Competition and sustainability: How can companies cooperate now?

We’ve talked previously about the climate emergency reshaping political agendas globally. We’ve also presented the results of our survey showing that companies want to work together to address climate change and view coordinated action as key to achieving it.

Yet laudable environmental initiatives by individual companies may put them at a competitive disadvantage. Emission-reducing technology and processes can be very expensive, so a company taking positive action alone may face a cost disadvantage that will disincentivise individual action. And reducing the carbon footprint of a complex supply chain may require changes that are simply beyond the scope of a single company.

Self-assessment under the current competition rules

Companies take decisions based on a risk-reward analysis. Projects will not go ahead if the perceived risks outweigh the benefits. The immediate upside for companies taking climate change action is at best uncertain, while the potential risks of falling foul of the competition rules are significant.

Many agreements won’t raise competition concerns at all, e.g. because they won’t increase prices, won’t involve an agreement to adopt common technology, or won’t involve sharing competitively sensitive information between competitors. On the opposite end of the scale we find practices that masquerade as sustainability agreements to hide cartel activity (“greenwash” agreements).

The real challenge for companies lies in the self-assessment of agreements that fall in between: they may affect competition (e.g. by increasing prices paid by consumers), but at the same time genuinely pursue sustainability goals (to the benefit of all consumers). Restrictive agreements can be exempted if they generate economic benefits outweighing their negative effects, and consumers receive a fair share of those benefits.

But companies are faced with an arduous task: How do we quantify the environmental benefits generated by the agreement? And what is the right timeframe? Can we be comfortable these outweigh (unquantified) restrictions on competition?

Even once we answer these questions, the biggest question of all remains: will a competition authority or court agree with the analysis?

How have sustainability agreements been treated so far?

Around 2000, when the strict interpretation of the consumer welfare standard was less prevalent, the European Commission exempted a few agreements on environmental grounds:

But there are no recent cases where the EC has considered environmental issues and granted an exemption and examples from national competition authorities are discouraging. The Dutch competition authority (ACM) blocked an agreement between coal producers to switch to green energy and close down five coal plants (2013) and an initiative between chicken suppliers and retailers to replace regularly-produced broiler chicken with more sustainable alternatives (2015) to raise animal welfare standards. In both cases the benefits were found insufficient to outweigh the competitive harm.

The lack of guidance at EU level has led some Member States to undertake their own initiatives. Following the unhelpful precedents mentioned above, the Dutch Government issued a Policy Document in 2014 and introduced a new legislative proposal in 2019 to foster collaboration by removing the barrier of competition law. Meanwhile the Nordic competition authorities issued a Joint Report on competition and the environment in 2010. But a piecemeal approach at Member State level may lead to divergent application of the rules and even less clarity.

Current case law and legislation don’t provide the necessary legal certainty for companies to embark on the projects required to credibly tackle the climate emergency and help deliver ambitious political plans to achieve carbon neutrality by 2050.

When might we get more guidance?

The EC is currently reviewing its guidance on cooperation between competitors. EC executive Vice-President Vestager recently affirmed that this “could be another opportunity to explain how companies can put together sustainability agreements without harming competition”.

In our response to the EC Review of the Horizontal Block Exemption Regulation, we suggested that to unlock the benefits of sustainability cooperation, the EC could adopt a standalone block exemption regulation dealing with sustainability agreements and provide clear guidance as part of the updated Horizontal Guidelines. It should also take the opportunity to adopt and publish several “finding of inapplicability” decisions regarding real-life sustainability arrangements where the EC has been approached by the companies involved. And, referring to its plans to give comfort letters to companies cooperating in response to Covid-19, the EC has said it was already considering giving comfort in the context of “decarbonisation of the economy” – a trend which has been “accelerated” by the current health crisis.

Following Brexit, the UK must now consider its own approach. It is promising that the UK CMA has already expressed its support for sustainability efforts as one of its key priorities for this year. Meanwhile the French Competition Authority has signalled its intention to target competition law infringements which also jeopardize the protection of the environment.

For their part, the US agencies have maintained that, however laudable their aims, competitor collaborations for social welfare goals are still subject to antitrust scrutiny. Responding to criticism that the DOJ’s investigation into emissions collusion by carmakers was politically motivated, Assistant AG Makan Delrahim stated that “[n]o goal, well-intentioned or otherwise, is an excuse for collusion or other anti-competitive behavior that runs afoul of the antitrust laws.” The DOJ has since dropped its investigation. The FTC has made similar statements underlining the applicability of the antitrust rules in this space, but it has also acknowledged that the rules don’t preclude cooperation where any potential harm to competition is outweighed by enhanced competition and economic welfare benefits to consumers.

China’s Anti-Monopoly Law (the AML) explicitly contemplate a possible exemption for restrictive agreements which produce sufficient environmental benefits. SAMR recently issued an enforcement guideline which raises the bar for exemption: in line with international best practice, parties will need to show that restrictive measures are “indispensable” to the efficiency goal pursued. The same point was also reflected in SAMR’s recent proposed amendments to the AML itself. Beyond this, there is no practical guidance on SAMR’s approach, nor is there any precedent in which the parties have successfully defended collaboration on this basis.

It’s clear that these issues are rocketing up the political agenda, especially in Europe. For our part, we will continue to advocate for clearer and supportive rules in this space.

What practical steps can companies take in the meantime?

In the EU, where the current guidance doesn’t expire until May 2022, we are likely to have to wait quite some time for detailed guidance. The COVID-19 pandemic may delay US and other agencies from focusing on climate issues in the near future. But, with careful planning, many genuine sustainability initiatives should be possible within the current rules. The key will be to understand the potential risks and think about how best to manage them upfront. Our top tips:

  • Remember that having genuinely laudable aims won’t stop the competition rules applying
  • Make sure you can compellingly explain why you need to work together and why you can’t undertake your sustainability project alone (i.e. why collaboration is indispensable to achieving your sustainability goal)
  • Think about how you can achieve your goals whilst having the minimum impact on competition in the market (i.e. make sure you are doing it in the least restrictive way)
  • Identify and quantify the environmental and other benefits produced as a result of the project (be precise – general statements about something being green won’t be enough) and consider to what extent these benefits will be shared with consumers
  • Work out the precise scope of the collaboration and then:
  • Set out precisely the matters you really need to discuss with each other to facilitate the project
  • Be vigilant about not discussing matters falling outside of the project that may lead to the sharing (even unilaterally) of commercially sensitive information
  • Consider whether to involve an independent third party to the extent any commercially sensitive information must be exchanged
  • Fully document your discussions for future reference
  • Keep your collaboration under review and ensure cooperation doesn’t go beyond the terms of what is indispensable, particularly in a long run project
  • Consider whether you want to seek comfort from a regulator (but be aware that there are potential downsides to doing so in terms of the need to pull together information to underpin a reasoned submission, delay and the limitation of “soft” comfort).

If you’ve enjoyed reading this post, why not listen to this podcast, in which Nicole Kar and Vanessa Havard-Williams discuss the importance of pursuing a green agenda, and how to do it in line with the competition rules.

seedling plant in hand