New guidelines on sustainability agreements between competitors

On 1 June 2023, the European Commission adopted revised guidelines on co-operation between competitors, together with revised block exemption regulations for specialisation agreements and R&D agreements. The new block exemptions enter into force on 1 July 2023. The new guidelines include a chapter on the assessment of so-called sustainability agreements.

The term sustainability agreement refers to agreements between actual or potential competitors that pursue one or more sustainability objectives, regardless of their form, e.g. joint R&D, joint purchasing or sustainability standardisation. The term sustainability objectives is not limited to climate objectives. It also includes broader sustainability objectives such as human rights, healthy food and animal welfare.

Sustainability agreements between competitors can be an effective way of driving development towards a more sustainable society. In some situations, sustainability benefits can only be achieved, or achieved more cost-effectively, if competing companies work together. A sustainability agreement may be necessary to avoid free-riding on the investments required to promote a sustainable product, that is overcoming “first mover disadvantages”. Sustainability agreements can thus give rise to significant benefits both for individual consumers and for society in general. In recent years, companies' work with sustainability issues has also become an important competitive parameter.

Co-operation between competitors can however also give rise to consumer harm, e.g. in the form of higher prices or a reduced product range. This could be the case even if the parties' intention is not to restrict competition. Agreements that violate the prohibition against anti-competitive agreements set forth in Chapter 2, Section 1 of the Swedish Competition Act/Article 101 TFEU may lead to significant fines. Even in cases where the agreement pursues sustainability objectives or other objectives it is important to conduct a thorough competition law review of the agreement.

The lack of case-law and guidelines on how sustainability agreements between competitors should be assessed, together with the risk of significant fines in the event of incorrect assessments, may have had a restraining effect on companies' propensity to enter into this type of agreement. It is thus welcome that the Commission is now adopting guidelines describing the principles governing the assessment. The Commission's guidelines are also applicable in the assessment of the Swedish competition rules and will make it easier for companies to assess the competition law risks. In addition to the general guidance provided in the guidelines, the Commission has stated that it is committed to also provide informal guidance regarding novel or unresolved questions on individual sustainability agreements through its Informal Guidance Notice and thereby signalled that it realizes the importance of this type of co-operation.

Guidelines on sustainability agreements

The Commission's new guidelines on co-operation between competitors contain a completely new chapter on sustainability agreements. The most important take-aways are summarized below.

Agreements not caught by the prohibition

Agreements that do not affect any parameters of competition are not caught by the prohibition. The guidelines contain the following examples:

  • Agreements that aim solely to ensure compliance with sufficiently precise requirements or prohibitions in legally binding international treaties, agreements or conventions.
  • Agreements that do not concern the economic activity of undertakings, but their internal corporate conduct, e.g. agreements on measures to eliminate single-use plastics from their business premises.
  • Agreements to set up a database containing general information about suppliers that have (un)sustainable value chains, use (un)sustainable production processes, or supply (un)sustainable inputs, but which do not forbid or oblige the parties to purchase from such suppliers.
  • Agreements between competitors relating to the organisation of industry-wide awareness campaigns, or campaigns raising customers’ awareness of the environmental impact or other negative externalities of their consumption, which do not amount to joint advertising of specific products.

Assessment of sustainability agreements that may be caught by the prohibition

Sustainability agreements that affect any competitive parameter such as price, quality or sales volume, may be caught by the prohibition against anti-competitive agreements. For such agreements, it must be assessed whether the agreement may objectively be deemed to have the object or effect to restrict competition. Depending on the nature of the co-operation, guidance may be found in the other chapters of the Commission's guidelines, e.g. the chapters on joint R&D or joint purchasing, in addition to the guidance provided in the new chapter on sustainability agreements. The following factors should in particular be taken into account:

  • The market power of the parties participating in the agreement.
  • The degree to which the agreement limits the decision-making independence of the parties in relation to the main parameters of competition.
  • The market coverage of the agreement.
  • The extent to which commercially sensitive information is exchanged in the context of the agreement.
  • Whether the agreement results in an appreciable increase in price or an appreciable reduction in output, variety, quality or innovation.

Soft safe harbour for sustainability standardisation agreements

A common form of sustainability agreement is sustainability standardisation agreements, i.e. agreements that specify the requirements that manufacturers or retailers in a supply chain must meet in relation to different sustainability metrics. Such agreements can often have positive effects on competition, but they can also give rise to competition harm in the form of, e.g. increased possibilities to co-ordinate prices or exclude alternative standards.

The Commission considers that sustainability standardisation agreements are unlikely to be caught by the prohibition against anti-competitive agreements if the following cumulative criteria are met:

  • 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.
  • There is no (direct or indirect) obligation for the participating undertakings to comply with the standard.
  • The participating undertakings are free to adopt for themselves a higher sustainability standard.
  • The parties to the sustainability standard do not exchange commercially sensitive information that is not necessary for the development, the adoption or the modification of the standard.
  • The co-operation ensures effective and non-discriminatory access to the outcome of the standardisation, including the requirements 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.
  • The sustainability standard satisfies at least one of the following two conditions:
    • The standard does not lead to a significant increase in the price or a significant reduction in the quality of the products concerned.
    • The combined market share of the participating undertakings does not exceed 20 percent on any relevant market affected by the standard.

The fact that an agreement fails to meet these conditions, e.g. because it gives rise to a significant price increase for the products in question, is not sufficient per se to conclude that the agreement violates the prohibition against anti-competitive agreements. However, this means that an individual assessment of the agreement must be made.

Conditions for exemption

A sustainability agreement that is covered by the prohibition against anti-competitive agreements can be exempted if the following cumulative conditions are met:

  • The agreement gives rise to (objective, concrete and verifiable) efficiency gains.
  • The agreement does not impose other restrictions on the undertakings than those that are necessary to attain these efficiency gains.
  • Consumers receive a fair share of the efficiency gains.
  • The agreement does not allow the parties the possibility to eliminate competition in respect of a substantial part of the products in question.

Of the conditions set out above, the third is likely be the most difficult to apply in practice. Although the guidelines provide comprehensive guidance on what is required for consumers to receive a fair share of the efficiency gains (i.e. sustainability benefits), weighing different sustainability benefits against the disadvantages in the form of, e.g. higher price or reduced supply resulting from the agreement will continue to be difficult. The guidelines describe three different types of individual and collective sustainability benefits that may be taken into consideration.

  • Individual use value benefits, i.e. direct benefits in the individual customers’ user experience (e.g. better taste).
  • Individual non-use value benefits, i.e. indirect benefits to the individual customer that are not related to their user experience but rather their perception of higher quality resulting from their appreciation of the positive (external) impact their sustainable consumption has on others.
  • Collective benefits for a larger group of individuals, e.g. in the form of less pollution.

The sustainability benefits must accrue to the consumers of the products covered by that agreement and be sufficient to offset the harm caused by the agreement in the relevant market. Consumers are deemed to receive a fair share of the benefits when the benefits deriving from the agreement outweigh the harm caused by the agreement, so that the overall effect on consumers in the relevant market is at least neutral. Benefits on related markets may be considered, but only if the group of customers affected by the restrictions and benefitting from the efficiency gains are essentially the same. This limits the possibility to take collective benefits into consideration, as such benefits often arise in other markets than those to which the agreement relates. As an example, the guidelines state that there is likely to be no substantial overlap between the group of individuals that would benefit environmentally by sustainable grown cotton (inhabitants in the country in which the cotton is grown) and the consumers that buy the sustainable cotton clothing (customers in other countries), and that sustainable grown cotton is thus not likely to give rise to collective benefits to customers on the relevant market concerned by the agreement. To the extent that customers are willing to pay more if their clothing is made of sustainably grown cotton, the local environmental benefits can however be taken into account as individual non-value benefits for the consumers of the clothing (see (ii) above)).

If you have any questions regarding the above, you are welcome to contact:

Marcus Glader

Trine Osen Bergqvist