In context

Dutch competition authority first to give provisional view on sustainability initiatives

September 16, 2020
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In context

The Paris agreements require a substantial reduction in greenhouse gas emissions, and society as a whole – businesses and citizens alike – will have to contribute to these goals. Consequently, companies are taking their corporate social responsibility (CSR) plans seriously and try to support sustainability, or at least pollute less. However, when undertakings jointly pursue sustainability objectives, they might fall foul of the cartel prohibition.

 

The Dutch competition authority, ACM, has been the first to set out its position, albeit provisional, on the role of competition law in promoting sustainability initiatives. The ACM’s draft guidelines on sustainability agreements provide welcome clarity on the scope of such initiatives in the private sector. The innovative stance taken breaks with tradition by outlining which benefits for society as a whole can be considered legitimate efficiencies when weighing up the pro and anti-competitive effects of sustainability arrangements.

Progressive approach

In its guidelines, the ACM advocates for a progressive approach towards sustainability initiatives and extends an open invitation to companies to discuss the permissibility of their proposals. In line with this approach, the ACM sets out that it will not impose fines for sustainability agreements which turn out to be incompatible with competition rules, notably the cartel prohibition, if these agreements were discussed with the ACM beforehand or if the companies followed the guidelines in good faith.

 

The guidelines set out three categories of initiatives that do not fall under the cartel prohibition.

 

Category 1: sustainability agreements that do not restrict competition

In line with existing practice, the guidelines provide that sustainability agreements that do not, or do not appreciably, affect key competition parameters such as price, quality, diversity, service and distribution method, do not fall under the scope of the cartel prohibition. The ACM goes on to clarify what types of agreement do not restrict competition and are, therefore, permissible. These include codes of conduct promoting environmentally-conscious practices and non-binding agreements incentivising undertakings to make a positive contribution to a sustainability objective.

 

Category 2: sustainability agreements with benefits that offset restrictions of competition

The second category of permissible agreements includes agreements that do restrict competition, but satisfy four cumulative conditions. In order to be exempted from the cartel prohibition, agreements must

  • offer properly substantiated, objective sustainability benefits;
  • allow users a fair share of these benefits;
  • not restrict competition further than necessary for realising those benefits;
  • ensure that sufficient competition remains on the market.

 

It is with respect to this second category and, more specifically, the determination of a “fair share”, that the ACM demonstrates its progressive stance towards sustainability initiatives. So far, the basic principle adhered to by the European Commission has been that consumers should be compensated “at least for the harm caused by the restriction of competition to them“. Put differently, if an agreement were to lead to both a quality improvement and a price increase of a particular product, the consumers of this product (as a group) will have to attach sufficient value to those quality improvements to offset the price increase.

 

This was the case with an agreement between washing machine producers to no longer produce cheaper energy-inefficient models. The Commission exempted that agreement, because the price increase for energy-saving machines was outweighed for the consumer by a reduction in longer-term energy costs. In its draft guidelines, the ACM expressly deviates from this principle when it comes to agreements that help, in an efficient manner, to comply with a binding international or national standard aimed at preventing environmental damage. The ACM outlines that the benefits of a potentially anti-competitive agreement may be taken into account, even where these are predominantly enjoyed by a wider group of citizens in society, rather than by those directly experiencing the anti-competitive effect (such as a price increase).

 

In its draft guidelines, the ACM distinguishes between “environmental-damage agreements” and “other sustainability agreements”. The ACM clarifies that agreements where either: (a) the parties have a combined market share of less than 30%, or (b) it is obvious that the benefits offset the harm, a simplified assessment will suffice. Parties will need to explain the benefits and disadvantages to the ACM, but they are not required to quantify them. Where these criteria are not met, parties must put forward a more sophisticated analysis and quantify the pros and cons of the proposed sustainability agreement in monetary terms.

 

Environmental-damage agreements

Environmental-damage agreements reduce negative externalities on humans, the environment, and nature. These include agreements aimed at CO2 reduction or which prevent the use of polluting raw materials. The ACM feels that environmental-damage agreements between competitors are permitted where the benefits to society as a whole outweigh the disadvantages of any restriction of competition. The ACM departs from the existing practice and clarifies that it will look beyond the group of direct consumers and will even consider sustainability benefits accruing to future generations.

 

The ACM expressly states that it considers it “fair” for consumers not to be fully compensated for a price increase if it is essentially consumer demand for a product which has resulted in sustainability issues in the first place. As long as the sustainability agreement results in benefits to society and contributes to a policy objective to which the Dutch government is bound, having “the polluter” pay for the sustainability benefits is considered fair.

 

This approach contrasts with the ACM’s previous approach in a case where energy producers had agreed to switch to green energy and close down five coal plants. In 2013, the ACM blocked that agreement, focusing only on the benefits to the consumers affected, rather than to society as a whole. This agreement seems to be a perfect example of an initiative which now may be exempted from the competition rules as interpreted under the new draft guidelines.

 

Other sustainability agreements

“Other sustainability agreements” include agreements aimed at improving animal welfare or setting minimum wages for production taking place in developing countries. For such other sustainability agreements, the ACM adheres to the existing principle that the benefits of these agreements must fully compensate onsumers for any harm caused to them by a restriction of competition.

 

In 2015, the ACM famously blocked an initiative between the poultry industry and retailers to completely replace regularly-produced broiler chicken in supermarkets with the “chicken of tomorrow”, which would represent chicken reared under improved welfare standards. In weighing the pros and the cons, the ACM concluded that benefits in terms of animal welfare did not offset the associated price increase for consumers. Although the ACM’s approach to animal welfare initiatives in its guidelines does not seem to differ to its approach in 2015, it will be interesting to see how its newly advocated progressive approach will translate into the ACM’s decisional practice regarding environmental-damage agreements.

 

Even though the ACM did not allow the “chicken of tomorrow” initiative, according to the ACM, animal welfare in the poultry industry has improved. It recently concluded that broiler chicken has almost disappeared from Dutch supermarket shelves, and the quality of chicken meat sold in supermarkets is generally higher than in the “chicken of tomorrow” initiative. This, in itself, raises a “chicken and egg” dilemma: did the changes come about more quickly as a result of farmers daring to implement the initiative, resulting in an increased focus on animal welfare standards, or were the farmers ultimately led by an increase in consumer demand for chickens reared under better standards?

 

Category 3: Dutch bill on “room for sustainability” initiatives

If the ACM finds that a sustainability initiative is incompatible with the competition rules, companies may in specific cases submit such an initiative to the Dutch Minister of Economic Affairs and Climate Policy, provided that the pending bill on “room for sustainability” initiatives is adopted. Within the proposed framework, companies would be able to request the Minister to declare the sustainability initiative legally binding on the entire sector.

 

The ACM invites public and private stakeholders to submit their views ahead of their finalising of the draft guidelines. The deadline for submission is 1 October 2020.

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