emissions) may not be considered to materially benefit the same group of consumers that suffers the harm due to the increased price.
  • No elimination of competition: There must always remain some competition in the market regardless of the extent of the sustainability agreement. Even if the agreement restricting competition covers the entire industry, competition must continue on at least one important parameter of competition, such as quality, selection or price.

A step towards reaching the EU’s sustainability objectives

Assessing the reform concerning sustainability agreements in its entirety, it is evident that the Commission is taking significant steps towards reaching sustainability objectives. It is good that the Commission is excluding some sustainability agreements from the scope of application of the cartel regulations. This means that undertakings need not refrain from cooperating due to fear of competition law sanctions. Furthermore, the soft safe harbour for sustainability standards will significantly facilitate cooperation in sustainability issues. Most of all, the guidelines increase legal certainty in the assessment and application of sustainability agreements while observing the competition rules, allowing undertakings to focus on the essentials of their cooperation in sustainability.

Outside of the soft safe harbour, it is still important for undertakings to evaluate the competitive effects of any arrangements and to assess whether the cooperation arrangements can be protected by the efficiency argument. Regarding the assessment of efficiency gains, the Commission continues to place a strong emphasis on the willingness of the consumer to pay for a more sustainable product and requires that the group of consumers benefiting and suffering harm due to the restriction must be substantially the same. In this respect the Commission could have taken a more progressive stand. It is to be hoped that we will see improvements in policy and case law in the future. Combating the climate crisis and loss of biodiversity requires that undertakings work together, even if they are competitors.

See also:

Greening Competition Law – Sustainability Agreements and Competition Law