UK and EU Horizontal Guidelines - Episode 3: Sustainability agreements and competition law

Fiona:

Hello and welcome to Ashurst Legal Outlook, and this, the third episode in our miniseries on the new EU and UK Horizontal Guidelines. My name is Fiona Garside and I'm a Senior Expertise Lawyer in Ashurst's Antitrust, Regulation and Foreign Investment team. I'm delighted to be joined today by Irene Antypas, a Counsel in our Brussels office, and Christopher Eberhardt, a Counsel in our London office. Thank you both for joining me today.

Irene:

Hi, Fiona. Hi, Chris.

Chris:

Hi, Fiona. Hi, all.

Fiona:

Today, we're going to talk about sustainability agreements and competition law. This has been a hot topic for some years, with regulators, stakeholders and academics debating where the line should be drawn in relation to sustainability agreements. On the one hand, there's a desire to ensure that competition law doesn't unduly stymy progress towards net-zero and other sustainability goals, but on the other, sustainability shouldn't be used as a cover for anticompetitive agreements which do not genuinely promote sustainable progress.

Several years ago, the Dutch Competition Authority published its draft guidance on sustainability, which promoted a progressive and more flexible approach to sustainability agreements, and in the last few months, the European Commission and the UK CMA have firmed up their position and published their final guidance, which is what we're going to be focusing on today.

Before we get into the detail, to set the scene, Irene, what's behind the recent focus on sustainability and competition law?

Irene:

Yes, so sustainability and sustainable growth is a priority objective for the European Commission and the European Union,and in recent years, the EU has been very active across many different policy areas promoting the ambitious objectives of its Green Deal, with the ultimate goal being to reach climate neutrality by 2050. This can be done only by "greening" the economy, meaning supporting affordable and clean energy, promoting responsible consumption and production, protecting labour rights and fighting climate change. So we are really in an era of a "new" green industrial revolution.

So it's unsurprising to see that competition authorities are thinking about the impact of competition law on achieving the goals of a sustainable, green and circular economy, and there have been concerns that there may be a potential conflict between the sustainability goals and the protection of competition, and that the enforcement of competition laws may stop competitors collaborating on issues that would actually be beneficial for both the environment and consumers. Regulators recognise that sustainability goals and the green transition requires significant investment, (for instance, in new technologies), which means that joint industry effort in certain cases is necessary to get there and to get there in time, and so keen to address that, we've seen regulators engaging in debates and consultation over recent years to come up with clearer guidance for businesses.

Companies and entire industries are obviously also in the process of re-thinking their business models, introducing sustainability policies, setting sustainability goals and targets by taking a closer look at the environmental and social impact of every aspect of their business, and companies are also increasingly recognising the strategic and competitive benefits that come from integrating green concern in their commercial operations. So building a green corporate image and potentially having a "green competitive advantage" has become quite important. Often the employees dealing with sustainability policies within a company are less familiar with competition law principles than in other areas of the business which are traditionally expected to be subject to scrutiny. So it is very helpful to have a clear steer from regulators on the types of agreements which are unlikely to raise concerns, and those that potentially may raise concerns and need to require some careful thoughts, as it will offer companies some comfort going forward.

Chris:

Thanks, Irene. Just to add a couple of thoughts to what Irene has just said, I think we've also seen recent enforcement activity, which really has served to focus regulators' minds and emphasised to them (and to the wider community) why greater clarity really is needed on the regulatory approach to these types of agreements and these types of collaborations.

Now, a high profile example in this area was the AdBlue case. For those who are not familiar with it, in that case, the Commission found that a number of car manufacturers had colluded, essentially by agreeing not to compete on technical development in relation to the removal of harmful nitrogen oxide emissions, and as a result of that, the Commission imposed fines of EUR 875 million.

So while that case reiterated how collusion on technical development can amount to a cartel, in particular where it seeks to stifle innovation or competition, I think it also raised questions about how collusion or collaboration on technical development in procedural environmental benefits could be treated.

Now, in the UK, the CMA has been considering for a number of years now how both the competition and also the consumer protection regimes could better support and facilitate the UK's net-zero and wider environmental goals. For example, the CMA made a public commitment in its annual report earlier this year to support those goals.

We're focusing mainly on the competition aspects today but certainly on the consumer side recently we've seen a big focus on aspects like greenwashing and misleading green claims. The CMA published this Green Claims Code guidance in 2021, setting out its thoughts on how environmental and sustainability claims are assessed and there are ongoing investigations into a number of companies in relation to their green claims. So, packaging all that up, we think regulators have increasingly been engaging with these sustainability issues and are increasingly exploring how their regulatory toolkit can serve to assist or at least not hinder those goals going forward.

Fiona:

Thank you both. More guidance from competition authorities is certainly welcome. Before we dive into the European and UK guidance, we should just highlight that the scope of the two sets of guidance is actually slightly different. In the UK, the guidance is limited to environmental sustainability agreements, whereas the EU guidance applies more broadly to sustainability agreements, meaning it covers initiatives relating to improving animal welfare, workers' welfare and corporate social responsibility, as well as environmental sustainability. Now, both the European Commission and CMA guidance set out types of sustainability agreements, which are unlikely to infringe competition law. Irene, you've already touched on this, could you give us a few examples?

Irene:

Yes, that's right, Fiona. So the Commission recognises that competition law has an important role to play in contributing to the Green Deal objectives. At the same time, the Commission has stressed that a "green" competition policy still is a competition policy, which means that regulators (including the Commission) will not hesitate to take strong enforcement action against so-called "green cartels", which remain prohibited, and the AdBlue case just mentioned by Chris is a good illustration of that.

That said, both the Commission and the CMA recognise that many sustainability agreements are unlikely to raise any competition concerns. Just to give you a few examples, agreements that don't affect factors such as price, quantity, quality, choice, or innovation: for example, agreements that relate to business' internal conduct such as limiting the use of paper or heating. Another example is cooperation that is required by law. A third example is the pooling of general information on suppliers or customer sustainability credentials, provided that there is no obligation to trade and that the information gathered is limited. Further examples are industry-wide awareness campaigns, the setting of non-binding targets for a whole industry.

And then also industry sustainability standards which benefit from a so-called "soft safe harbour", which the Commission has introduced in its revised guidelines. Now, to benefit from that "soft safe harbour", a number of conditions have to be fulfilled. The standard setting procedure should be open and transparent; participation should be voluntary; and participating companies should be free to be more ambitious; access to the standards should be effective and non-discriminatory; commercially sensitive information should be shared only if absolutely necessary for the standards, and that should be approached very cautiously; and then finally, where the standard is adopted by a significant part of the market, it should (in principle) not lead to a significant price increase. Now, that doesn't mean that if you are outside of the safe harbour that you, by definition, have an issue. It just means that the standardisation agreement will require an effects analysis.

Fiona:

Thanks, Irene. Now, turning to the types of sustainability agreements that are more likely to raise competition concerns. Chris, what examples have we been given there?

Chris:

Sure. So I think it follows from what Irene has just explained that really it's where agreements or collaboration relate to or affect how businesses compete, that's more likely where the concerns will arise. So, as ever, particular care will be needed for agreements which involve things like price fixing, market or customer allocation, or involve limitations on output quality or innovation. We've talked in previous podcasts about the differences between by object and effects infringements, and all of these types of agreements that I've just listed really are likely to fall into the 'object' bucket. They directly relate to how businesses compete and are therefore in themselves likely to raise concerns.

Where we're not in that world, but where we need to consider whether the agreement has an effect on competition, we'll need to think about factors such as the market coverage of the agreement: whether it involves exchanges of competitively sensitive information; whether there's likely to have been an appreciable increase in price or a reduction in quality or innovation; as well as other factors. I think this type of assessment is likely to be particularly relevant and potentially helpful going forward in relation to sustainability agreements between SMEs.

Fiona:

Thanks, Chris. Now, listeners may recall that in previous episodes we've talked about the criteria for benefiting from an individual exemption from the prohibition on anticompetitive agreements. Just to quickly recap, to benefit from an individual exemption, the agreement has to give rise to efficiencies. So that means it needs to improve production or distribution, or to promote some technical or economic progress. The agreement also needs to not impose restrictions that go beyond what's necessary to actually achieve those efficiencies or those benefits, and third, it needs to ensure that customers receive a fair share of the benefits. And finally, the agreement should not eliminate competition so there needs to be some element of competition left on the market. Irene, this has been a particular interest. What guidance have we had from the European Commission on how sustainability agreements can satisfy these exemption criteria?

Irene:

Yes, thanks Fiona. This is probably one of the most debated topics and it will no doubt continue to spark further discussion in the coming years. To determine whether and when a sustainability agreement can be exempt from the competition law prohibitions, two key questions had to be answered. First, what types of sustainability efficiencies (or benefits) can be taken into account? And then the second question is which consumers need to receive a fair share of these benefits. It's fair to say that the views of the European Commission and certain national competition authorities in the EU are not entirely aligned on this.

Starting with the types of benefits which can be taken into account. The European Commission guidelines allow for a broad range of sustainability benefits. For example, the use of less polluting technologies, the creation of more resilient supply chains, and better quality products. One important thing to note is that the efficiencies do need to be substantiated, so they can't simply be assumed.

The question is then how to determine which consumers must receive a fair share of the claim benefits. The answer to that question has proven to be one of the particular challenges for sustainability agreements. Are the relevant consumers those who purchase the product concerned, or society as a whole, or future generations? Can and should the benefits for the wider society be taken into account?

The Commission has taken the view in its guidelines that there must be a link between any sustainability benefits claimed and the consumers of the products concerned by the sustainability agreement.

This doesn't mean, of course, that benefits to the wider society play no role at all in the analysis. The Commission guidance talks about three different types of benefits that may be relevant in a given case.

The first type are referred to as individual use value benefits and refers to the direct benefits that a consumer gets from using a sustainable product. For example, the availability of healthier grown vegetables.

The second type of benefits are referred to as individual non-use value benefits. Those refer to the consumer's personal appreciation of the benefits of its own sustainable consumption on others in society. For example, consumers may be willing to pay more for a less polluting car because it has a less negative impact on the environment that benefits society as a whole. That type of benefit obviously depends very much on the consumer's appreciation and awareness of the importance of sustainable consumption and that may not always be enough, and that's why the Commission also recognises a third possible type of benefit, which it calls collective benefits.

So those are benefits for a larger group of society, irrespective of the choices made by individual consumers. For example, consumers may not be prepared to pay a higher price for a less polluting product so it may be necessary to agree to phase out an old polluting technology.

Under the Commission guidance, collective benefits can be taken into account only if the group of consumers affected by the competition restriction and the group that benefits from the agreement is substantially the same or overlaps. To give an example, the guidelines give the example of a driver using less polluting fuel, and that driver is obviously also a citizen who will benefit from cleaner air in his city.

So this also means that collective benefits can, in principle, not be relied on where the positive impact of a particular initiative is felt outside Europe. For instance, the use of sustainable cotton for clothing sold in Europe will lead to environmental benefits and more sustainable farming of cotton in, for instance, India where cotton is grown but it will not be felt by consumers in Europe.

Fiona:

Thanks, Irene. The CMA's guidance is broadly similar, but there is an important difference with the CMA taking a more novel approach to the fair share for consumers element for climate change agreements. Chris, what does the CMA consider to be climate change agreements and how will those be treated differently?

Chris:

Yes, you're right. So this really is one of the key features of the CMAs guidance, certainly as compared to the approach that Irene was just discussing from the Commission. Now, the CMA describes climate change agreements as environmental sustainability agreements which combat or mitigate climate change. In other words, these are agreements or collaboration that seek to reduce the negative effects arising from greenhouse gases.

In its guidance, the CMA provides a number of examples of these types of agreements, and these include things like agreements to phase out production processes, which involve the emission of carbon dioxide, agreements between delivery companies to switch to using electric vehicles, agreements between retail businesses to incentivise or require suppliers to phase down greenhouse gas emissions so that they can reduce the emissions in their supply chains, and agreements between financial service providers not to provide support such as financing or insurance to fossil fuel projects. There's a wider list in the CMA's guidance, but that gives you a flavour of the types of issues they're considering.

So, in relation to these types of climate change agreements, what the CMAs guidance says is that the CMA will take a more permissive approach to the fair share to consumers condition for climate change agreements. And why is this? Well, they say it's in recognition of the exceptional nature of the threat posed by climate change and the importance to society as a whole of addressing the impact of climate change.

So what does this mean in practise? Well, thinking about the test that Irene has already explained, the CMA has said they will take into account totality of benefits to all UK consumers when assessing whether the fair share for consumers condition is satisfied, rather than just focusing solely on the benefits to consumers in the particular markets affected by the agreements.

So, the example the CMA gives of this is in the case of an agreement between delivery companies to switch to electric vehicles. You can see that such an agreement would benefit all UK consumers for a reduction in CO2 emissions so the total reduction of CO2 emissions could be taken into account when deciding whether customers receive a fair share, rather than just having to work out the benefit only to the customers of the particular delivery services.

I think overall, this progressive approach is certainly to be welcomed and I think it will clearly provide greater certainty to businesses going forward, in particular as the pressure to hit net-zero targets increases in the next few years. But I think there are still a couple of criticisms that can be made, basically saying that the CMA could have gone further, may not have gone far enough. I think it would've been good to see the CMA consider the benefits to consumers outside the UK, given the global nature and impact of climate change. And I think there's also been some criticism that the CMA has restricted its more permissive approach to only climate change agreements and does not, at least currently, propose to apply that approach to agreements to combat other environmental issues. You can think about things like biodiversity loss or improving air or water quality, which could in principle benefit from a similar more permissive approach. Now, the CMA has said it will keep this under review, so it may well be we'll see an expansion of this approach in due course.

Irene:

Yes, thanks Chris, and interesting to mention here as well is that, for instance, the Dutch Competition Authority has also published its own guidelines. And it appears from those guidelines, that they take quite a similar flexible approach to the assessment of certain types of, what they call, environmental damage agreements, and so for those agreements, it may also be possible to consider the benefits for the wider society as a whole.

Fiona:

Thank you. Is there anything else from the guidance that you wanted to mention today?

Chris:

Shall I go first? Certainly, I think a key point to mention from the CMA's guidance is there are some really quite notable procedural changes in relation to how the CMA will take enforcement action against environmental sustainability agreements.

The first, is that in relation to these types of agreements, the CMA has said that it would operate an open door policy. So essentially, it is inviting businesses which are considering entering into these types of arrangements, but which may be unsure about how the guidance will apply, to seek informal guidance from the CMA, and businesses can take advantage of this option by contacting the CMA's Sustainability Taskforce through their dedicated email address.Now, the CMA makes it clear that this certainly is not a substitute for self-assessment, and it still expects businesses to have first assessed the proposed agreement and collaboration against their guidelines. But what's really helpful here, is that if there is then uncertainty about how particular issues apply, the businesses do now have the option of approaching the CMA for advice on those points. Helpfully for us as advisors and for the wider business community, the CMA has said that they will typically publish non-confidential summaries of the initiative they've assessed, the risk assessment carried out, and any proposed solutions, and this obviously should provide additional helpful guidance in future.

The second point to mention is that although receiving informal guidance does not preclude the CMA from deciding at a later date to actually investigate and take enforcement action in relation to the agreement, for example, if it turns out that the anticompetitive effects are greater than expected, the CMA reserves that right. But if businesses have sought informal guidance from the CMA, and in that guidance the CMA has not raised concerns (or if any concerns that were raised have been addressed)and then the CMA nonetheless decides to investigate, the CMA has confirmed that in that scenario it will not issue fines and will also not seek director disqualification orders. So this really provides welcome certainty that where you do seek that informal guidance and you comply with what the CMA has suggested that the risk of doing so and the risk of entering into these types of environmental agreements going forward will be quite significantly mitigated.

Irene:

Yes,similar to the CMA, the Commission has also stressed the possibility for companies to come in and seek informal guidance on individual sustainability agreements or projects, though seemingly more limited in scope and reserved to mainly novel and unresolved questions.

The Commission's informal guidance notice was revised last year to make the process more attractive and encourage businesses to seek guidance. One of the important changes is that where the Commission does decide to issue guidance letter and the company relies on it in good faith, but still finds itself in breach of competition rules, no fines would be imposed.

Chris:

So just a final point for me, which I think it's worth mentioning, is that unlike in the EU, the guidance we've been discussing from the CMA is a separate guidance document. In other words, the Green Agreements Guidance is separate from the CMA's wider guidance on horizontal cooperation.

Now, there are clearly scenarios in which both sets of guidance may apply, and it may be necessary to consider both sets of guidance when assessing agreements or collaboration, but helpfully, the CMA has said that in that scenario, so if both do apply, then parties will be able to rely on the guidance which is most favourable to them.

Fiona:

Thank you both. It's been a really interesting overview of sustainability and competition law. Just before we wrap up, are there any general final thoughts you'd like to share?

Chris:

I think as a final comment, it's worth saying this is obviously a relatively novel area in the UK. Certainly in particular, the more permissive approach adopted for climate change agreements. So, I think it's going to be really interesting to see how that guidance is applied in practice, and then we should get a flavour from that, from the updates and summaries published by the CMA as it receives requests for informal guidance. We understand that there have already been approaches to the CMA for such guidance, and that that's only going to increase and continue. And I suspect it's likely that the CMA will be issuing further guidance and updates as it's thinking and its approach develops over the next few years.

Irene:

Yes, I think it's clear that Europe faces many challenges on the road to climate neutrality, and the new Commission guidelines on sustainability agreements offer businesses a bit more steer and clarity as to how competition law may be applied to specific projects.

It has also given an important signal to businesses: competition law is not there to stand in the way of agreements between competitors that genuinely pursue a sustainability objective. So it will be interesting to see in the coming months and years how that will translate in practice and how pragmatic regulators are prepared to be in this space.

Fiona:

Thanks, Chris and Irene. As Chris says, this is still a pretty new area of enforcement, but we are seeing regulators taking a keen interest worldwide. Our discussion today has focused on the new UK and EU guidelines, but at the same time, we're seeing regulators in Australia, Japan, Singapore, and other jurisdictions either developing their own guidance or highlighting sustainability as a key area of focus for their enforcement. It's also an area where intuitively it can be more challenging to apply competition law, so the guidance is very welcome and we'll be watching for further developments as companies, the CMA, and the European Commission get to grips with applying these new principles in practice.

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