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| 3 minutes read

ESG - The benefits of a sustainability horizontal agreement must outweigh its costs...but which benefits count for the European Commission?

Agreements between competitors to collaborate in the pursuit of sustainability objectives can lead to restrictions of competition between the competitors. The European Commission (EC) has recognised that these negative consequences may be outweighed by the sustainability benefits of such agreements, and it has provided some useful guidance on how businesses can self-assess the compliance of their sustainability agreements with EU competition law.

As businesses start engaging in joint sustainability initiatives, they might often face new burdens in meeting sustainability requirements, such as increased costs, or reduced choices regarding their suppliers, distributors, or production processes. In turn, this might incentivise them to restrict competition between themselves, such as by agreeing with their competitors on how to pass the increased costs to their customers.

The EC has made it clear that sustainability objectives cannot be used to disguise hard-core restrictions on competition, such as price fixing and/or market sharing. Therefore, agreements affecting one of the main competition parameters (such as price, quality, or choice) must undergo a traditional analysis of their effects on competition. In that context, and to ensure that their agreements comply with EU competition law, the parties must demonstrate that their agreements:

  1. lead to demonstrable efficiency gains, such as increased product variety and quality or reduced costs, which can be objectively substantiated;
  2. do not eliminate competition, ensuring that the parties compete on at least a few of the main competition parameters;
  3. do not impose restrictions that are not indispensable to attaining the intended sustainability benefits; and
  4. bring benefits which are passed-on to consumers.

The EC’s Horizontal Guidelines provide that “consumers” encompasses all direct and indirect customers of the products covered by the agreement. Usually, consumers will benefit directly through the consumption or use of the relevant products, such as through improved quality or variety. Consumers may also benefit indirectly from a more sustainable product where they value the product’s positive impact on others. The EC gives the example of a washing liquid that contaminates the water less but does not necessarily clean better. Consumers might be willing to pay more for such a sustainable product due to its indirect benefits, and this can be evidenced through customer surveys.

The Guidelines indicate that the EC will consider not just individual benefits, but also collective benefits. Collective benefits are those benefitting a wider section of society than just the relevant consumers and they occur regardless of the consumers’ individual appreciation of the product. Such benefits may include less polluting fuel, which improves the air quality in the local area and benefits all local residents, including the drivers purchasing the fuel. Businesses claiming collective benefits must describe these clearly and identify their beneficiaries, while demonstrating that the consumers in the relevant market substantially overlap with the beneficiaries. Finally, they must demonstrate that the benefits accruing to the consumers in the relevant market (whether direct, indirect, or collective), outweigh the harm suffered by those consumers because of the agreement.

The parties to a sustainability agreement must prove that all conditions are met using objective, concrete, and verifiable evidence. The nature of the required evidence will depend on each individual case, with the EC pointing to studies, market surveys and academic reports as potential evidence that could be used. The Guidelines, though, are not exhaustive and businesses have noted that it is not clear what kind of evidence will be needed to prove the benefits of their sustainability agreements. The lack of previous EC decisions in this field from which businesses could draw guidance further increases uncertainty.

Moreover, the EC has indicated that sustainability agreements should not be viewed as a separate category of agreement. Instead, they will take the form of other types of agreements (i.e., production, purchasing, specialisation) which pursues a sustainable objective. Therefore, sustainability agreements must additionally be assessed under the rules pertaining to those types of agreements. This “dual-rule” applicability may increase the difficulty of self-assessing sustainability agreements. To sweeten the pill, the EC has confirmed that any inconsistencies in the Guidelines will be resolved in favour of the provisions that are more favourable to the parties relying on them.

The new Horizontal Guidelines give useful guidance to businesses considering entering into sustainability agreements, and most businesses should be able to self-assess the compatibility of their agreements with EU competition law. Nonetheless, significant uncertainty remains as to the evidence needed to prove an agreement’s benefits, while connecting a sustainable product’s consumers to its collective benefits might not always be straightforward. As such, legal assistance should be sought where an agreement with competitors affects prices, quantities, innovation, or product quality and variety, and businesses can also approach the EC for informal guidance with any novel questions.