Sustainability Agreements in Focus

Acknowledging that competition law should not hinder legitimate collaboration between businesses necessary for the promotion of environmental sustainability and related objectives, competition regulators around the world, including those in Asia Pacific (APAC), have issued specific guidelines on how businesses may engage in sustainability collaborations in a competition law-compliant manner.

In a previous briefing, our UK Competition, Trade and Foreign Investment team discussed the Green Agreements Guidance published by the Competition and Markets Authority, as well as similar guidelines issued by competition regulators in the European Union.

In this briefing, we discuss what ‘sustainability agreements’ are, competition law risks that may arise from sustainability collaborations and how businesses can mitigate the relevant risks in the APAC context, drawing on the sustainability guidelines issued by APAC regulators to date.

1. What are ‘sustainability agreements’?

‘Sustainability agreements’ broadly refer to agreements, collaborations or understanding between businesses which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment, or otherwise pursue sustainability objectives including, but not limited to, tackling climate change (e.g. through the reduction of greenhouse gas emissions), reducing pollution, limiting the use of natural resources and promoting biodiversity preservation.

2. How sustainability agreements may be scrutinised under competition law

As a starting point, in the absence of a specific exemption, sustainability agreements are subject to scrutiny based on the usual competition law considerations, irrespective of their underlying objectives or purposes.

Agreements that are anti-competitive by object or illegal per se

Depending on the applicable legal tests in each relevant jurisdiction in APAC, sustainability agreements which have the object (or purpose) of restricting competition in a market, or involve any conduct that is considered illegal per se under the relevant legal framework, will be considered unlawful in any given competition law regime.  These most commonly include agreements or coordination involving price fixing, market sharing, output restrictions, bid rigging, and the exchange of competitively sensitive information.  Examples of sustainability agreements that are likely to be considered anti-competitive by object or per se illegal include:

• competitors agreeing on the pricing for products that meet an agreed environmental standard; and
• competitors agreeing to limit their production or sale of a particular product, or their respective research and development capabilities, in order to meet or exceed a sustainability target.

A sustainability agreement could be deemed illegal if it involves any anti-competitive agreement, even where other aspects of the collaboration are not restrictive of competition.

Agreements that are anti-competitive by effect

Where a sustainability agreement is not found to have an anti-competitive object, it may nevertheless be found to be anti-competitive if it has an adverse effect on competition in the market.  The effects of a sustainability agreement are assessed on a case-by-case basis and will depend on a range of factors including, but not limited to, the respective market positions of the parties (which may be assessed based on the respective market shares of the parties, barriers to entry to the market, market concentration, the existence of any countervailing power of buyers / suppliers, etc.), the proportion of the market affected by the agreement, the extent to which the agreement constrains the freedom of the parties, and whether the agreement is likely to lead to an appreciable increase in price or reduction in output, product variety, quality or innovation.

Agreements that may be exempt or otherwise justified under applicable laws

Notwithstanding the above, in certain jurisdictions, restrictions imposed as part of a sustainability agreement may be exempt from scrutiny or otherwise justified under applicable laws.  Taking Hong Kong as an example:

• A restriction of competition may be permitted where it is ‘ancillary’ to the main sustainability agreement, which is not itself anti-competitive.  An ancillary restriction must be directly related to and objectively necessary for the implementation of, and proportionate to, the objectives of the main agreement.  Any argument that a restriction is ‘ancillary’ would succeed only where it would be impossible to carry out the agreement absent the restriction in question, considering its objectives and the legal and economic context.  The concept should therefore be interpreted narrowly.
• An agreement that has the object or effect of harming competition, but generates pro-competitive benefits in terms of the improvement in production or distribution, and/or the promotion of technical and economic progress, may be justified if it meets the cumulative conditions provided under section 1 of Schedule 1 to the Hong Kong Competition Ordinance. That said:
• To date the Hong Kong Competition Commission has not issued any guidance on whether the achievement of green objectives would count as an economic efficiency in respect of which section 1 of Schedule 1 may apply.
• Practically speaking, it would be extremely difficult to justify any agreement that is anti-competitive by object on grounds of efficiencies.
• In any event, in order to justify any anti-competitive agreement on grounds of efficiencies, parties should be prepared to demonstrate the following:
• sufficient evidence of any claimed benefits (such as the reduction of greenhouse gas emissions) (especially where the benefits are expected to only materialise in future or over a relatively long period of time);
• that they have thoroughly considered the viability of any less restrictive alternatives to the intended collaboration that may be no less effective in achieving the claimed benefits (such as granting licences to intellectual property in lieu of joint research and development);
• whether the claimed benefits can be passed on to direct and indirect consumers of the products / services in the relevant market, and that those benefits outweigh the actual or likely harm on competition; and
• there remains meaningful competition in the relevant market affected by the agreement, for example where there is still scope for businesses to compete on the main parameters such as prices and quality, or where the elimination of competition is only for a limited period of time.
• A sustainability agreement may benefit from other exemptions or justifications prescribed by law, including where the agreement is made for the purpose of complying with a legal requirement or for the performance of services entrusted by the government, or where turnovers of the parties involved fall below the de minimis threshold, etc., all of which would require a case-by-case assessment.

3. Sustainability-related competition law developments in APAC

As at the date of writing, this year (2024):

• the Competition and Consumer Commission of Singapore (CCCS) published the Guidance Note on Business Collaborations pursuing Environmental Sustainability Objectives;
• the Japan Fair Trade Commission (JFTC) published the revised Guidelines Concerning the Activities of Enterprises, etc. Toward the Realization of a Green Society under the Antimonopoly Act;
• the Australian Competition and Consumer Commission (ACCC) published the Consultation Draft on Sustainability Collaborations and Australian Competition Law: A guide for business.  The final guidelines are expected to be published in late-2024; and
• the Korea Fair Trade Commission issued its draft sustainability guidelines (as at the date of writing, available only in Korean), which were open for public consultation until 20 November 2024.

Generally speaking, the guidelines provide guidance to businesses on how sustainability collaborations will generally be assessed, and how they may be implemented in a way that is compliant with applicable competition laws.

For example, the CCCS and JFTC’s guidelines have helpfully provided examples of sustainability agreements that:

• (i) are unlikely to give rise to competition concerns;
• (ii) are less likely to give rise to competition concerns, provided that appropriate safeguards have been implemented; and
• (iii) could potentially raise competition concerns.

The JFTC’s guidelines go further to analyse vertical activities (i.e. collaborations between businesses on different levels of a supply chain), exchanges of information, conducts of enterprises with a superior bargaining position, and mergers, in a sustainability context under Japan’s Anti-monopoly Act.

Further, in Singapore, Japan and Australia, there are specific channels through which businesses may seek clarifications on whether a proposed sustainable collaboration may be permitted:

• In Singapore, a business may notify any proposed collaboration to the CCCS for guidance or decision as to whether it would be likely to infringe, or has infringed, the prohibition of anti-competitive agreements under Singaporean law.
• In Japan, a business may seek consultation with the JFTC via one of two channels: (i) the ‘Prior Consultation System’, which is a formal consultation process under which the JFTC will provide a binding written response to the applicant; and (ii) the ‘General Consultation’ system, which is an informal consultation process which will allow an applicant to obtain an informal response from the JFTC.
• In Australia, a business may seek an exemption from the ACCC through the ‘authorisation’ procedure, which applies to various business conduct (and not only sustainability agreements).

In other jurisdictions in APAC (such as Hong Kong, Mainland China and Taiwan) which have not issued any guidelines specific to sustainability agreement, businesses may still consult the competent authorities on the legality of any proposed agreement or collaboration and modify the proposed arrangements accordingly to mitigate infringement and enforcement risks. 

4. Concluding remarks

While not all competition regulators in APAC have issued sustainability-related guidelines, businesses should be mindful that sustainability agreements remain subject to competition law scrutiny.

To mitigate infringement and enforcement risks, businesses should ascertain whether any proposed agreement, collaboration or exchange of information between them and their competitors or business partners could give rise to potential competition law risks, and if so, whether they may be exempt or otherwise justified, and how the proposed arrangement may be modified to mitigate any infringement and enforcement risks.  Competition law assessments are complex and business teams should escalate any proposals involving competitors (or restrictions agreed with other business partners such as suppliers) for review by their in-house legal teams, supported by competition law experts. 

For more information or guidance, please get in touch with a member of Eversheds Sutherland’s Asia Competition, Trade and Foreign Investment team.