Sustainability and competition law: practical guidelines

Is it possible to cooperate with a competitor to develop a new product or reduce emissions in the production process without engaging in anti-competitive conduct? As we discussed in this blog, the European Commission (the “Commission”) has published the new Guidelines on horizontal cooperation agreements, introducing a specific chapter aimed at assessing the compatibility with competition rules of agreements between competitors that promote sustainability objectives.

Sustainability agreements are forms of cooperation between competing companies that pursue a sustainability objective. The Commission interprets the concept of sustainability broadly, referring to the United Nations Sustainable Development Goals (SDGs). For instance, the Guidelines cover agreements aimed at reducing the climate impact of production processes or the adoption of cleaner technology, limiting the exploitation of natural resources or even upholding human, social and labor rights in the production chain or animal welfare.

The new Commission Guidelines consider that competition rules do not prevent agreements between competitors that pursue sustainability objectives. They assume that sustainability agreements can help mitigate negative externalities on the environment and human rights arising from production processes and consumption.

However, sustainability should not be used as a pretext to mask agreements with an anti-competitive purpose—e.g., price-fixing or market or customer sharing. The Guidelines set out certain safeguards to ensure that only agreements that pursue legitimate sustainability-related objectives are covered, thus minimizing the risk of green and social washing.

Based on these principles, the new Guidelines include criteria for assessing the compatibility of sustainability agreements with competition law. The main new developments in this area are described below.

Agreements that are unlikely to raise competition concerns

The Guidelines advise assessing whether the agreement in question affects competition parameters (e.g., prices, quantities, innovation). Agreements that do not relate to these issues will generally fall outside the scope of article 101 TFEU and will therefore not raise concerns from a competition law perspective.

Among the examples provided in the Guidelines are agreements relating to awareness campaigns or to ensure compliance with requirements in international treaties (e.g., agreements between competing companies not to import prohibited products). Other permitted agreements include those to create databases with general information on suppliers that have sustainable value chains (for instance, suppliers that respect labor rights or pay living wages) or that use sustainable production processes.

Assessment of sustainability agreements that affect competition parameters

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 generally not be considered as a restriction “by object” (the most serious ones), but it will require an assessment of the effects and efficiencies generated.

The first step is to assess whether the agreement has actual or potential restrictive effects on competition (article 101(1) TFEU). For this purpose, the assessment should consider different factors such as the market powers of the parties, the relevant market or the sensitivity of information exchanged.

The second step is to determine the advantages produced by the agreement and whether they offset the anti-competitive effects. Specific guidelines are provided for assessing efficiencies, which broaden the types of benefits that may be considered:

• “Traditional” efficiencies (use benefits): improved product quality, product variety or price reductions. Until now, these were the only efficiencies that competition authorities considered valid for these purposes.

• Benefits from sustainable products appreciated by consumers (non-use benefits): based on the lower impact on the planet, consumers may value a sustainable (e.g., less polluting) product more favorably than a non-sustainable one, even if the price is higher.

• Out-of-market efficiencies:  benefits for a broader sector or even society at large.  For instance, agreements by which consumers end up paying a higher price for a product while significantly reducing emissions as part of the production process would generate out-of-market efficiencies.

Sustainability standardization agreements

The Guidelines also provide a specific safeguard (safe harbor) for agreements between competitors to adopt a sustainability standard (e.g., the creation of a common label or logo for products that meet certain requirements). These agreements will be exempted as long as they meet the Guidelines’ requirements.

Consultation with the Commission or other authorities

The Guidelines also open the door for companies wishing to enter into a sustainability agreement to seek informal guidance from the Commission to ensure compliance with EU competition rules.

Sectors concerned

Although the Guidelines are generally applicable to all economic sectors, regulatory developments in recent months suggest that there will be a number of industries more prone to business collaboration to achieve sustainability and human rights objectives.

In particular, the Guidelines will have a special impact on the industrial, energy and agricultural sectors. Sustainability agreements may help increase legal environmental standards, reduce pesticides or improve animal welfare. Likewise, in the textile sector, agreements can be used to reduce production waste and manage surplus stock. Finally, in the field of sustainable mobility, these agreements will facilitate the installation of charging points for electric vehicles to accelerate the transition to a climate-neutral economy.

In conclusion, all companies intending to enter into agreements with competitors with sustainability objectives will have to assess their content in light of the new Guidelines.

The new Horizontal Guidelines in the EU’s global sustainability commitment

The Guidelines significantly emphasize that the principle of sustainable development must be taken into account when applying article 101 TFEU. After all, this is a fundamental principle and a priority objective of the EU (article 3 TFEU), in line with the Commission’s commitments regarding the fulfillment of the UN SDGs and human rights.

The possibility to exempt sustainability agreements from the prohibition of horizontal agreements under article 101 TFEU gives a greater role to companies in achieving these specific EU commitments. The Guidelines thus contribute to the growing regulatory efforts to promote responsible business conduct. Companies will be able to collaborate and share resources and information with regard to due diligence in respecting human rights and the environment.