During the last year, discussions about sustainability have grown dramatically in the forums where competition defense policies are discussed. What do competition and sustainability have to do with each other? Much more than it seems.
The adoption of sustainable inputs, procedures or materials often requires the assumption of considerable risks and significant investments. To begin with, for a company, traveling the path of sustainability may require the use of more expensive inputs or the acquisition of expensive technologies. In turn, persuading consumers to purchase sustainable products or services (generally more expensive) is also difficult, and may require additional investments.
Many sustainability initiatives have a high degree of uncertainty; not only in terms of whether customers will accept the products or services, but also because many projects, for example to obtain more efficient or less polluting materials or inputs, can fail. A recent real-life example, analyzed by the Dutch competition authority, involves a project in which several competitors came together to transform off-shore gas pipelines located in the North Sea into CO2 emissions repositories for Dutch factories (the project includes the construction of a terminal, a pipeline and a compressor to transport CO2 to gas pipelines, and contemplates the joint marketing of a part of the CO2 storage service for a limited period). An initiative like this has high costs and risks.
Added to these difficulties is what can be translated as “first-mover disadvantage”: a company that adopts sustainable processes or inputs may be at a competitive disadvantage compared to competitors that do not do so. For example, products from a furniture manufacturer that buys wood from suppliers that reforest will likely be more expensive than those from competitors who do not. A company considering converting its business into a sustainable business may be discouraged by the prospect that consumers will prefer cheap products to sustainable ones. These kinds of dilemmas can discourage many sustainability initiatives.
Cooperation between competitors can help resolve these dilemmas: if a group of companies commits to modifying the characteristics of their inputs, products or processes to achieve sustainability goals, none of them will be at a competitive disadvantage. Cooperation, as the Dutch example illustrates, can also allow competitors to share the costs or risks involved in sustainability initiatives.
The problem with these types of solutions is that cooperation between competitors is problematic under antitrust laws, and often quickly comes into the crosshairs of the agencies in charge of enforcing those laws. For example, in recent months, many media outlets have reported on the “battle” that is being waged in different states of the United States between members of sustainability alliances (especially linked to initiatives to replace fossil fuels) and prosecutors who threaten to apply the competition defense laws.
As in other jurisdictions, some sustainability initiatives could raise legitimate competition concerns. An agreement like the one in the Netherlands example involves joint marketing of a portion of capacity and price coordination, and should be carefully analyzed. An agreement to stop using certain inputs in manufacturing processes (which can range from packaging to fertilizers to energy), or an agreement to stop marketing certain products, could have an indirect impact on prices. They could also limit consumer options. In some scenarios, these kinds of agreements could lead to supplier boycotts. If certain conditions are met, an agreement to modify product characteristics (for example to reduce fat or sugar levels in foods or beverages) could also have an impact on competition: it could affect quality or differentiation, two variables which in some markets may be relevant to compete.
In this context, the worst enemy of many sustainability initiatives is legal uncertainty: sanctions for violating competition laws usually have a high impact and, when in doubt, many companies will say “no” to sustainability so as not to run legal risks.
What is the status of the discussion? Today, the intersection between competition and sustainability faces two major challenges. The first is to find the legal tools that allow companies to move forward with this type of initiatives with acceptable levels of risk. The second is to understand how competition works in the context of each initiative, how it can be affected and the resulting social benefits, and determine whether the initiative in question can pass the “filter” of competition agencies to make it viable.
For more information contact:
Agustín Waisman | Partner Beccar Varela | awaisman@beccarvarela.com
