The role of competition law in moving towards a more sustainable world

06 December 2020

Across the globe, more and more companies are looking into ways to strengthen their environmental, social and corporate governance ("ESG") profile as investors realise that a strong ESG profile is the key to safeguarding a company's long-term profit and growth. Besides pressure from investors, the importance of sustainability has also been driven by public debate and consumers using spending power to signal their priorities.

With the topic of sustainability moving up the global political agenda (for example, achieving the sustainability goals set out in the EU Green New Deal has become one of the top priorities of the European Commission) and eco-credentials becoming an important feature of companies' products, there is an increasing need for competition policy to respond.

What does competition law have to do with sustainability?

While companies can contribute to sustainability goals through their unilateral forms of engagement, most of them – trying to avoid first-mover and free-rider disadvantages – are more inclined to shift to green business practices if they can collaborate and harness their efforts and resources in support of sustainability objectives. However, concerns have been raised about competition law risks relating to uniform actions collectively introduced by market players to promote sustainability, ultimately resulting in sustainable practices not being implemented and leaving everyone worse off. But why is there a tension between competition law and sustainability? And what can be done about it?

Can competitors collaborate with a view to pursuing sustainability objectives?

Let's consider the following illustrative example tackled in 2014 by the Dutch competition authority ("ACM"): Dutch supermarkets, the poultry processing industry, and chicken farmers agreed on "Chicken of Tomorrow" – minimum standards aimed at increasing poultry welfare (such as fewer antibiotics and more space), and to which all sector participants would need to adhere. The Chicken of Tomorrow was targeted to replace the unnatural broiler chicken but resulted in higher end-prices for consumers. 

Generally, Article 101 of the Treaty on the Functioning of the European Union ("TFEU") prohibits cartels, i.e. agreements between undertakings and concerted practices which may affect trade between Member States and result in the prevention, restriction or distortion of competition within the internal market. Companies can escape this prohibition provided they bring forward the efficiency defence embedded in paragraph 3 of Article 101 TFEU showing that the positive effects of the agreement outweigh its anticompetitive effects.

When determining whether a certain practice satisfies the conditions of the efficiency defence, the competition authorities predominantly rely on the legal standard of consumer welfare. This concept has been established to ensure that consumers are not worse off as a result of collusion between the market players. Currently, the consumer welfare test focuses narrowly on financial considerations and (short-term) price effects. In practice, such an economic (Chicagoan) approach to competition enforcement is tailored to rooting out collaboration between companies resulting in higher prices for consumers without considering its potential broader (positive) implications. Yet, there is no legal basis to jettison sustainability objectives in favour of economic efficiency. In fact, the general provisions of EU Treaties setting out their objectives and providing guidance on the interpretation of the rest of the articles require practitioners to take full account of sustainability (see, for example, Articles 7 and 11 TFEU).  

The agreement on Chicken of Tomorrow never got the green light because it was found to restrict competition under Article 101 TFEU. The ACM concluded that the additional costs of eco-friendly chicken would result in a EUR 0.64 negative effect on consumer surplus, and therefore blocked the sustainability initiative. On a positive note, the ACM should be applauded for embracing a wider approach to consumer welfare, including the non-economic benefits generated by the agreement. Unfortunately, those were left undervalued, and the ACM's attempt to do the right thing felt short.

Competition law and sustainability go hand in hand

EU Commissioner for competition, Margrethe Vestager, has so far taken a more cautious approach and seems to underscore the importance of competition law by stressing on various occasions that "businesses have a vital role in helping to create markets that are sustainable [and] competition policy should support them in doing that."

This calls for a paradigm shift. There needs to be a debate about whether an economic approach focusing too narrowly on short-term price effects should be abandoned. It has been rightly pointed out that not only does such an approach ignore negative externalities borne by society as a whole in the form of air pollution, ecological degradation and social disparity, but it is also inconsistent with the constitutional provisions of the EU Treaties. Interests wider than those of an economic nature should be considered.

As the European Green Deal and the Paris Agreement are now daily topics of discussion, there also needs to be an open debate on how competition law and policy should react and set a clear legal framework for tackling sustainability agreements and other collective sustainability practices in the future. Clear guidelines would reassure companies that are currently reluctant to collaborate due to legal uncertainty and fear of fines, and at the same time prevent cases of greenwashing (i.e. invoking sustainability to cover up anticompetitive practices).

A greener competition policy is around the corner

The ACM has already taken steps towards a greener competition policy by introducing Guidelines on sustainability agreements[1] offering a practical roadmap for applying competition rules on sustainability agreements. The German Competition Agency (Bundeskartellamt) has also recognised the need for competition law to step up, having dedicated this year's annual meeting to sustainable business and competition law.[2] It is time for other national authorities and the EC, for its part, to take action too.

In December 2022, the validity of the two Block Exemption Regulations ("BERs")[3] will expire. In conjunction with the Guidelines on the applicability of Article 101 TFEU to horizontal cooperation agreements,  BERs apply to the assessment of and provide a safe harbour for agreements whose positive effects are deemed to outweigh the anticompetitive ones. Should the EC decide to let the BERs be revised in light of current trends and developments, this would provide a great opportunity to include sustainability agreements among those benefiting from the safe harbour.

This is merely one of several options for embedding collective sustainability practices within the existing competition law context. The bottom line should be clear: competition law should not pose an obstacle to companies' genuine collective sustainability initiatives. Rather, it should facilitate and encourage them, based on their ability to invest and innovate, to embrace their wider responsibilities to society by internalising negative externalities and truly contribute to a sustainable future.

Authors: Eva Škufca and Tjaša Geč