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Sustainability and competition law: EU and UK partial 'green' light

Overview

With COP 26 still fresh in the memories of lawmakers, and both the European Green Deal and UK Government's 'Net Zero Strategy' setting the goal of being climate-neutral by 2050, it is no surprise that competition law is having to examine its interaction with the environmental, social and governance (ESG) agenda.

On 14 March 2022, the UK Competition & Markets Authority (CMA) published advice to the Secretary of State for Business, Energy and Industrial Strategy (BEIS), detailing its view on the role of competition law in furthering environmental sustainability goals (although we await the final outcome of BEIS and the CMA's proposals). This came hot on the heels of the European Commission's (Commission) new draft Horizontal Guidelines, published on 1 March 2022, which dedicate an entire chapter to 'Sustainability Agreements' and shed light on the EU's proposed approach to the interaction between competition law and sustainability.

Achieving ESG ambitions will unavoidably require industry collaboration, and ESG purposes do not automatically immunise conduct from competition law scrutiny. Industry players have therefore long been calling for practical and reliable solutions to be developed in the competition law field so that businesses can confidently promote ESG considerations in their decision-making.  In this briefing, we discuss how far these latest updates from the Commission and CMA go towards providing those solutions.

Scope of the commission and CMA positions

The scope of the Commission's draft Horizontal Guidelines is widely drawn: with sustainability defined to include not only environmental/'net zero' goals, but also other activities that support social development (including labour and human rights).

The CMA's current focus, however, is specifically on the environmental aspects of sustainability, given its stated strategic objective to support the transition to a low carbon economy. It therefore remains to be seen how the CMA will view other types of agreement with social, rather than purely environmental, objectives – however, given the CMA does not currently consider that large scale changes to the law need to be made in order to address environmental agreements, it seems likely that the CMA would view wider ESG agreements in a similar way, provided they pursue a genuine ESG agenda.

The starting point for assessing so-called 'green' agreements

At one end of the scale, both the Commission and CMA recognise that not all sustainability agreements are even caught by Article 101, or the Chapter 1 UK equivalent. Where sustainability agreements do not affect the parameters of competition (such as price, quantity, quality, choice or innovation) they do not raise competition law concerns. The Commission's draft Horizontal Guidelines go further to set out specific examples of types of sustainability agreement that do not raise competition concerns, and further guidance from the CMA is expected in the coming weeks. By way of example, an agreement between competitors relating to an industry wide environmental footprint awareness campaign would generally not be of concern.

At the other end of the scale, both the Commission and the CMA take a tough stance on 'green washing' and anti-competitive arrangements masquerading as green initiatives. They make clear that sustainability agreements must never be used as a cover for a business cartel, and that the consequences for such agreements will be serious.

The grey area falls in the middle. What about a sustainability agreement that affects the parameters of competition (for example where competitively sensitive information needs to be exchanged, standard terms are set, or where the introduction of a "green" product affects prices, features or customer choice) but at the same time genuinely pursues a sustainability goal?  The Commission's starting point is that, if the agreement pursues a genuine sustainability objective, it will not amount to a restriction 'by object' but its effects on competition will need to be assessed. The CMA is so far silent on a clearly defined object vs effects distinction, but makes clear that 'by object' restrictions must be avoided.

When will 'green' agreements be exempt from the competition law prohibitions?

Perhaps the most debated issue surrounding sustainability agreements has, to date, been the real uncertainty as to (1) how businesses can quantify the environmental benefits generated by a "green" agreement, and (2) how businesses can demonstrate that any restriction of competition is outweighed by those benefits.

As to point (1), historically, European case law has focused on the direct cost savings achieved by an initiative, or the willingness of consumers to pay for the benefit. However, this approach does not adequately encompass the wider, and unquantified, environmental benefits of an agreement.

And, as to point (2) - i.e. which "consumers" need to receive a "fair share" of the benefits - are the relevant "consumers" those who purchase the products under the agreement in question, or society as a whole (perhaps over a number of generations)?

As the Commission's Chief Economist put it recently: “Can we allow sustainability deals if that means taxing the people who buy, to benefit those who do not buy?

The Commission and the CMA (from what we can tell from its brief advice) appear broadly on the same page as to when a sustainability agreement[1] might be exempt from competition law under Article 101(3) TFEU and section 9 CA98 respectively.

The Commission's draft Horizontal Guidelines state that Article 101(3) allows for a broad spectrum of sustainability benefits. Examples given include the use of cleaner production or distribution technologies, less pollution and more resilient infrastructure and supply chains. The CMA promises to provide further guidance on the concept (and measurement) of 'benefits' in the near future.

Crucially, both the EU and domestic UK regimes require that the customers harmed by the restrictive agreement receive a 'fair share' of the claimed benefits. On the concept of 'fair share' there is significant alignment between the Commission and CMA.

The Commission clarifies that there must be a nexus between any sustainability benefits and the consumers of the products covered by the agreement. This does not mean that the assessment of benefits to wider society plays no role in the analysis. However, a business claiming exemption does need to prove that the overall effect on consumers in the relevant market is at least neutral. The Commission refers to three categories of benefits that may be relevant in a given case:

  • Individual-use-value benefits: i.e. "I, as a consumer, derive benefits from using the products covered by the agreement" (this may be e.g. in the form of improved quality/variety or lower prices/costs).
  • Individual-non-use-value benefits i.e. "I value the impact of my sustainable consumption on others" (this may be e.g. in the form of willingness to pay more for a particular washing up liquid because but it pollutes the water less).
  • Collective benefits i.e. benefits that occur irrespective of the consumers' individual appreciation of the product (this may be, e.g. a situation where consumers are unwilling to pay a higher price for a lesser polluting product so, to ensure that the benefits of reduced pollution from that product actually materialise, an agreement to phase out old polluting technology may be needed). These collective benefits can accrue to the consumers of the product in question (i.e. in the relevant market) if they are part of the larger group in society that benefits as a whole.

However, the Commission does clarify that the group of consumers affected by the competition restriction under the agreement, and benefitting from the efficiency, must be substantially the same. This means that it is not enough for a business to claim large benefits to society as a whole: it also has to provide evidence that those consumers under that actual agreement are left in at least a neutral position.[2]

The Commission gives an example of a driver, who is also a citizen, who would benefit from cleaner air if less polluting fuel was used. To the extent there is a substantial overlap between consumers (drivers) and beneficiaries (citizens), the sustainability benefits of cleaner air can in principle be taken into account if they are significant enough to compensate the consumers (drivers) for the harm suffered from the restrictive agreement. Note: it also seems logical that, if it can be demonstrated that the consumers (drivers) would be willing to pay a higher price for fuel that is better for the environment anyway (i.e. as an individual-non-use-value benefit), then the benefits could be taken into account without needing to evidence the substantial overlap between consumers and beneficiaries.

The CMA, meanwhile, considers that wider 'collective' environmental benefits can already be taken into account under section 9 CA98, provided that the consumers are fully compensated for any harm suffered as a result of the agreement. The CMA considers that it has the ability to apply the 'fair share' criterion flexibly and notes that this may be an area where case law may develop further in the future, especially given, among other things, the ability for the CMA and UK courts to depart from EU precedents in certain circumstances under section 60A CA98. Therefore, at this stage, the CMA does not go into further detail – although more may be provided in its forthcoming guidance. Crucially though, the Commission and CMA appear to be on broadly the same page, even though differences may materialise as to how they reach that position.

[1] An environmental sustainability agreement in the case of the CMA.

[2] This is an area of ongoing debate across Europe, with the Dutch Competition Authority claiming full compensation is not required - https://www.acm.nl/sites/default/files/documents/acm-fair-share-for-consumers-in-a-sustainability-context.pdf

Safe harbour

The Commission has introduced the concept of a 'Soft Safe Harbour', limited to sustainability standardisation agreements. Conversely, there is no such explicit carve out detailed in the CMA advice.

Agreements that restrict competition 'by object' cannot benefit from the Soft Safe Harbour. However, genuinely pursued sustainability agreements will benefit, i.e. fall outside the scope of Article 101(1), if all of the following conditions are met:

  1. 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.

  2. The sustainability standard should not impose on undertakings that do not wish to participate in the standard an obligation - either directly or indirectly - to comply with the standard.

  3. Participating undertakings should remain free to adopt for themselves a higher sustainability standard than the one agreed with the other parties to the agreement (e.g. they may decide to use more sustainable ingredients in their final product than the standard may require).

  4. The parties to the sustainability standard should not exchange commercially sensitive information that is not necessary for the development, the adoption or the modification of the standard.

  5. Effective and non-discriminatory access to the outcome of the standardisation procedure should be ensured. This should include effective and non-discriminatory access to the requirements and the conditions for obtaining the agreed label or for the adoption of the standard at a later stage by undertakings that have not participated in the standard development process.

  6. The sustainability standard should not lead to a significant increase in price or to a significant reduction in the choice of products available on the market.

  7. There should be a mechanism or a monitoring system in place to ensure that undertakings that adopt the sustainability standard indeed comply with the requirements of the standard.

The Commission's view is that these conditions ensure that the sustainability standard does not foreclose innovative alternative standards, nor exclude or discriminate against other undertakings, and ensure effective access to the standard. These criteria have clearly been considered at length by the Commission in order to ascertain the factors that indicate a genuine attempt to create a sustainability standard. Whilst the CMA's advice does not set out an equivalent proposal for a safe-harbour, it does specify that the CMA will bring forward guidance on when environmental sustainability agreements will not restrict competition. However there is no indication of what this guidance will look like in practice, and whether or not they will adopt the 'Soft Safe Harbour' approach, and if they did, what the criteria would be.

Concluding remarks

The Commission and CMA appear broadly aligned on the overall application of competition law to (environmental) sustainability agreements, although their thought processes in reaching the overall position are not in all aspects identical. Whilst we do not yet have detailed guidance from the CMA or BEIS, many of the stances that the Commission has taken appear to also be the direction of travel for the UK. It must be borne in mind, however, that the advice from the CMA to government is just that, advice, and that there will be more detailed guidance in due course which will likely provide a better base for a more in-depth comparison between the EU and UK positions.

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