Green shoots: digging into the ACCC's draft guidelines on sustainability collaborations

A focus on the main areas of risk 10 min read

Climate change has been described as a 'defining challenge' for humanity. Climate-related risks, which are already manifesting, include extreme weather events, rising sea levels, human displacement, heat-related illness, more widespread disease and decreased food production. There is also an increasing focus on other environmental sustainability matters such as biodiversity loss as part of the broader ESG movement.

In these circumstances, it is timely that the ACCC has released its draft guide on the interaction between sustainability collaborations and Australian competition law (the Draft Guide).

In this Insight, we dig into the main areas of risk that the ACCC has identified in the Draft Guide and what the key takeaways are for businesses wishing to enter into sustainability collaborations.

Key takeaways

• To address the material risks of climate change, businesses are increasingly entering into sustainability collaborations. However, there remains a certain level of fear and uncertainty around whether such collaborations may contravene Australian competition law. To address that uncertainty, the ACCC has published the Draft Guide.
• In the Draft Guide, the ACCC has confirmed that businesses can have preliminary discussions among themselves about whether to pursue a sustainability collaboration without the need for prior ACCC approval.
• Businesses entering into sustainability collaborations should review the Draft Guide, as it provides an overview of conduct that is unlikely to raise competition law risks and that which is more likely to raise concerns. Where the proposed conduct may raise concerns, care will need to be taken as there are substantial penalties for contravening Australian competition law.
• However, there are certain exemptions under Australian competition law that sustainability collaborations may benefit from—the most common of which is the authorisation process. These processes are likely to become increasingly important as businesses seek to collaborate further to reach environmental goals.

Why the ACCC released this guidance

Businesses are increasingly facing a range of ESG-related risks, including new regulatory obligations, changes in demand from consumers seeking 'greener' products and services, and scrutiny from institutional investors looking for more sustainable assets. In response, many businesses are collaborating to fast-track sustainability initiatives and to mitigate these risks. The ACCC has recognised this change, with Acting Chair of the ACCC, Mick Keogh, recently noting:

'As Australia transforms to a more sustainable economy, there will be instances where businesses seek to work together to achieve better environmental outcomes'.¹

However, where such collaboration occurs between competitors, businesses face the additional risk that their actions may contravene competition laws. A recent paper by the International Chamber of Commerce found that 'fear' and uncertainty around competition law risk is deterring businesses from pursuing sustainable collaborations. This fear is well founded, as competition law risks in relation to sustainability agreements are not theoretical. In both Australia and overseas, competition regulators have already commenced—and succeeded—in cartel investigations related to sustainability agreements between competitors. Two prominent cases in this regard are the 'laundry detergent case' in Australia and the 'AdBlue case' in Europe.

In the laundry detergent case, the ACCC alleged that certain major laundry detergent suppliers had entered into an arrangement to cease supplying standard concentrate laundry detergents, and at the same time, sell ultra concentrate detergent for the same price per wash as the equivalent standard concentrated products. These arrangements would have likely led to more sustainable outcomes, such as a reduction in the amount of packaging (due to the reduced size of ultra concentrate detergent). Nonetheless, the ACCC still commenced these proceedings as it argued that ultra concentrate detergent also offered the detergent suppliers significant cost savings which were not passed on to consumers due to the parties' agreement. Ultimately, Colgate-Palmolive admitted to cartel conduct and agreed to pay a total penalty of $18 million. Woolworths also admitted to being knowingly concerned in relation to the cartel conduct and agreed to pay a penalty of $9 million.

In the AdBlue case, certain European car manufacturers held regular meetings to develop systems for diesel passenger cars to meet legislated EU emissions standards. In the course of those meetings, the parties exchanged commercially sensitive information about the development of technology that eliminated harmful nitrogen oxide emissions from diesel passenger cars known as 'AdBlue'. While this cooperation was likely to result in reduced car emissions in Europe, the European Commission (EC) concluded that the coordinated conduct of these car manufacturers restricted competition in relation to the technical aspects of AdBlue tanks and imposed a fine of €875 million.

Given the success of the ACCC and EC in these cases, and the quantum of the fines in each, it is unsurprising that some businesses may be reluctant to enter into sustainability collaborations. To address this issue, a number of competition authorities have issued guidelines on how competition law will apply in these circumstances. In general terms, these guidelines aim to clarify what will constitute risky conduct from a competition law perspective, and what steps parties can take to mitigate these risks. The Netherlands Authority for Consumers and Markets took the lead in this regard and published its first detailed guidance in July 2020. Since then, a number of other authorities have also issued guidance, such as the EC, the UK's Competition and Markets Authority (CMA), the New Zealand Commerce Commission (NZCC), the Competition and Consumer Commission of Singapore, and France's Competition Authority. The ACCC has now followed this trend in publishing the Draft Guide.

The release of the Draft Guide also reflects the increasing intersection of ESG topics, including environmental sustainability and matters such as anti-competitive conduct. In this regard, there is a growing body of cases brought by strategic litigants that are challenging the way action on climate change is taken, highlighting the potential trade-offs between pursuing 'green' objectives and guarding against associated adverse impacts, including with respect to human rights and other social considerations. It is possible that strategic litigants in the future may expand their focus to other types of adverse impacts, such as where business collaboration on sustainability matters undermines competition and affects consumers.

What does the ACCC mean by 'sustainability collaborations'?

In the Draft Guide, the ACCC defines 'sustainability collaborations' as referring to 'discussions, agreements or other practices amongst businesses which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment'. The ACCC footnotes that principles discussed in the Draft Guide may also apply to other forms of collaboration relating to 'sustainability objectives', but does not clarify what these sustainability objectives refer to.

Interestingly, other authorities have adopted a broader definition of 'sustainability' in their guidelines. For instance, the EC outlines that 'sustainability objectives' are not limited to environmental or climate change concerns, but also encompass initiatives that support economic, environmental and social (including labour and human rights) development. Similarly, the NZ Guidelines provide that while 'the concept is generally associated with environmental protection, it also includes broader aims such as inequality, food security, responsible consumption and labour rights'. The CMA has issued informal guidance on a Fairtrade agreement between certain UK grocery retailers where these retailers committed to either a three- or five-year period to purchase, on an annual basis, additional Fairtrade banana, coffee and/or cocoa products from certain suppliers.

What are the Australian competition law risks for sustainability collaborations?

The first potential risk of sustainability collaboration identified by the ACCC in the Draft Guide is cartel conduct. A cartel occurs when businesses that are competitors or likely competitors agree to act together instead of competing with each other. Cartel conduct is prohibited outright under the Competition and Consumer Act 2010 (Cth) (CCA) and will occur where competitors enter into agreements or arrangements that:

• have the purpose or effect of fixing, controlling or maintaining prices for goods or services supplied or acquired or re-supplied; or
• have the purpose of preventing, restricting or limiting the supply or acquisition of goods or services; or
• have the purpose of allocating customers, suppliers or territories; or
• amount to bid rigging (ie agreeing on bids or whether or not to bid, arrangements for the success or otherwise of a bid, or agreeing on a material component of a bid).

In the Draft Guide, the ACCC also outlines that sustainability collaboration may raise other competition law risks. These risks arise where the relevant conduct has the purpose or effect of substantially lessening competition in a market. Examples of conduct that may have this purpose or effect include:

• anti-competitive contracts, arrangements or understandings: this occurs where two or more businesses (which may or may not be competitors) collaborate on a shared action plan. The ACCC outlined that these types of arrangements are likely to be higher risk where they prevent a business from competing effectively.
• concerted practices: this occurs where two or more businesses cooperate or communicate, but where this cooperation or communication does not quite amount to a contract, arrangement or understanding. The ACCC has outlined that the risk of a party engaging in a concerted practice is higher where the relevant conduct involves the sharing of commercially sensitive information, particularly in relation to price.
• exclusive dealing: this arises where one business imposes restrictions on another business' activities, such as who it can do business with, what business it does and where it does its business. The ACCC outlines in the Draft Guide that this conduct is higher risk where it makes it more difficult for new businesses to start competing, or harder for existing businesses to expand.

Exceptions

The Draft Guide identifies various exceptions in the CCA which, if applicable, would exempt a sustainability collaboration from contravening the prohibitions on cartel conduct or other anti-competitive practices. Importantly, one of the most useful exceptions is the joint venture exception, which applies where:

• there is a joint venture for the production of goods, supply of goods or services, or the acquisition of goods or services;
• the relevant cartel provision is for the purposes of the joint venture, and is reasonably necessary for undertaking the joint venture; and
• the joint venture is not carried on for the purpose of substantially lessening competition.

This exception requires self-assessment by the parties (ie the ACCC does not make this assessment). Therefore, it is important that parties consider whether their initiative may benefit from this exception before they take any steps to formally start. This is because the joint venture exception can be technically challenging to apply, particularly after a project with multiple parties has already commenced.

Other exceptions raised by the ACCC in the Draft Guide include: conduct specifically authorised by federal, state or territory legislation, agreements between related bodies corporate; crown immunity; provisions or practices relating to standards prepared or approved by Standards Australia; and the notification of the sustainability collaboration (among others).

Authorisation

The most commonly used exception is ACCC authorisation. If a business obtains authorisation before engaging in the relevant conduct, the authorisation provides statutory protection from liability under the CCA. That is, for the duration of the authorisation, the parties can engage in the proposed conduct without the risk of the ACCC or third parties taking legal action against them. This is very helpful for businesses wishing to engage in sustainability collaborations and different from the position in many overseas jurisdictions where there is often no equivalent to the authorisation process.

The ACCC will assess applications for authorisation on a case-by-case basis. However, to grant authorisation, the ACCC must be satisfied that the proposed conduct:

• will not have the likely effect of substantially lessening competition; or
• would result in a benefit to the public and the benefit would outweigh the public detriment.

Public benefits

The term 'public benefit' is not defined in the CCA. However, it has been broadly construed by the Australian Competition Tribunal (Tribunal) as 'anything of value to the community generally'. The wide ambit of what constitutes a 'public benefit' under the authorisation test means that sustainability benefits may be considered by the ACCC. The ACCC highlights in the Draft Guide that a reduction in greenhouse gas emissions is a public benefit of 'considerable weight'. In addition, there is no requirement that the public benefits from an agreement must directly flow back to those impacted by the agreement—the benefits can be to society at large. This is less onerous than the position in some overseas jurisdictions, where parties must demonstrate that affected consumers will receive a 'fair share' of the benefits that the parties claim will result from the initiative.

The ACCC has already granted authorisation for a range of conduct that resulted in sustainability-related public benefits. These include:

• Product stewardship schemes: these are schemes agreed by producers and/or suppliers of a product to share the responsibility for the environmental impact of their product. Often, these schemes will impose a levy on the participants, which will fund the operation of the scheme. Without authorisation, the imposition of such a levy may raise price-fixing concerns. Nonetheless, the ACCC has authorised a number of product stewardship schemes due to the improved environmental outcomes they sought to achieve in relation to mattresses, gas refrigerants, end-of-life tyres, agricultural and veterinary chemicals and containers, paints and batteries.
• Joint acquisition / tendering: these are sustainability agreements where competitors jointly acquire goods or services to help them reach certain environmental goals. The ACCC has considered many applications for joint acquisition of goods and services in the sustainability context. In particular, the ACCC has frequently authorised:
  • joint purchasing agreements for the supply of electricity and/or renewable energy certificates (which allowed the joint acquirers to reduce their greenhouse gas emissions); and
  • joint acquisition of waste management services, such as collective tendering and acquisition of recycling services (which allowed the joint acquirers to divert waste from landfill and increase the generation of renewable energy from waste).
• Sustainability standards agreements: these are mandatory or voluntary sets of rules outlining a minimum standard of sustainability within a particular industry. One of the competition law issues that can arise with these kinds of agreements is that they can result in discrimination against certain competitors who have not signed up to the agreement. However, the ACCC has authorised sustainability standards agreements such as the Solar Retailer Code, which imposed obligations on retail businesses selling certain solar panel systems.

While the ACCC has authorised a wide range of sustainability arrangements, it has also warned it 'will not grant authorisation to what would amount to "greenwashing cartels" which do not achieve meaningful environmental benefits'.

Examples of future collaborations that the ACCC may authorise based on sustainability public benefits

In addition to the conduct it has already authorised, the ACCC provides some examples of arrangements that are likely to arise in the future and that may have sustainability-related public benefits. These include:

Public detriments

In any authorisation application, the ACCC will also consider public detriments that are likely to result from the conduct for which authorisation is being sought. The term 'public detriment' is also not defined in the CCA. However, the Tribunal has construed this broadly as 'any impairment to the community generally'. In most cases, public detriments will be those that result from a lessening of competition, such as reducing incentives to innovate and increasing barriers to entry. In the Draft Guide, the ACCC outlines that the greater the competition impacts will be, the greater the public benefits will need to be for the ACCC to authorise the proposed conduct.

General authorisation tips

In the Draft Guide, the ACCC helpfully includes some tips for business when they are considering applying for authorisation. These tips include:

Interim authorisation

Businesses can also seek interim authorisation to enable them to engage in some of the proposed conduct while the ACCC considers the substantive application. An application for interim authorisation must be made at the same time as the application for full authorisation.

Interim authorisation can often enable parties to engage in a range of conduct such as preliminary discussions, putting out requests for tender and taking preparatory steps. Generally however, interim authorisation will not enable the parties to finalise their arrangements until the ACCC has determined the matter. For example, the ACCC recently granted interim authorisation to Coles, Woolworths, ALDI and the 'Program Partners' to develop an interim 'Roadmap to Restart' plan for soft plastics following the collapse of the REDcycle program.

Next steps

The ACCC is now seeking comments on the Draft Guide. Businesses and other stakeholders interested in providing comments are encouraged to provide feedback before 26 July. We anticipate that the ACCC will publish its finalised guide later this year.

In the interim, the Draft Guide will be an important tool that businesses can rely on to mitigate their competition law risks when they are considering engaging in sustainability collaborations.