Sustainability Practices Through the Lens of Competition Law

Introduction

Sustainability agreements[1] have been gaining traction across the globe requiring competition law practices to provide clear, concise advice to their clients. We aim to provide an overview of how ESG[2] processes are assessed under Turkish competition law and in other jurisdictions.

Sustainability Agreements under Turkish Competition Law

The Turkish Competition Authority does not provide direct guidance on the assessment of ESG processes under Law No. 4054 on the Protection of Competition (“Law No. 4054”). Therefore, ESG agreements are assessed in accordance with the guidelines[3] and general principles it has issued.

In Türkiye, agreements between competitors are examined within the scope of Article 4, Law No. 4054. If an agreement between competitors has, or is likely to have, a negative impact on at least one parameter, including price, production quantity, product quality, product diversity or innovation, it will be deemed restrictive of competition.

If an agreement is found to be restrictive, the Competition Board determines its positive effects and whether they offset the negative effects. If it decides the positive effects outweigh the negative, it grants exemption to these agreements for either a defined period or indefinitely.[4]

For example, the Competition Board assessed an agreement between detergent manufacturers, both members of the Soap and Detergent Industrialists’ Association, which aimed to reduce chemical emissions and save energy by raising consumer awareness of the damaging use of concentrated detergents. The Board viewed the agreement as potentially restrictive of competition under price and product diversity parameters; however it subsequently decided that the positive effects outweighed the potential negative effects and granted an exemption. The Board came to the view that as environmental pollution is a social cost, a consumer benefit can be achieved by reducing this cost.[5]

The Board also assessed an agreement between iron and steel producers regarding the disposal and recovery of waste generated by production. It stated that agreements regarding the disposal or recovery of waste that threaten the environment and human health are allowed, and granted an exemption to companies legally obliged to do so, allowing them to cooperate for this purpose.[6]

The Board also granted an exemption for tire manufacturers to join together, under the umbrella of the Tire Industrialists Association, which would allow them to fulfil legal obligations for the recycling of end-of-life tires.[7]

The Board has therefore demonstrated a moderate approach to sustainability agreements, but is not always willing to grant exemptions under Law No. 4054. On the contrary, it may subject these agreements to detailed examination to ensure they do not result in an anti-competitive outcome. For this reason, it is imperative that competitor businesses conduct careful analysis before entering into such agreements and take necessary measures to eliminate risks.[8]

Sustainability Agreements in the European Union

In its recently revised guidelines on horizontal co-operation agreements (“EU Horizontal Guidelines”), the European Commission included guidance on sustainability agreements. These state that agreements potentially restrictive of competition cannot be exempted from the application of competition law by mere reference to the sustainability objective. Moreover, sustainability agreements are not an independent class of horizontal co-operation agreement.

The EU Horizontal Guidelines include only four examples of sustainability agreements exempted from application of the law.[9] In addition, sustainability standardization agreements[10], a sub-category of sustainability agreements, are unlikely to restrict competition if they meet certain conditions.[11]

Member states have also taken their own approaches. For example, the Dutch Competition Authority (“ACM”) recently assessed an agreement between retailers and producers on the breeding and purchase of broiler chickens (known as “Chicken of Tomorrow”) producers would aim[12] to raise chickens under more humane conditions; and participating supermarkets would only purchase chickens bred according to these standards. The ACM stated that the agreement went beyond regulatory obligations and restricted consumers’ freedom to buy conventionally produced chickens.[13 ]It then considered whether the agreement’s positive effects outweighed the negative.

While consumers are willing to pay a little more for animal welfare, the ACM viewed the additional costs associated with the Chicken of Tomorrow project as outweighing the positive impacts on animal welfare, the environment and public health. While there are products labeled “Better Life”, for instance, they do not have a large market share and consumers are therefore unaware of their benefits.[14]

The ACM decided that the “Chicken of Tomorrow” project restricts competition and cannot be exempted; it also noted that it had recently advised producers how to comply with competition law in this agreement.[15]

The French Competition Authority has also stated that sustainability agreements can be in breach of competition law, and that companies may argue for compliance through an “open door policy”. [16]

The European Commission addressed sustainability agreements arising from M&A transactions in its summary of sustainability and merger control where it confirms it will work to achieve the objectives of the Green Deal.

The relevant principles can be summarized as follows:

Market definition: Consumer preference for sustainable products, separate markets for which the Commission notes it has defined in previous decisions, will be considered.

Efficiency gains: Consideration of environmental and social efficiency gains (e.g. reduction in pollution or use of fewer raw materials) in the affected market only.

[1] The European Commission defines sustainability agreements broadly as the consumption of resources by present members of society to the detriment of future generations. This includes issues such as the prevention of climate change and human and animal rights. Guidelines on the applicability of Article 101 of the TFEU to horizontal co- operation agreements (“EU Horizontal Guidelines”), para 517.

[2] ESG, which is a combination of the English words environmental, social and governance, can be used to describe a company’s non-financial sustainability practices.

[3] For example, a sustainability agreement designed as a co-production agreement will be assessed by utilizing the disclosures on co-production agreements.

[4] The balancing exercise between negative and positive effects is undertaken according to Article 5, Law No. 4054, which states that agreements that may restrict competition must fulfil all of the following three conditions: (a) new developments and improvements or economic or technical improvements in the production or distribution of goods or the provision of services; (b) the consumer benefits; (c) competition is not eliminated in a significant portion of the relevant market and no more restrictions are foreseen than are compulsory to achieve the objectives listed in (a) and (b).

[5] Detergent Manufacturers decision (15.07.2009, 09-33/727-167)

[6] Steel Producers decision (26.08.2009, 09-39/946-233).

[7] Tire Industrialists Association decision (27.10.2010, 10-67/1422-538).

[8] EU Horizontal Guidelines, para. 523. For example, a co- production agreement with a sustainability objective will be assessed by considering both the principles on co- production agreements and the Guidelines’ statements on sustainability.

[9] (i) Agreements to comply only with obligations or prohibitions strictly outlined by international treaties,
laws etc. (e.g. no child labor); (ii) agreements unrelated to economic activity and arising only from internal company operations; (iii) the creation of databases providing general information about providers (e.g. providers of labor law); and (iv) industry awareness campaigns (not including co- promotion of products).

[10] EU Horizontal Guidelines, para. 537.

[11] EU Horizontal Guidelines, para. 549: (i) The standard-setting process should be transparent and open to all competitors; (ii) Sustainability standards should only be voluntary and should not impose compliance obligations on companies that do not wish to participate; (iii) The agreement can establish a floor for sustainability standards, but not a ceiling, which means that companies should be free to adopt higher sustainability standards; (iv) Parties should not exchange commercially sensitive information that is not objectively necessary and proportionate to the development, implementation, adoption or modification of the standard; (v) Non-discriminatory access to the outcome of the standard-setting process, including access to any logos or other marketing assets for companies that comply with the standards, should be guaranteed; and (vi) Sustainability standards should not lead to an increase in the price or decrease in the quality of the relevant products, and the combined market share of participating companies should not exceed 20% of the relevant market.

[12] E.g. chickens allowed more movement and therefore requiring fewer antibiotics; reduction in the number of chickens per square meter; chickens provided at least six consecutive hours of darkness improving circadian rhythm and reducing likelihood of injury. See ACM summary of Chicken of Tomorrow, p. 2.

[13] ACM summary of Chicken of Tomorrow, p. 4.

[14] ACM summary of Chicken of Tomorrow, p. 6.

[15] ACM summary of Chicken of Tomorrow, p. 8.

[16] https://www.autoritedelaconcurrence.fr/en/page-riche/developpement-durable-et-concurrence.