Is competition law a roadblock to sustainability initiatives?

9 minute read  29.09.2020 Paul Schoff, Sarah Barker, Haydn Flack, Karla Nader

Competition law concerns about collaborating with competitors can create a barrier for businesses to innovate and respond to the threats associated with climate change. We identify some lessons from the regulatory response to the pandemic as well as international regulatory developments to explore the role of competition law to facilitate climate-related financial risk mitigation and adaptation and how the ACCC can help.

Key takeouts

  • Sustainability-related issues, particularly climate change, have rapidly evolved from 'non-financial, environmental' issues to material financial risks and opportunities for Australian businesses.
  • Business and industry groups are looking to implement collaborative sustainability strategies and solutions including sector-wide initiatives. Industry solutions that involve agreements between competitors create competition law risks.
  • Some international regulators have recognised that competition law should be less of a roadblock to collective action on climate risk issues. Learning from the experience of COVID-19, there is scope for the ACCC to better facilitate and perhaps encourage industry solutions to tackle these issues.

Corporate Australia is increasingly implementing measures to mitigate risks associated with climate change. Scrutiny from institutional investors, regulators and the community has focused attention on climate risk and strategies to transition to a net zero emissions economy by 2050. That goal is required to limit global warming to 'well below 2C' in accordance with targets outlined in the Paris Agreement.

But what role is competition law playing in that process? Are concerns for business about the risk of collaborating with competitors creating a barrier to innovate and respond to the threat of climate change and to capture relevant opportunities?

International competition regulators are beginning to engage more explicitly with that question – articulating the interplay between competition law and sustainability initiatives. While the Australian Competition and Consumer Commission (ACCC) has considered sustainability related issues from time to time, it has not provided coherent overarching guidance to business.

Competition law should not act as a roadblock to action on climate change. This year parts of the economy rapidly responded to the economic threat of COVID-19 by turning from competition to co-operation. The ACCC assisted with a program of urgent interim authorisations. Unlike the unexpected impact of COVID-19, climate change is an evolving threat. However, much like the COVID-19 emergency, businesses need to recognise possible competition law risks as they take steps to respond.

Sustainability and competition law – what's the issue?

Sustainability issues, including responding to climate change, are global threats that businesses and governments cannot tackle alone. The issues demand a collective response.

In the context of COVID-19, the Chair of the ACCC, Rod Sims, explained that where there is 'a common enemy to fight for the nation’s survival, and so a sense of national purpose, co-ordination is both efficient and carries little or no downside'. These words resonate in terms of climate risk.

Business and industry groups are looking to implement sustainability related strategies including:

  • Industry commitments to sustainability-related standards (that exceed government standards).
  • Agreements about products or packaging (such as packaging size, weight or recycled content).
  • Supply chain restrictions (including not dealing with businesses that have unsustainable practices).
  • Information sharing (for example new production processes).
  • Joint procurement initiatives (such as underwriting large-scale renewable energy developments).
  • Collaborative R&D initiatives (in areas such as developing green hydrogen technology).

Industry responses, however, create risk of serious forms of anticompetitive conduct like cartel arrangements. The legal position remains that, absent a relevant exemption, defence or authorisation, the following types of arrangements or understandings between competitors are a criminal offence:

  • Price Fixing
  • Dividing or allocating customers, suppliers or territories
  • Rigging bids
  • Restricting the production, supply or acquisition of goods / services.

These are strictly prohibited under the Competition and Consumer Act, regardless of whether the purpose of the parties involved is to drive efficiency or innovation, or that the arrangements are likely to have a pro-competitive (or competitively neutral) impact. While competition lawyers are adept at structuring arrangements to fall within the limited defences or assist to apply for authorisation from the ACCC, this can be time-consuming, costly, and require a structure that is not commercially optimal.

At various times competition regulators around the world have investigated agreements seemingly directed at achieving sustainability focused outcomes. Examples include agreements between competitors to limit deforestation or introduce stricter vehicle emissions standards. In Australia, the ACCC investigated and brought enforcement action regarding an agreement to transition detergent products from standard to ultra-concentrates. That agreement emerged from a proposed industry sustainability initiative which canvassed benefits including reduced packaging and transport resources.

Regulators will need to remain vigilant about the risk of sustainability agreements being used to disguise anticompetitive conduct (so-called 'cartel greenwashing'). Equally, however, it is important to recognise that coordination can eliminate the competitive disincentives of being first in the sector to make more sustainable and often more costly choices – the 'first mover' risk. It also has the potential to deliver more efficient and innovative solutions, and create larger-scale impact compared to a business acting alone.

What's being done globally to encourage sustainability agreements?

Regulators are beginning to recognise the need to ensure competition laws do not form a roadblock to appropriate collective action. They are also debating options to encourage sustainability initiatives:

  • In July 2020 the Dutch regulator, the Netherlands Authority for Consumers and Markets (ACM), issued draft guidelines regarding sustainability agreements. The Guidelines provide clarity around the types of agreements that are already allowed, a new approach in the way the ACM proposes to weigh up benefits compared to disadvantages, and the steps the ACM will take to help parties.
  • In September 2020, the Hellenic Competition Commission published a series of proposals it is considering to assist the Greek economy to address climate risk. This includes better aligning competition laws with broader legal norms regarding sustainability, offering advice (possibly with other agencies) about sustainability-related initiatives, and potentially creating a competition sustainability 'sandbox' to allow business to experiment with new formats or initiatives.

The current strategic objectives of the UK regulator, the Competition and Markets Authority, include climate and supporting the transition to a low carbon economy. The European Commission is also reviewing its horizontal block exemption regulations, which has raised the need for guidance about sustainability in the context of Europe's 'Green Deal'. Commissioner Vestager has recognised that competition policy should help business to create sustainable markets. This month the Commissioner also announced a review into how EU competition policy can best support the Green Deal, acknowledging competition law will not lead the way in greening Europe, but that it 'has to do its bit'.

What about Australia – what's been the response?

Throughout the COVID-19 pandemic, the ACCC has acted swiftly in response to the 'common enemy' by authorising coordination between competitors across various industries. Action has focused on protecting supply of essential goods, services, medicines and equipment, and facilitating hardship relief.

We are yet to see a detailed response or guidance from the ACCC about the threat of climate change and the role of competition law. That is not to say the ACCC has failed to take any action. It has:

  • Brought enforcement action regarding environmental claims – eg. advertising regarding organic and free range products, and claims around biodegradable and flushable products. It has also issued guidance regarding 'green marketing' advertising claims.
  • Authorised conduct that may breach the Act. This typically involves the ACCC weighing public benefits and detriments. From time to time it has authorised conduct on the basis of environmental benefits. This includes arrangements between competitors to impose levies for the environmentally friendly disposal of harmful wastes such as agricultural chemicals, paint and refrigerant gas. Recently, it authorised a national scheme for expired batteries that will generate significant environmental benefits by directing used batteries away from landfill.

While these actions are important steps, they are effectively 'business as usual'. The ACCC is yet to deliver clear or coherent guidance on the interplay between competition policy and sustainability more generally. The ACCC turned itself upside down to assist businesses to shape authorisation applications in the context of COVID-19 and then granted interim authorisations in as little as 1-2 days. That proactive and encouraging response is perhaps something that could be a precedent for how the ACCC can help ensure competition law doesn't discourage important collective action to tackle climate risk.

Considering the authorisation process can be prohibitively time-consuming and costly, there is also a question about what regulators like the ACCC can do to not just authorise collective action directed at climate change, but even perhaps to encourage it?

One option could involve using the ACCC's class exemption power. Since late 2017 the ACCC has had the ability to issue class exemptions that identify conduct to which parts of our competition laws do not apply. That process avoids the need for individual authorisations and offers an effective 'safe harbour'.

So far, the ACCC is yet to issue any class exemptions. Perhaps sustainability agreements and action on climate change are a fitting place to start – where the ACCC not only authorises action, but encourages business to find solutions to this common challenge. The Report that recommended the ACCC be given such a power said class exemptions "…may also play a role in educating and informing business about the types of conduct that do not raise competition concerns and those that do".

Such an approach could give business comfort that competition law is supporting their initiatives to mitigate climate risk.

Read further insights from our  Climate Risk Governance and broader Responsible Business team.

Please reach out to a member of our Competition, Risk & Regulatory or Climate Risk Governance teams if you would like to discuss these issues and how they may apply to you.