The ACCC recently published a draft guide for businesses on sustainability collaborations or agreements (Guide), which is open for consultation until 26 July 2024. Like other competition authorities globally, the ACCC has published the Guide to encourage joint sustainability initiatives by explaining when they might or might not be compatible with competition law or qualify for an exemption. The Guide also includes a new streamlined process for granting an exemption more quickly in certain cases. We have explained our 7 key takeaways for business in a separate update available here.
The Guide does not address some of the more difficult legal issues involved in applying existing competition law to sustainability agreements, or explain when the ACCC might or might not prioritise cases for enforcement. It also does not identify when the ACCC can and should impose conditions as part of the exemption process to enhance sustainability outcomes.
While this is not surprising, given the broad audience the Guide is intended for, this update considers these issues and the alternative approaches taken by the European Commission’s updated Horizontal Guidelines issued in July 2023 (EU Guidelines) and the UK Competition and Markets Authority’s Green Agreements Guidance published in October 2023 (UK Guidance).
What are sustainability agreements?
Sustainability agreements provide for collaboration between businesses to achieve a sustainability goal that would not have otherwise occurred, or would have occurred more slowly, or at a lesser scale without collaboration.
One way to define relevant sustainability goals is by reference to the 17 goals of the 2030 Agenda for Sustainable Development, which Australia signed up to in 2015. They relate not only to the natural environment (eg climate action – no 13), but also society (eg decent work and economic growth – no 8), and the intersection between the natural environment and our daily lives (eg clean water and sanitation – no 6).
Due to the scale, complexity and urgency of these challenges, collaboration between businesses within and across sectors has been promoted as a tool for delivering these goals by 2030. Collaboration may be needed to incentivise the uptake of more sustainable but more costly inputs and methods (to overcome the ‘first mover disadvantage’), to achieve the necessary economies of scale to deliver sustainability outcomes more efficiently and sooner, or to share knowledge and pool resources to solve problems and innovate.
What is the problem?
Sustainability agreements involving collaboration are at risk of infringing competition law. For example:
- agreements between competitors to jointly tender for or finance a technology or infrastructure project such as carbon capture and storage may involve cartel conduct;
- agreements between manufacturers or service providers to withdraw or phase out non-sustainable inputs or processes may trigger the prohibition against anti-competitive agreements;
- businesses working together to develop an industry standard to market certain sustainable products to consumers might also be anti-competitive; and
- a manufacturer requiring its logistics network to use electric vehicles or its retailers to use environmentally friendly packaging might involve vertical restraints or exclusive dealing.
To address these concerns, sustainability guidance has proliferated globally over the last few years, with two notable examples being the EC Guidelines and CMA Guidance.
It is encouraging that the ACCC has now published a draft Guide for consultation. The Guide gives shape to the Chair’s observation last year that there is a need to ensure the law in Australia is not operating as ‘an unnecessary barrier’ to sustainability objectives, and her confirmation in March that guidance will be issued ‘recognising the public benefit of facilitating the transition and improvements in sustainability’. The Deputy Chair made similar statements, citing a ‘clear legal mandate to take sustainability benefits into account as part of [the exemptions] process’.
Further to the draft Guide, the ACCC might consider other ways to assist and encourage businesses wanting to enter into sustainability agreements. As explained below, the EC and CMA examples provide valuable guidance for the ACCC in developing its approach.
The Guide’s approach to exemptions
As the Guide explains, where an agreement might infringe competition law parties can seek an exemption from the ACCC using the authorisations, notifications or class exemptions processes. The Guide focuses on the authorisations process and should be read together with the existing Guidelines for Authorisation of Conduct (non-merger) published in December 2022 (Authorisation Guidelines).
There are differences between each process, but the core outcome is the same: the ACCC may confer protection if satisfied either that the agreement does not raise competition concerns to the relevant standard, or if there is a ‘net public benefit’. The first option requires the ACCC to be satisfied that the conduct would not substantially lessening competition. Alternatively, the ACCC can authorise agreements that result in a public benefit which outweighs any harm to competition or any other public detriment.
On its face, the net public benefits test is a useful tool to support sustainability agreements, and the ACCC has referred in the Guide to a number of cases in which it has granted authorisation for agreements that involve sustainability related public benefits.
However, there are still 4 issues that warrant further clarification.
(1) Public benefits
Despite its breadth, public benefits are often conceived of in terms of economic efficiency. Both the Guide and the Authorisation Guidelines refer to the seminal case, decided nearly 50 years ago, where the Tribunal stated that public benefits can include:
‘anything of value to the community generally, any contribution to the aims pursued by the society including as one of its principal elements (in the context of trade practices legislation) the achievement of the economic goals of efficiency and progress’ (emphasis added).[1]
The Authorisation Guidelines also state that ‘most public benefits accepted by the ACCC (including, for example, those initially framed by applicants as being social and/or environmental benefits) can be attributed to improvements in economic efficiency’.
Of course, economic efficiency is capable of capturing a wide range of sustainability benefits: a group of smaller producers may collectively bargain to share and reduce the transaction costs involved in upgrading to more environmentally friendly technologies; businesses may create a positive externality by training a local workforce, or reduce a negative externality by adopting new practices that reduce pollution; an industry group may reduce information asymmetries by creating a standard that provides information to consumers about recycled products; or energy producers may collaborate to achieve the necessary scale for a regional carbon storage facility.
However, the economic reframing of sustainability benefits is not strictly necessary and risks reducing their salience, particularly when they are weighed against anti-competitive effects. Economic efficiency is also only one factor relevant to the ACCC’s overall goal of achieving modern, well-functioning markets that work for consumers. It is therefore worth clarifying whether the ACCC is prepared to accept all types of sustainability benefits on their own merit. If so, the Guide or future guidance could be updated to reflect that.
(2) Public detriments
The identified sustainability benefits must also outweigh any public detriments, which are also explained by reference to efficiency as:
‘any impairment to the community generally, any harm or damage to the aims pursued by the society including as one of its principal elements the achievement of the goal of economic efficiency’ (emphasis added).[2]
In particular, public detriment may be constituted by any degree of harm to competition, even if it is not substantial — it can therefore be of a lesser degree than what is required for the conduct to amount to an infringement. This means the decks are stacked against the public benefits test, particularly when the ACCC has not been able to grant the exemption on the basis that it is satisfied the agreement does not substantially lessen competition.
As explained in the Guide, in most cases the identifiable public detriments will be those that result from a lessening of competition. Businesses will therefore need to grapple with how sustainability related public benefits can be explained and properly quantified, in a way that can be measured against various types of harm to competition.
(3) Weighing benefits and detriments
Both the Guide and the Authorisation Guidelines state that the ACCC will consider whether public benefits are of value to the community generally and how much weight society attaches to them. The ACCC will give more weight to benefits which flow through to the broader community and are sustained over time.
However, there is still limited insight into how the ACCC undertakes this assessment when there are material public detriments, and prior cases suggest that it can be difficult for accepted sustainability benefits to outweigh an identifiable risk of harm to competition.
For example, the Guide states that the ACCC previously accepted that a reduction in greenhouse gas emissions is a public benefit of considerable weight. However, questions like how much of a reduction is needed, how quickly it must occur, and how much certainty must there be will still need to be assessed on a case by case basis.
Also, this example is cited from the recent Origin Energy decision, which presents a mixed picture:
- First, the public benefits accepted by the ACCC and the weight attributed to them hinged on the fact that Origin Energy is one of Australia’s largest emitters: because of its size, the reduction of its emissions is a material public benefit in and of itself, and would also have a material impact on the national position, which constitutes an additional public benefit. Even then the assessment was finely balanced because the ACCC also found material public detriments in the form of potential anti-competitive effects.
- Second, the parties had relied on 6 categories of claimed public benefits, but were not able to substantiate to the ACCC’s satisfaction that 4 of those categories were likely to occur to as a result of the acquisition.
Overall, the existence of even considerable sustainability benefits that are accepted by the ACCC will not always result in the net public benefits needed for an exemption. Parties should therefore invest in evidencing either quantitatively or qualitatively the positive impacts of the agreement, their timing and scope, and minimise to the extent possible any anti-competitive effects.
(4) Conditions and undertakings
The Guide does not address when the ACCC will require conditions as part of the grant of authorisation for sustainability agreements, and what those conditions might require.
The Authorisation Guidelines state that the ACCC will not substantially redraft or redesign proposed conduct, but will impose conditions to enhance or increase the likelihood of benefits, or reduce or limit the likelihood of detriments. The ACCC typically uses court-enforceable undertakings to require parties to refrain from or engage in certain conduct as a condition of authorisation. However, the guidance on undertakings is very old, published in 2014, and does not elaborate on how they may be used to support public benefits.
The Guide does refer to two previous cases in which conditions were imposed: the Recycle My Mattress product stewardship scheme and the supermarkets Soft Plastics Taskforce. Conditions were also imposed in the Origin Energy decision. In all 3 cases the conditions were designed to increase the likelihood of the claimed public benefits occurring through public reporting, transparency and post-facto assessment of conduct, but did not seek to enhance those benefits or increase their weight and impact. The ACCC went a step further in the Recycle My Mattress case, requiring an independent review on the success of the scheme and recommendations for improvement, but this was only after 4 years.
The ACCC appears more willing to impose substantial requirements to mitigate the risk of harm to competition, including, as it did in the Origin Energy case, significant measures like the separation of business structures to avoid self-preferencing. As Ampol submitted in that case, the ACCC could have done more to enhance the public benefits claimed by requiring a firm commitment to build a certain quantity of new generation and storage assets by 2033, which might better support the net-zero transformation.
Particularly in cases where a sustainability agreement involves risks to competition, parties and the ACCC could therefore consider conditions to enhance (and increase the weight of) claimed public benefits, for example, by adjusting the quantity or time by which the benefits will be achieved and specifying consequences if they are not.
So, what other approaches could the ACCC take?
As explained below, there are 4 key features of the guidance published by the EC and CMA that the ACCC could consider in furthering its approach.
(1) Sustainability goals and types of agreements
There are different approaches to defining sustainability agreements and the types of goals that are endorsed. The EC and CMA take different approaches, but both place specific emphasis on a particular type of agreement that they are seeking to encourage.
The EC has taken a broad approach, covering all types of sustainable development goals, and focuses on encouraging sustainability standardisation agreements: typically, private initiatives that replace non-sustainable inputs, processes and products with sustainable ones, including industry body codes of conduct and certified quality marks or labels.
In contrast, the CMA’s guidance is limited to ‘environmental sustainability agreements’, relating to the natural environment and specifically excluding other societal objectives. The CMA also specifically encourages ‘climate change agreements’, a sub-set of environmental sustainability agreements, by adopting a more favourable approach to such agreements on that basis that there is a more urgent need for businesses to transition to more climate friendly practices.
The ACCC could also consider whether there is a need for it to encourage certain types of agreements. Providing more specific and in-depth guidance sends a stronger signal to the market, and monitoring any increase in the particular agreements is a way to test whether the guidance is effective in practice.
(2) Developing the law
The EC has developed its approach to assessing the competition impacts of sustainability agreements in 2 ways:
- for all types of sustainability agreements, the EC has clarified its approach to ‘by object’ infringements, expressly excluding cases where the parties substantiate that the main object is the pursuit of a sustainability objective;
- for ‘standardisation agreements’, it has also changed its approach to the ‘by effects’ test by creating a new ‘soft safe harbour’ within which the agreement would not be construed as having the required effects to amount to an infringement.
In addition, both the EC and CMA have significantly enhanced their approaches to applying the statutory exemption. Like Australia and other regimes, the EU and UK exemption is a benefits test. Traditionally, that assessment focused on benefits accruing to direct consumers. Now, both the EC and CMA accept what are referred to as collective benefits or wider sustainability and environmental benefits. The CMA also goes further, by setting a more permissive approach for climate change agreements, which in practice is designed to increase the weight that can be attributed to climate change related benefits.
Even though Australia already has a broad public benefits test that enables sustainability benefits that accrue to Australians generally to be taken into account, there is room to consider adapting the EU and UK approaches. This could include identifying how certain legal criteria contained in the relevant prohibitions will be applied to sustainability agreements, as the EU has done, or developing approaches to enhance the comparative weight of certain types of sustainability benefits, as the CMA has done.
(3) Protection from enforcement
The Guide could also go further in explaining how the ACCC will prioritise cases involving sustainability agreements for investigation or providing a commitment to not take enforcement action in certain limited circumstances (without formally granting an exemption). This would provide a materially higher level of comfort and encouragement for sustainability agreements.
The EC provides some protection from enforcement through the informal guidance letter process, which has now been extended to include sustainability agreements. The process enables the EC to review and provide guidance to the parties about a particular sustainability agreement. The EC is not precluded from later investigating and taking enforcement action against that agreement. However, if it does, the EC has promised to take into account its prior assessment and, assuming the agreement is consistent with that assessment, has also promised not to impose a penalty.
The CMA has made a stronger commitment to not take enforcement action in relation to an environmental sustainability agreement if it clearly corresponds to the principles set out in the guidance. It has also commenced a new ‘open door’ policy, where businesses can approach the CMA for an informal assessment of a proposed agreement. If the CMA endorses an agreement it does not expect to take enforcement action unless there is a material change of circumstance (for example, because the anticompetitive effects are materially greater than expected, or because the cumulative effects of the agreements result in unexpected anticompetitive effects). Even then, if the CMA does later investigate an agreement and finds an infringement, the CMA would not issue a penalty or seek to disqualify directors.
In contrast, the ACCC has sought to increase the efficiency of the authorisation process through a new streamlined procedure. In cases where the ACCC decides it is appropriate to do so — for example, if there do not appear to be any significant detriments — it will remove one stage of public consultations from the usual procedure and proceed directly to a draft determination. Therefore, in lieu of any statement about enforcement, this development could encourage increased use of the authorisation process from parties wanting formal comfort that they are not at risk of enforcement.
(4) Influencing outcomes
The ACCC could also use the Guide as an opportunity to influence outcomes achieved by sustainability agreements.
In contrast to the authorisation process, the EC’s informal guidance letter process is designed to assist parties in cases where there is genuine uncertainty about whether an agreement is compatible with competition law, including whether it is likely to benefit from the exemption. Parties can re-structure their agreement in accordance with the EC’s guidance so that it is compatible with competition law. Therefore, in providing guidance on whether particular sustainability agreements benefit from the exemption, the EC has the opportunity directly to influence sustainability outcomes, in particular, where parties identify collective benefits as the basis for relying on the exemption.
The CMA has gone further with its new open door policy. It is promoted as a way for businesses to obtain the CMA’s position on whether or not the proposed agreement is compatible with competition law, and to work collaboratively with the CMA to resolve any concerns. The review is ‘light touch’ and informal, and not a binary assessment of compliance or non-compliance. The CMA will indicate any concerns and possible adjustments, working with the parties to achieve a solution consistent with its guidance. This is a significant change for the UK regime, and an example of a competition agency working with the scope of its administrative discretion to help address a policy problem.
The ACCC is well placed to use the authorisations process and its associated administrative powers such as conditions and undertakings in the same way. However, this will require the ACCC to think differently about its role and the nature and value of sustainability goals.
Conclusion
The Treasurer’s recent Statement of Expectations for the ACCC asks it to support the Government in ‘building a stronger, more productive, more inclusive economy’. There is a clear mandate for the ACCC to recognise sustainability and environmental sustainability in particular as priority goals for well-functioning markets.
The Guide, or future guidance, could therefore improve on the existing position by seeking to encourage all types of sustainability agreements where they are compatible with competition law, not only environmental sustainability agreements. This includes developing the ACCC’s approach to applying the law and its enforcement discretion, to provide a greater level of comfort for parties genuinely pursuing sustainability goals. The ACCC could also modernise the net public benefits test by explicitly recognising the value of sustainability goals on their own merit and make more of the opportunity to use the process to enhance sustainability outcomes.
The CMA has already issued 2 decisions under the Guidance: to the Fairtrade Foundation and WWF-UK. We look forward to the outcome of the ACCC’s consultation, which closes on 26 July, and working with businesses in applying the Guide to future sustainability initiatives.
[1] Queensland Co-operative Milling Association Ltd (1976) ATPR 40-012 at 17,242.
[2] Re 7-Eleven Stores (1994) ATPR 41-357 at 42,683.
