European Commission consults on draft guidance on sustainability agreements

On 1 March 2022, the European Commission ("Commission") published its draft revised Horizontal Block Exemption Regulations and Horizontal Guidelines, which include a new chapter on the assessment of sustainability agreements under competition law. The consultation is open until 26 April 2022. 

Key takeaways

• The draft Horizontal Guidelines include a new chapter on sustainability which provides guidance on the assessment of whether sustainability agreements give rise to competition concerns. It provides helpful additional guidance for industry but does not endorse the more flexible approach to sustainability agreements advocated by some national competition authorities (e.g. the Netherlands).
• Though cooperation in the area of sustainability may take many forms, the draft Horizontal Guidelines primarily focus on sustainability standardisation with the Commission proposing a "soft" safe harbour for agreements which meet certain cumulative criteria, in line with the Commission's previous guidance on standard-setting.
• The draft Horizontal Guidelines set out the Commission's proposed approach to consumer benefits which can be taken into account when assessing whether an agreement should benefit from an individual exemption. Any claimed sustainability efficiencies arising from the cooperation will need to be substantiated and where possible quantified. Only benefits which accrue to consumers of the products affected by the agreement may be taken into account, meaning that it will not be possible to exempt agreements on the basis of benefits which primarily accrue outside the EU (e.g. greener farming outside the EU or fair trade objectives).
• The draft Horizontal Guidelines state that sustainability agreements must not be used as a cover for illegal cartel conduct.

Background

In its September 2021 Policy Brief, the Commission explored how competition rules can complement the EU's ambitious environmental and climate policies more effectively and confirmed its intention to provide guidance in its updated Horizontal Guidelines (see our October 2021 newsletter). National competition authorities in Austria, Greece and the Netherlands have also provided guidance on the assessment of sustainability initiatives under competition law, proposing a more flexible approach.

As anticipated, the draft Horizontal Guidelines provide guidance on the assessment of sustainability initiatives under Article 101 of the Treaty on the Functioning of the European Union ("TFEU") and its proposed approach to sustainability initiatives, including under Article 101(3).

Sustainability agreements covered by the proposed guidance

Under the draft Horizontal Guidelines, sustainability agreements cover "any type of horizontal cooperation agreement that genuinely pursues one or more sustainability objectives, irrespective of the form of cooperation". In line with the 2030 UN Agenda for Sustainable Development, sustainability is not limited to environmental cooperation but also covers initiatives aimed at improving animal welfare, workers' welfare or corporate social responsibility. 

The Commission has emphasised that the mere fact that an agreement pursues a sustainability objective will not mean that competition law does not apply. Sustainability agreements are not a distinct type of cooperation and they may take many forms (such as standard-setting, joint research and development and joint procurement of sustainable raw inputs). Sustainability agreements should therefore be assessed based on the type of cooperation: for example, research and development projects should be assessed according to the Horizontal Guidelines chapter on research and development. 

While the draft Horizontal Guidelines apply to all sustainability agreements, the guidance focuses on sustainability standardisation agreements which the Commission considers to be the most common form of cooperation. These are described as agreements that specify requirements for parties in a supply chain in relation to a wide range of sustainability metrics and cover all forms of industry-developed standards, commitments, codes of conduct, labels/certification systems that formulate a set of minimum quality requirements for the manufacture and/or supply of "greener" or "more sustainable" products or services.

Sustainability agreements unlikely to raise competition concerns

In the Policy Brief, the Commission acknowledged that many sustainability initiatives will not raise competition concerns. 

Sustainability agreements which do not affect the parameters of competition

Sustainability agreements will not raise competition concerns where they do not affect the parameters of competition (such as price, quality, quantity, choice or innovation). The draft Horizontal Guidelines provide some examples of such agreements, including agreements relating to: 

• companies' internal sustainability policies (e.g. waste management/recycling programmes, sustainable business travel policy, etc.);
• industry-wide awareness campaigns; and
• the creation of a database containing information about suppliers that have sustainable value chains or sustainable production processes, or distributors selling products in a sustainable manner, provided there is no requirement to trade.

In practice, companies will still need to carefully consider the type of information collected on suppliers and distributors as well as the precise modalities of access to the database.

Principles for antitrust assessment of sustainability agreements

The draft Horizontal Guidelines emphasise that sustainability standardisation agreements often have pro-competitive effects. For example, they may contribute to sustainable development by improving product quality, stimulating innovation or enabling consumers to make informed product choices considering a product or a service's ethical, social or environmental profile/attributes. 

No cover for illegal cartels

In line with other competition authorities, the Commission emphasises that sustainability agreements should not be used as a cover for cartels. This is not new and reflects previous case law. For example, in the context of a voluntary environmental initiative launched at industry level and genuinely aimed at reducing the environmental impact through compaction of products and packaging, the Commission fined three major detergent manufacturers for discussing and coordinating prices of detergents.

According to the draft Horizontal Guidelines, where an agreement appears to involve price fixing, market/customer sharing and limitation of output or innovation (typically considered "by object" infringements), the burden of proof will be on the parties to provide evidence that the agreement genuinely pursues a sustainability objective and the sustainability objective is not being used to disguise an object infringement. Where this is established, the agreement will be assessed as a potential by effect restriction and not a by object infringement. 

Specific guidance on sustainability standardisation

As set out above, the draft Horizontal Guidelines focus on sustainability standardisation agreements. Adoption of sustainability standards may require significant changes to existing production or trading processes (e.g. different product formulation) and the draft Horizontal Guidelines acknowledge that it is not uncommon for standards to lead to increased production or distribution costs which may in turn be passed on the consumer.

"Soft" safe harbour for sustainability standardisation agreements

The draft Horizontal Guidelines introduce a "soft" safe harbour for sustainability standardisation agreements. To fall within the safe harbour, the agreement must meet a list of cumulative conditions, which largely reflect the guidance on standardisation agreements generally in the current Horizontal Guidelines: 

• transparent standardisation procedure;
• voluntary participation in the standard;
• participating companies remain free to adopt higher sustainability standards;
• no exchange of commercially sensitive information that is not necessary for the development of the standard;
• effective and non-discriminatory access to the outcome of the standardisation procedure;
• no "significant" increase in price or "significant" reduction in the choice of products, as a consequence of the standard; and
• monitoring mechanism to ensure compliance.

While the safe harbour is conditional upon agreements not significantly affecting price and/or product diversity, the Commission has not defined "significant" in this context. However, the Commission does note that economies of scale may allow companies to only apply an insignificant price increase where the standard is adopted by a significant part of the market. 

Agreements which do not benefit from the "soft" safe harbour

Importantly, failure to satisfy the safe harbour conditions does not mean that the agreement is presumed to restrict competition. Where one or more of the conditions is not fulfilled, the parties will need to assess whether the agreement is likely to lead to an appreciable negative effect on competition and, if so, whether it may benefit from an individual exemption under Article 101(3). 

The draft Horizontal Guidelines indicate that a sustainability standardisation agreement is likely to be restrictive of competition where it risks leading to a "significant increase in price or reduction in output, product variety, quality or innovation". 

Assessment of sustainability benefit under Article 101(3)

Where a sustainability agreement is caught by Article 101(1), it may still benefit from an individual exemption under Article 101(3). The agreement will be assessed on the basis of the four Article 101(3) criteria, namely that the agreement: (i) contributes to improving the production/distribution of goods or to promoting technical/economic progress (efficiency gains), (ii) allows consumers a fair share of the resulting benefit, (iii) does not impose restrictions which are not indispensable, and (iv) does not afford the companies the possibility of eliminating competition in respect of a substantial part of the products in question. 

Efficiency gains 

The draft Horizontal Guidelines allow for a broad spectrum of sustainability benefits to be taken into account as efficiency gains, including less pollution, more resilient infrastructure or supply chains and better quality products. These efficiencies will need to be substantiated and will not simply be assumed. 

Indispensability 

In principle, each company should decide for itself how to pursue sustainability benefits. Cooperation to achieve sustainability goals should therefore be objectively justifiable and companies should be able to demonstrate that each restriction is reasonably necessary to achieve the sustainability benefits and that no less restrictive means are available. 

Fair share for consumers 

The assessment of whether consumers receive a fair share of the resulting benefits has been a topic of debate amongst academics and national competition authorities, with some advocating for a broader approach taking into account the wider benefits for society. In the draft Horizontal Guidelines, the Commission has set out its proposed approach: "sustainability benefits that ensue from the agreements have to be related to the consumers of the products covered by those agreements". This contrasts to the approach proposed by the Dutch competition authority under which benefits to society as a whole could be taken into account in certain circumstances. 

The draft Horizontal Guidelines distinguish between three different types of consumer benefits: 

• "Individual use value benefits": direct consumer benefits that result from the use of a sustainable product and directly improve the consumer's experience, such as improved product quality efficiencies (e.g. healthier grown vegetables).
• "Individual non-use value benefits": indirect benefits resulting from the consumer's personal appreciation of the impact of sustainable consumption on others. For example, consumers may be prepared to pay more for a sustainable product if the sustainable product has a less negative impact on the environment (e.g. a less polluting car fuel) which benefits society as a whole and future generations.
• "Collective benefits": sustainability efficiencies which benefit a larger group of society, irrespective of the choices made by individual consumers. For example, phasing out polluting technology may be necessary to deliver sustainability benefits to a larger group of society.

The draft Horizontal Guidelines state that in some cases one type of consumer benefit may be sufficient to satisfy the conditions of Article 101(3) and in other cases a combination of more than one type of benefit may be required.

Companies will bear a significant burden of proof as any expected benefits will need to be "substantiated and cannot simply be assumed".  In practice, this may be a significant obstacle for companies to overcome in order to benefit from the exemption under Article 101(3). Companies will need to provide "cogent evidence" demonstrating the actual willingness of consumers to pay a higher price for sustainable products (e.g. through customer surveys).

Collective benefits

For collective benefits to be taken into account, companies should be able to: 

• clearly describe the claimed benefits and provide evidence that they have already occurred or are likely to occur;
• clearly define the beneficiaries;
• demonstrate that the consumers in the relevant market substantially overlap with the beneficiaries or are part of them; and
• demonstrate what part of the collective benefits occurring or likely to occur outside the relevant market accrue to the consumers of the product in the relevant market.

As a result, negative effects arising from sustainability initiatives would not be outweighed where beneficiaries of the collective benefits are situated outside the EU. For example, there is unlikely to be a significant overlap between the consumers who buy clothing made of sustainably grown cotton and the beneficiaries of the environmental benefits (such as less chemicals and water use on the land where the cotton is cultivated). 

The collective benefits also need to be significant enough to compensate consumers in the relevant market for any harm suffered. Where a lack of data prevents a quantifiable analysis, it must be possible to foresee a "clearly identifiable positive impact", though no further guidance is provided on how this should be demonstrated. In the draft Horizontal Guidelines, the Commission recognises that it currently lacks experience of measuring and quantifying collective benefits and indicates that it may provide additional guidance in the future.

No elimination of competition

This condition may be satisfied even where the agreement covers the whole industry, provided the parties continue to compete "vigorously" on at least one important parameter of competition such as price. 

Comment

The draft Horizontal Guidelines reflect the Commission's current thinking but the ongoing public consultation process will further fuel the ongoing debate. In particular, the Commission has raised on several occasions that it lacks concrete examples of sustainability initiatives which would require specific and additional guidance to ensure that companies do not fall foul of competition law. The public consultation process provides an opportunity for stakeholders to share concrete and practical examples of initiatives, in particular outside the realm of sustainability standardisation. Industry may for instance also benefit from specific guidance on data collection and database development aimed at connecting various actors in a more sustainable value chain. 

National competition authorities (most notably in the Netherlands, Greece, Austria and the UK) are also actively contributing to the discussion and have published (draft) guidance clarifying the application of competition rules to sustainability agreements. The Dutch competition authority has broadly welcomed the proposed new chapter on sustainability agreements in the draft Horizontal Guidelines, and in particular the proposal for a soft safe harbour for sustainability standardisation but it does call for a broader application thereof. 

The UK Competition and Markets Authority ("CMA") has also recently published its advice to the UK government on environmental sustainability and the UK competition and consumer regimes. While the CMA does not believe any legislative change is required, it has stated that it will provide additional guidance on when sustainability agreements will not restrict competition, the concept of benefits and what constitutes a fair share of benefits for consumers.