By publishing progressive guidance on sustainability agreements, the Netherlands Authority for Consumers & Markets (ACM) has cast the spotlight on the role of competition law in promoting sustainability. Now its practical approach is beginning to reap dividends. Businesses are stepping forward to discuss pro-sustainability initiatives with the ACM where its guidelines are applied. Recently, the ACM declared that an initiative between soft drink suppliers to remove plastic handles and an initiative by garden centres to curtail their suppliers' use of illegal pesticides was not anti-competitive. On the other hand, while the ACM considered a joint marketing initiative for CO2 storage facilities to constitute a restriction of competition, it allowed the collaboration because the sustainable benefits out-weighed the anti-competitive effects. In addition to developing unilateral ESG initiatives, these real-life cases demonstrate opportunities for market participants to conclude sustainability agreements with their competitors.
The sustainability backdrop
The Paris Agreements and the EU Green Deal aim to substantially reduce greenhouse gases and climate neutrality. National legislation also has similar ambitions. For example, under the Dutch National Climate Act, the Netherlands needs to reduce its greenhouse gas emissions by 95% by 2050 (as compared to 1990 levels). Businesses are conscious of the urgency of reaching these targets and are eager to play their part. However, due to additional costs and unavoidable price increases, being the first to adopt a more sustainable product or production process can be a competitive disadvantage. To overcome that "first-mover" disadvantage, competitors might instead want to take the first step together - but if they do join forces to pursue sustainability objectives, they may risk flouting the prohibition on anti-competitive agreements.
Although the ACM and a few other national competition enforcers, like the Austrian and Greek authorities, have been showcasing the possibilities for pro-sustainability collaboration, there were not many precedents, until recently. In the Netherlands, a steady trickle of approved sustainability agreements are demonstrating that companies can pursue green ambitions without falling foul of competition law. Businesses, as such, require specific guidance, and they also need the competition authority to actively facilitate sustainability initiatives by helping them interpret the guidance and apply it in individual cases.
ACM plays facilitator
The ACM was the first authority to provide specific guidance on how businesses can cooperate in their pursuit of sustainability goals. In January 2021, the ACM published draft guidelines on sustainability agreements, explaining that these were not final because it prefers an EU-wide harmonised approach (see our previous article). At that time, the ACM made it clear that it nonetheless would use these draft guidelines in the interim as a reference instrument in its review of sustainability agreements. In parallel, the ACM extended an open invitation to companies to discuss the acceptability of their joint proposals. The ACM also gave assurance that it would not impose fines for sustainability agreements that turn out to be incompatible with competition rules, if these agreements were discussed with it beforehand or if companies followed the draft guidelines in good faith. The ACM also expressed a willingness to sit down with businesses to address bottlenecks.
True to its word, the ACM has already assessed and supported five pro-sustainability agreements covering industry sectors as diverse as energy, beverages and the floricultural market. Moreover, by publishing its informal opinions on some of these agreements, the ACM is providing templates for other similar market-wide arrangements. In addition, the ACM has also compiled an overview of the types of opportunities available to the agricultural sector in its latest guidelines on collaborations between farmers. For its part, the German competition authority has already applied a new derogation from competition rules for agricultural products in several cases (see our previous article).
Sustainability agreements that do not restrict competition
Sustainability agreements may either be permitted if they do not restrict competition or, if despite containing restrictions to competition, they have benefits that offset those restrictions. In many cases, joint sustainability initiatives may not even need to be assessed under the prohibition on anticompetitive agreements at all, if, for instance, there is no appreciable restriction of competition. With the ACM supporting unproblematic cases which are in line with the rules, it is giving businesses real-world examples to rely on.
Discontinuing plastic handles
Soft drink suppliers in the Netherlands, including Coca-Cola, Vrumona and supermarket chains Albert Heijn and Jumbo, intend to discontinue plastic handles on all soft-drink and water multipacks. Discontinuing plastic handles will make multipacks easier to recycle and contribute to a reduction in plastic in packaging. Going forward, at least 70% of multipacks will no longer have plastic handles. The ACM guidelines indicate that before approaching the ACM, businesses must self-assess if their agreement restricts competition. The soft drink suppliers conducted a self-assessment, as well as a market study that showed plastic handles do not have significance in the competitive process. Following the self-assessment, Coca-Cola sought the specific opinion of the ACM. The ACM applied its guidelines on sustainability agreements and endorsed the agreement, as it helps realise a sustainability goal without having negative effects on consumers.
The ACM guidelines on sustainability set out five categories of agreement which do not restrict competition. According to the ACM, the agreement to discontinue plastic handles is covered by at least two categories:
- Non-binding agreements to make a positive sustainability contribution: it is important that for such agreements, an individual party to the agreement can decide on the level of contribution it would like to make as well as how it would like to do so. In this regard, the ACM took note that each soft drink supplier will decide when and how it will discontinue handles from its multipacks.
- Agreements for improving quality or discontinuing products that are less sustainably produced: The objective behind discontinuing plastic handles fits in this category that covers agreements aimed at: a more efficient use of packaging materials, or at no longer using a certain type of packaging. Moreover, safeguards required for this type of agreement are met, as discontinuing plastic handles will not affect the price or greatly reduce product choices for consumers.
Curtailing illegal pesticide use
Agreements between undertakings are typically anti-competitive if they appreciably affect key parameters of competition, such as price, quality, diversity, service, or distribution methods. The costs of products or services might be lower if they are produced below the legal standard; this might also affect the quality (both positively and negatively), for example by using illegal pesticides in growing plants. The Dutch garden retail sector trade association wanted to conclude an agreement between its members to boycott suppliers which use illegal pesticides. Normally, such a boycott would fall foul of the prohibition on anti-competitive agreements. However, the ACM considers below-legal-standard competition to be illicit competition which is not protected by Dutch competition law. It therefore gave the green light to pursue this initiative.
Jointly purchasing wind energy
The ACM previously supported a collaboration between energy users to collectively procure wind energy from the offshore wind farm Hollandse Kust West, since this collaboration supports the transition to clean energy. The joint procurement will incentivise the parties to use clean energy because the price for electricity sourced from a clean energy source will remain fixed for several years. Wind farm developers will also benefit from long-term supply contracts. Moreover, the ACM noted that as this initiative only concerns one wind farm, energy users and other wind-farm developers will continue to have options to buy and sell sustainable energy elsewhere. For these reasons, the ACM did not consider this to be an anti-competitive initiative.
Sustainability benefits that offset restrictions of competition
Although an agreement between competitors may negatively affect price, quality and innovation, these negative effects can be offset by the benefits provided by that agreement. An agreement with a restriction to competition that is necessary for realising sustainability benefits may qualify for statutory exemption if a fair share of the benefits is passed on to customers (the fair share requirement).
CO2 capture and storage marketing initiative
TotalEnergies, Shell Netherlands, and two state-owned companies, Energie Beheer Nederland and Gasunie, formed a partnership (Project Aramis), to collaborate for the development of a new CO2 transport infrastructure to enable offshore CO2 storage. In addition, Shell and TotalEnergies plan to transport and store CO2 in empty gas fields in the North Sea. This requires substantial investments, including building a high-capacity trunkline that connects to the empty gas fields. To ensure that the start-up phase is economically viable, Shell and TotalEnergies intend to offer their storage facilities collectively. The parties will fix the price jointly for the first 20% of transport and storage capacity. They will market the remaining 80% of their capacity individually. The launch of the trunkline will be followed by a large-scale commercialisation phase which will make it possible for other operators of empty gas fields to connect to the trunkline.
The initial collaboration between Total and Shell will support Project Aramis which in turn will create a new market for CO2 storage in empty gas fields and will offer decarbonisation solutions. This will allow industries that cannot make their production processes sustainable in the near future to nevertheless reduce their greenhouse gas emissions. As per the ACM, the benefits for customers and wider society outweigh the restriction of competition of the joint commercalisation of the 20% capacity.
CO2 uniform settlement price
Before supporting the carbon capture and storage joint marketing initiative, the ACM had also exempted a proposal by distribution system operators to use a uniform price for CO2 in calculation models for grid investments. The system operators submitted their agreement on the use of a uniform CO2 settlement price in purchasing and investment decisions to the ACM. A uniform settlement price would make it more appealing to make investments that result in fewer CO2 emissions. According to the ACM, as all energy users will benefit if CO2 emissions are reduced, the system operators may agree on a uniform settlement price.
ACM vs the European Commission
The sustainability benefits of these initiatives are often not limited to the direct customers of the products or services affected by a restriction of competition caused by the initiative. Consumers or society as a whole could also benefit from it – or, particularly in the case of vertical supply chains, citizens elsewhere in the world could benefit, while the competitive disadvantage is only felt by direct customers of those products or services ("out-of-market benefits"). To exempt sustainability agreements with benefits that offset restrictions of competition, the key question is: if in addition to the benefits for affected customers in the relevant market, should out-of-market benefits also be considered when weighing the competitive disadvantages and sustainable benefits?
The new chapter on sustainability agreements in the European Commission's draft horizontal guidelines (see our previous article) sets out a different test than the ACM for accepting "out-of-market" benefits. The Commission will only take into account out-of-market sustainability benefits of an anti-competitive agreement (namely, benefits that accrue to wider society), if the affected customer group is also a direct beneficiary. By way of illustration, this means that initiatives designed to provide a more sustainable approach for suppliers in poorer countries globally (for example, in Asia, minimum wage agreements for farmers or ensuring they have access to green energy sources) will not be considered as benefits that could offset anti-competitive effects for customers in Europe. In contrast, the ACM looks beyond the relevant market and the direct consumer. The ACM can do so since, unlike the Commission, it does not view all sustainability agreements in the same breadth, but distinguishes "environmental damage agreements" from "other" sustainability agreements.
Environmental damage agreements
The ACM explains that damage caused to the environment – such as atmospheric heating, reduced biodiversity, or less healthy livelihood – concerns serious "negative externalities" requiring more urgent attention than other forms of sustainability (animal welfare, labour rights, etc). Environmental damage agreements are about reducing these negative externalities. Therefore, the fair share requirement will not necessarily mean that immediate users are compensated fully for the competitive harm caused by the agreement. It is enough if society benefits, provided the direct customers are a constituent part of that society. For example, the ACM considered the Shell/TotalEnergy CO2 storage marketing initiative an environmental damage agreement. According to the ACM, cleaner air and less CO2 pollution can be taken into account in invoking the statutory exemption - as long as society as a whole benefits and there are advantages for consumers in the relevant market
The ACM believes that as user demand is the reason which essentially creates the negative externalities sought to be mitigated by environmental damage agreements, if wider society benefits and even if immediate users are not fully compensated (the "polluter pays" principle), this will be an acceptable outcome.
How wide is "wider" society?
In the two examples relating to CO2 storage and CO2 settlement prices, the ACM took into account the benefits that accrue to wider society. In these two cases, there was considerable overlap between the beneficiaries of the environmental benefit and the customers affected by the competitive restriction. In our view, the Commission would therefore have come to the same conclusion as the ACM. However, the Commission may assess a case differently than the ACM if the end beneficiaries are located in another part of the world or elsewhere in Europe, instead of the Netherlands (for example, the Asian farmers referred to above). However, when considering benefits accruing outside the Netherlands, the ACM only requires that it must be shown how the benefits affect users in the Netherlands. The ACM does not impose a strict condition requiring a substantial overlap between the affected consumers and the beneficiaries.
The Commission's draft revised rules on horizontal agreements, including the chapter devoted to sustainability, are expected to be finalised by the end of 2022. Whether there will be more convergence with the ACM's approach, especially as regards the "fair share" interpretation and the related issue of out-of-market efficiencies, remains to be seen. Until then, the ACM will continue facilitating sustainability initiatives under its guidelines.
Simultaneously, misleading sustainability claims (“Greenwashing”) remains high on the ACM's radar in its effort to enforce consumer law (see our previous article). Last week, following the ACM's intervention, two major retailers committed to providing better information on sustainability and to donating to sustainable causes as compensation for their previous use of unclear claims.
As all of these developments illustrate, it is clear that sustainability will continue to be a high enforcement priority for the ACM for some time to come. We applaud their resolve. For businesses, the ACM has shown itself willing to assist in the assessment of sustainable initiatives between competitors under competition law in a pragmatic and efficient manner. In contrast, when it comes to sustainability claims made by businesses for their products and services, it is important to self-assess whether they are genuine and true; the ACM will not give greenwashing the same treatment.