Knowledge Highlights 21 November 2024
The great convergence between sustainability and competition law: Recent developments
Sustainability is becoming an increasingly critical and top-of-mind theme in Singapore. Prime Minister Lee Hsien Loong, in his press conference on the new Cabinet line-up on 25 July 2020, highlighted that “sustainability has become an increasingly important part of [Singapore’s] national agenda”. Recent sustainability initiatives in Singapore include:
- Renaming of the Ministry of the Environment and Water Resources to the Ministry of Sustainability and the Environment;
- Planning climate change defences, managing Singapore’s carbon footprint and food and water security issues; and
- Proposed Guidelines on Environmental Risk Management for banks, insurers and asset managers (“MAS Guidelines”) by the Monetary Authority of Singapore (“MAS”), for which MAS launched a public consultation on 25 June 2020. The MAS Guidelines form part of MAS’s Green Finance Action Plan for Singapore to become a leading global centre for green finance and aim to enhance financial institutions’ resilience to environmental risk, and strengthen the financial sector’s role in supporting the transition to an environmentally sustainable economy, in Singapore and in the region.
While companies push forward with sustainability initiatives, there may be concerns as to whether such initiatives, and agreements between companies on these initiatives, may infringe Singapore’s competition laws. This article will briefly explain the present competition law framework in Singapore and how the framework may apply to sustainability initiatives.
1. Singapore’s competition law framework and potential application to sustainability initiatives
In Singapore, section 34 of the Competition Act (“Competition Act”) prohibits agreements between undertakings, decisions by associations of undertakings, or concerted practices which have, as their object or effect, the prevention, restriction or distortion of competition within Singapore (“Section 34 Prohibition”) unless exempted under the Third Schedule to the Competition Act or a block exemption under section 36 of the Competition Act.
Sustainability initiatives, where these involve collaboration between industry players who are competitors, are not expressly exempt from the Section 34 Prohibition. The table below sets out some examples of possible sustainability initiatives that industry players may contemplate, and how these may risk infringing the Section 34 Prohibition:
|
Sustainability initiative |
Potential infringement of the Section 34 Prohibition |
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Industry commitments / agreements between competitors to stop supplying less sustainable products. For example, energy companies may agree to close down coal power plants to switch to alternative energy sources. |
Such agreements, as they could restrict output between competitors, can be regarded as restricting competition appreciably and infringing the Section 34 Prohibition. |
|
Exchange of information related to sustainability efforts among competitors. For example, food processing companies may agree to share production information and terms of trade with suppliers to collectively ensure and prove that they are not contributing to unsustainable practices, such as deforestation. |
Such information exchanges may potentially infringe the Section 34 Prohibition, especially if the information exchanged relates directly to input costs of competitors that could affect elements of a pricing policy. |
|
The setting of mandatory sustainability-related standards / terms and conditions by associations which are stricter than existing legal requirements. For example, car manufacturer associations setting commitments to lower CO2 emissions to levels which are stricter than the levels set in law. |
Where the standards or terms and conditions are set so high to effectively exclude members from being able to participate in the relevant market, or remove a factor of competition between the association members, these may infringe the Section 34 Prohibition. |
Separately, section 47 of the Competition Act prohibits any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in any market in Singapore (“Section 47 Prohibition”), unless the conduct is exempted under the Third Schedule to the Competition Act.
Similarly, there are no express exemptions for sustainability initiatives from the Section 47 Prohibition. To illustrate, the table below sets out some examples of possible sustainability initiatives and how these may risk infringing the Section 47 Prohibition:
|
Sustainability initiative |
Potential infringement of the Section 47 Prohibition |
|
A refusal to supply buyers deemed to be engaging in unsustainable practices. For example, an industry player may refuse to supply to customers involved in unsustainable practices, such as deforestation. |
Refusal to supply by a dominant undertaking may constitute an infringement of the Section 47 Prohibition if the buyer has few or no other alternatives, and if the behaviour cannot be objectively justified. |
|
Price discrimination against buyers deemed to be engaged in unsustainable practices. For example, an industry player may decide to charge lower prices to customers who are deemed to be engaging in sustainable practices, and to charge higher prices to customers who are deemed to be engaging in unsustainable practices. |
Price discriminatory practices by a dominant undertaking may constitute an infringement of the Section 47 Prohibition if the conduct has the effect or likely effect of foreclosing all, or a substantial part of a market. |
Whether the current framework of the Section 34 Prohibition allows sustainability objectives to be considered
Paragraph 9 of the Third Schedule to the Competition Act exempts agreements with net economic benefit from the Section 34 Prohibition (“Net Economic Benefit Exemption”). Agreements with net economic benefit are agreements which contribute to improving production or distribution, or promoting technical or economic progress, but which do not (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of those objectives; or (b) afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the goods or services in question.
CCCS’s case precedents to-date suggest that the Net Economic Benefit Exemption is applied in consideration of economic benefits only, whether these are wider economic benefits accruing to society, or specific to the production or distribution of the products or services in question. By way of illustration:
- In Case No. CCS 400/003/06 Notification by Qantas Airways and Orangestar Investment Holdings of their Co-Operation Agreement, CCCS took into account the proposed agreement’s wider economic benefits, such as its impact on tourism demand to Singapore, when determining whether the Net Economic Benefit Exemption applied to the agreement.
- Similarly, in Case No. 400/009/14 Application for Decision by Cebu Air, Inc. and Tiger Airways Singapore Pte. Ltd., CCCS took into account wider economic efficiencies accruing to society such as the strengthening of Singapore’s position and competitiveness as an air hub, increases in tourist expenditure and the creation of more jobs in the travel and aviation industries, when determining whether the Net Economic Benefit Exemption applied to the proposed agreement.
While sustainability benefits to society can, and will have, implied economic benefits, the nexus to the Net Economic Benefit Exemption is less direct and less clear. There are no precedents to-date in this regard, but greater clarity would be desirable to companies planning to undertake sustainability initiatives and cooperation with other parties, in line with the national agenda.
Whether the current framework of the Section 47 Prohibition allows sustainability objectives to be considered
The Competition Appeal Board (“CAB”) has held that a dominant undertaking can advance an objective justification where an effect, or likely effect, on restricting competition by the dominant undertaking has been established. In particular, the dominant undertaking can advance an objective justification if it can adduce evidence to demonstrate that its behaviour produces countervailing benefits so that it has a net positive impact on welfare.
CCCS Guidelines on the Section 47 Prohibition 2016 and CCCS and CAB precedents suggest that only conduct spurred by legitimate commercial interests will be considered as objective justifications, although the dominant undertaking will still have to show that the conduct is not more restrictive than necessary, and the restrictions imposed by the conduct are proportionate to the benefits claimed by the objective justification.
As sustainability initiatives may be driven by wider stakeholder objectives, it is not clear the position that CCCS and CAB will apply in assessing if such objectives would qualify as objective justifications. There are no precedents to-date in this regard, and similarly, greater clarity would be desirable to companies planning to undertake sustainability initiatives, in line with the national agenda.
2. Notable global developments in sustainability and competition law
Questions around the compatibility of competition laws with sustainability initiatives are not new or peculiar to Singapore. There have been a number of notable developments in other jurisdictions in addressing such issues, which may serve as useful points of references.
China
In China, Article 15(4) of the Anti-Monopoly Law (“AML”), which came into effect in 2008, expressly lists the saving of energy and the protection of the environment as one of the conditions for monopoly agreements to be exempted from the AML.
European Union
The European Commission (“EC”) had, on 9 July 2020, released a statement that it fully supports the need for clear guidance on agreements aimed at reducing greenhouse gas emissions that would be compatible with competition law. In particular, the EC noted that it was currently looking into interpretations of the prohibition against anti-competitive agreements that would enable the balancing exercise to take into consideration the benefits not only for the consumers buying the relevant products, but also for society as a whole, as part of its review of the EC’s Horizontal Block Exemption Regulations and the Horizontal Co-operation Guidelines.
Netherlands
On 9 July 2020, the Netherlands Authority for Consumers and Markets (“ACM”) published a set of draft Guidelines on Sustainability Agreements (“ACM Draft Guidelines”). In particular, the ACM Draft Guidelines provide for a less onerous test for the granting of exemptions to agreements which fall within the ambit of “environmental-damage agreements” and which have been found to be restrictive of competition.
The present approach for granting exemptions to agreements which have been found to be restrictive of competition involves a balancing exercise between the benefits of the agreement for the customers directly or likely affected by the agreement against the anti-competitive effects of the agreement.
The ACM Draft Guidelines propose to deviate from the basic principle that consumers should be allowed a fair share of the resulting benefit when conducting the balancing exercise in relation to “environmental-damage agreements”. The ACM Draft Guidelines define “environmental-damage agreements” as agreements which (a) aim to prevent or limit any obvious environmental damage, and (b) help, in an efficient manner, compliance with an international or national standard to prevent environmental damage to which the government is bound.
The ACM Draft Guidelines also provide a list of examples of “environmental-damage agreements” such as agreements aimed at reducing emissions of pollutants, and at preventing the use of pollutive raw materials in products. For these agreements, ACM explains that it can be fair not to compensate users fully for the harm that the agreement causes because their demand for the products in question essentially creates the problem for which society needs to find solutions. Notwithstanding the foregoing, the ACM Draft Guidelines emphasise that any permissible deviation from the basic principle is limited to agreements which fall within the narrow definition of “environmental-damage agreements”.
Other forms of sustainability agreements which do not meet the criteria of “environmental-damage agreements” are not permitted to deviate from the basic principle. The ACM Draft Guidelines provide examples of such agreements, including agreements where undertakings set requirements for labour conditions or animal welfare; agreements to pay a fair wage in developing countries that do not have a minimum wage; and agreements setting minimum requirements for animal welfare in the production of meat or changing the recipes of food products for public-health reasons.
United Kingdom
The Competition and Markets Authority (“CMA”) had identified climate change as one of its six priorities for 2020/2021, with the aim of supporting the United Kingdom’s transition to a low carbon economy. CMA specifically noted that it would consider how, when exercising its functions, it could act in a way that supports the transition to a low carbon economy.
3. Final remarks
It is clear from global developments that there is a general trend towards paying more attention to sustainability initiatives, while not undermining compliance with competition laws at the same time. There is a balance to be struck, but it is not insurmountable to do so. The position globally is still evolving, but as with other jurisdictions, we expect to see the position clarified in Singapore over time.
Reference materials
The following materials are available on the CCCS website www.cccs.gov.sg and the Singapore Statutes Online website sso.agc.gov.sg:
