Last week, the European Commission published its much-anticipated draft revised Horizontal Guidelines and two Horizontal Block Exemption Regulations (in respect of R&D agreements and specialisation agreements) for comments, in addition to five accompanying expert reports (read our client alert here). This follows a review and evaluation process launched in September 2019 and aims at adapting the current rules in specific areas where the evaluation found that they were not fully adjusted to the economic and societal developments, in particular the digital and green transition.

Why sustainability?

The Guidelines contain nine sections devoted to different types of agreements between competitors.   The final, and crucial for this blog, section is new and entirely devoted to sustainability agreements. It is only “new” since the last version of the guidance however, as the 2001 guidance also included a sustainability section (specifically in relation to environmental agreements).

The Commission recognises that sustainable development is a core principle of the EU Treaties and a policy priority for the EU. It also says that competition enforcement contributes to sustainable development by ensuring effective competition, which stimulates innovation and contributes to consumer welfare. However, the Commission recognises that there is a concern that individual production and consumption decisions can have negative effects on factors like the environment, that are not sufficiently taken into account by the entities that cause them. One way of addressing or mitigating such market failures is through collective action.

What is a sustainability agreement?

The Commission uses the term ‘sustainability agreement’ in the Guidelines to refer to any type of agreement between competitors that genuinely pursues one or more sustainability objectives. And it says that the notion of a sustainability objective includes, but is not limited to addressing climate change, eliminating pollution, limiting the use of natural resources, respecting human rights, fostering resilient infrastructure and innovation, reducing food waste, facilitating a shift to healthy and nutritious food, and ensuring animal welfare.

Sustainability agreements that do not raise competition concerns

The Guidelines make clear that some types of sustainability agreements are generally permissible (under Article 101(1)), including:

• “agreements” on internal corporate conduct that do not concern the economic activity of competitors, for example measures to eliminate single-use plastics in the business premises, to not exceed certain temperatures in the buildings, or to limit the number of printed materials; (it is somewhat surprising such “agreements” were included at all given they involve unilateral conduct and so could not engage the provisions on agreements or concerted practices between competitors).
• agreements to create databases containing information about suppliers with sustainable value chains, production processes, or inputs, without the requirement to purchase from those suppliers or sell to distributors; and
• organising industry-wide awareness campaigns on the environmental footprint of consumption, without joint advertising of particular products.

Setting sustainability standards

Highly relevant to initiatives in the market at present, the Guidelines provide specific guidance on standardisation agreements in the sustainability field, which are agreements where competitors agree to adopt and comply with certain sustainability standards, such as manufacturing methods or input standards intended to phase out, withdraw or replace non-sustainable products and manufacturing methods.

The Commission’s draft guidance clarifies that such arrangements are generally unproblematic from an EU competition law perspective provided the following cumulative conditions are met:

• the procedure for developing the sustainability standard is transparent and all interested competitors can participate in the process leading to the selection of the standard;
• there is no obligation on companies not participating in the standard to comply with the standard;
• participants remain free to adopt for themselves a higher sustainability standard than the one agreed among the participants;
• participants do not exchange commercially sensitive information that is not needed for the development, adoption or modification of the standard;
• access to the outcome of the standardisation procedure is effective and non-discriminatory;
• the standard does not lead to significant price increase or reduction in choice of products; and
• there is a mechanism monitoring the compliance with the standard by undertakings that have adopted it.

Failure to meet one or more of these conditions does not automatically mean that the arrangement is anticompetitive. However, if any of the conditions are not met, the sustainability standardisation agreement requires further justification to determine whether it could have a negative effect on competition.

What about the benefits?

Even if an agreement has negative effects on competition, the Guidelines nonetheless recognise that the sustainability aim can benefit consumers in several ways, and may therefore be exempted from the rules on anticompetitive agreements, if the parties prove that four cumulative conditions (under Article 101(3)) are satisfied:

• the agreement in question contributes to improving the production or distribution of goods or to promoting technical or economic progress, such as use of cleaner production or distribution technologies, more resilient supply chains or better quality products;
• the agreement must not impose restrictions that are not indispensable to the attainment of the sustainability benefits under the agreement;
• consumers must receive a ‘fair share’ of the benefits under the agreement, which occurs when the benefits deriving from the agreement outweigh the harm, so the overall effect on consumers is at least neutral; and
• the agreement must not allow the parties to eliminate competition.

With regard to the consumer benefits, the most obvious are use-related benefits, such as the use of a healthier product. The less obvious (but still recognised) ones are non-use related benefits, such as a product that results in less water contamination or more limited deforestation.

The Guidelines also acknowledge that, in certain circumstances, collective benefits of sustainability objectives can occur, irrespective of consumers’ individual appreciation of the product. The Commission gives the example of drivers purchasing less polluting fuel also benefitting from cleaner air, if less polluting fuel is used. To the extent that there is a substantial overlap of consumers (the drivers) and the beneficiaries (citizens), the sustainability benefits of cleaner air are in principle relevant for the competition assessment and can be taken into account if they are significant enough to compensate consumers in the relevant market for the harm.

Therefore, and controversially, the Commission essentially requires full compensation of the consumers on the relevant markets, and despite criticism following its previous policy paper, it has not given away ground on this. We expect this to continue to be a key area of contention for stakeholders in their responses to the consultation.

How do the Guidelines compare?

The Dutch competition authority, the ACM, was an early mover on sustainability and competition, and published its Draft Guidelines on Sustainability Agreements last year. There are some similarities in the types of agreements that are generally permissible under the Dutch Guidelines (for example, non-binding agreements that incentivise sustainability objectives) and they also discuss the question of user benefits. But there are also important differences in the way such agreements are assessed under the EU and Dutch Guidelines, including in relation to the way in which benefits are quantified (or indeed whether they need to be). The ACM takes the view that, after analysing the relevant case law of the EU Courts and in contrast to the position adopted by the Commission, full compensation is not required. In addition, the EU Guidelines stop short of the comfort given by the ACM in terms of non-prosecution of bona fide agreements.

The Commission has already fined companies for colluding on technical development in relation to green initiatives (nitrogen oxide cleaning for cars), and so has shown that its bite is as strong as its bark when it comes to sustainability. Commissioner Vestager said at the time that, “competition and innovation on managing car pollution are essential for Europe to meet our ambitious Green Deal objectives. And this decision shows that we will not hesitate to take action against all forms of cartel conduct putting in jeopardy this goal.”

What’s next?

The EU Guidelines provide much-needed clarity on the Commission’s approach to sustainability agreements. While they provide a useful framework for companies wanting to cooperate on sustainability goals, they arguably do not go far enough. The Commission has signalled its willingness to use the Article 10 procedure to issue comfort letters in relation to proposed sustainability agreements and we anticipate companies will avail of this process while the new rules are finding their feet.

The Commission is now consulting on the Guidelines and Block Exemptions. Stakeholders have until 26 April 2022 to submit their comments on these drafts. The final revised rules are due to enter into force in January 2023. And in the UK, the Competition and Markets Authority is also due to publish an update on its sustainability guidance in the coming months.