The European Commission adopts guidance on how competition laws apply to sustainability agreements

The European Commission (EC) adopted revised guidelines (Guidelines) on horizontal cooperation which will enter into force on 1 July 2023. In the second of our briefings, we focus on the chapter in the Guidelines that specifically provides guidance on sustainability agreements.

This chapter aims to assist businesses by providing a framework within which they can assess, with certainty, whether agreements with competitors that pursue sustainability objectives are compatible with the EU competition rules. In so doing, the chapter also reinforces the EC’s commitment to sustainable development, a core policy objective for the European Union, as well as implementation of the United Nation’s sustainable development goals. 

Read our first briefing on the Guidance in our article "Collaboration between competitors – the EU publishes new guidance".

What are sustainability agreements?

The chapter aligns its definition of “sustainability” with the UN Sustainable Development Goals, namely, the ability of society to consume and use the resources available today without compromising the ability of future generations to meet their own needs. This is broad in scope and includes, for example, addressing climate change, reducing pollution, limiting the use of natural resources, upholding human rights, ensuring animal welfare etc.

In the same vein, the EC broadly defines sustainability agreements as “any horizontal cooperation that pursues a sustainability objective, irrespective of the form of cooperation”.

Sustainability agreements that are unlikely to infringe the prohibition under Article 101 TFEU

Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits anti-competitive agreements. 

The chapter explains that sustainability agreements that do not impact a parameter of competition (eg, price, quantity, quality, choice, or innovation) are unlikely to raise competition concerns. This would include, for example:

  • Agreements aimed at ensuring compliance with specific requirements or prohibitions in legally binding international treaties, agreements, or conventions, for example prohibitions against the logging of certain types of tropical wood.
  • Agreements concerning only the internal corporate conduct of firms, for example, an industry wide initiative to eliminate single-use plastics from business premises.
  • Agreements on the creation of databases containing general information about unsustainable suppliers (for example, suppliers using unsustainable production processes), without obliging the parties of the agreement to refrain from buying from those suppliers.
  • Agreements relating to industry wide awareness-raising campaigns (if they do not result in joint advertising of specific products). 

Sustainability agreements that could fall within the scope of the prohibition under Article 101 TFEU

Sustainability agreements which restrict competition by “object” (ie, agreements that are regarded, by their nature, as harming competition) or have an appreciable “effect” on competition will be caught by the prohibition in Article 101(1) TFEU.  

Where a sustainability agreement between competitors ‘disguise’ an agreement to fix prices, share markets or customers, limit output or innovation, this will be caught by the prohibition and will be regarded as a serious breach of the competition rules. 

However, the Guidelines set out a more nuanced and flexible approach for cooperation agreements between competitors pursuing a sustainability objective. For agreements falling into this category, the Guidelines state that the sustainability objective must be taken into account when determining whether the agreement may restrict competition “by object”. If the parties can demonstrate on the evidence that the main objective of the agreement is a sustainability objective and where this casts reasonable doubt on whether an agreement reveals, by its nature, a sufficient degree of harm to be considered an “object” restriction, it will be necessary to consider what effects the agreement may have on competition. The factors that are relevant to this assessment include:

  • Market coverage of the agreement
  • The extent to which commercially sensitive information is exchanged in the context of the agreement
  • The market power of the parties
  • The degree to which the agreement limits the decision-making independence of the parties in relation to the main parameters of competition
  • Whether the agreement results in an appreciable increase in price or an appreciable reduction in output, variety, quality, or innovation

Sustainability agreements that may benefit from individual exemption

Even if sustainability agreements are captured by the prohibition in Article 101(1), they can still qualify for an individual exemption under Article 101(3) TFEU if:

  • The agreement contributes to “objective, concrete and verifiable” efficiency gains
  • The restriction of competition is indispensable to the attainment of benefits generated by the agreement
  • That consumers receive a fair share of these benefits, which outweigh the restriction of competition
  • The agreement does not eliminate competition (ie, the parties continue to compete on at least one parameter of competition)

The Guidelines provide detail on the three types of benefits that can be considered in this instance: individual use value benefits (ie, benefits resulting from the use of the product in question, which directly improve the consumer’s experience); individual non-use value benefits (ie, indirect benefits resulting from consumers’ appreciation of the impact of their sustainable consumption on others); and collective benefits (ie indirect benefits that are limited to voluntary, altruistic choices by individual consumers).

When considering whether consumers receive a fair share of these benefits (the third condition), the Guidance states that the benefits must accrue to the consumers of the products covered by that agreement. This is a narrower approach compared to the approach adopted by other competition agencies (see below). 

Sustainability standardisation agreements - soft safe harbour

Within the sustainability chapter, the EC provides guidance specifically on sustainability standardisation agreements, which constitute a sub-category of sustainability agreements. Such agreements aim to adopt and comply with sustainability standards and specify the requirements which stakeholders along the supply chain must meet with regard to sustainability benchmarks, eg, initiatives that establish a specific label for products meeting minimum requirements, such as fair-trade labels.

Sustainability standardisation agreements can raise concerns in the form of price coordination, exclusion of alternative standards and the exclusion of, or discrimination against, certain competitors. However, where a sustainability standardisation agreement meets the following six cumulative conditions, the Guidelines create a “soft safe harbour”, meaning that the agreement will not be considered to have a negative effect on competition:

  • Transparency
  • Voluntary participation
  • Freedom to adopt higher standards
  • No exchange of commercially sensitive information
  • Non-discriminatory application and a monitoring mechanism to ensure compliance
  • Either the agreement does not cause a significant price increase, or the combined market share of the participating companies does not exceed 20% on the market affected by the standard.

What are the differences with the UK’s Competition and Market Authority’s (CMA) draft guidance on environmental sustainability agreements?

On the 28 February 2023, the CMA published its own draft guidance, which we have discussed previously in our article on "How businesses can co-operate on environmental goals - new CMA guidance". While the regulators are largely aligned, there is some divergence.

Firstly, the definition of “sustainability” in the CMA’s draft guidance is narrower than the EC’s definition, with the UK focus confined to sustainability agreements aimed at environmental protection, not broader societal objectives.

On the other hand, the EC’s approach to the pass on of benefits to consumers does not take into account the benefits that sustainability agreements may bring for wider groups of consumers or society at large. This puts the EC at odds with the approach of the CMA, which states in its draft guidance that, in the case of ‘climate change agreements’, the “fair share” condition can be met by taking into account all the benefits accruing to UK consumers. 

Key takeaways

The Guidance helpfully clarifies the EC’s approach to how competition law impacts on sustainability agreements and overall are a welcome step forward for businesses who are considering new sustainability initiatives. 

That said, the EC’s approach to the pass on of consumer benefits is narrow and perhaps a missed opportunity. In addition, areas of divergence between the Guidelines and those of other competition agencies means that businesses looking to roll-out initiatives across the UK and EU will need to proceed with caution to ensure compliance with the current patchwork of regulations. It remains to be seen how other competition agencies approach these issues and whether greater alignment will emerge over time. 

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Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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