With ESG firmly on the corporate agenda, recent guidance from the CMA is intended to give businesses confidence to collaborate across industries and sectors to support sustainability objectives without infringing competition law prohibitions on anti-competitive agreements. Published last month, the guidance (here) forms a key part of the CMA’s commitment to promoting sustainability and helping accelerate the transition to a net zero economy in the UK.
Agreements addressed by the Guidance
The Guidance addresses two forms of agreement:
- Agreements relating to environmental sustainability between competitors, i.e. agreements between competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability (e.g. agreements aimed at improving air or water quality, conserving biodiversity and natural habitats, or promoting the sustainable use of raw materials); and
- Environmental sustainability agreements that combat or mitigate climate change, i.e. agreements that contribute to combatting climate change such as those that will reduce the negative externalities arising from greenhouse gases emitted from the production, distribution or consumption of goods and services.
The CMA takes a more “permissive” approach to the latter type of agreement. It considers that the criteria for exemption from the prohibition on anti-competitive agreements should be applied more broadly to climate change agreements, owing to the nature of the climate crisis, the degree of public concern and the binding national and international commitments into which the UK government has entered.
The Guidance examines different forms of environmental sustainability agreement between competitors. In particular, those that:
- are unlikely to breach competition law; and
- those that could infringe competition law but could benefit from exemption (with separate guidance for environmental sustainability agreements and climate change agreements).
(i) Agreements unlikely to breach competition law
The Guidance clearly states that environmental sustainability agreements between competitors will be unlikely to breach competition law where they:
- do not relate to the way that business compete or may compete (i.e. they do not affect the main parameters of competition such as price, quantity, quality, choice or innovation); or
- do not have an “appreciable adverse effect” on competition (i.e. where the parties have a very small combined share of the market affected by the agreement and the main purpose of the agreement is not to restrict competition).
The Guidance usefully provides a range of examples of environmental sustainability agreements that do not affect competition. These include agreements concerning:
- internal corporate conduct of businesses to eliminate single-use plastic on their premises, moderate the use of heating or air conditioning in offices, or limit printing of hardcopies;
- pooling funds to engage in activities to mitigate, adapt or compensate for the effects of greenhouse gas emissions generated in production (e.g. funding for employee training to develop or encourage more sustainable practices and processes);
- joint campaigns to raise awareness of sustainability issues (as long as there is no joint selling or advertising of specific products involved); and
- joint lobbying for policy / legislative changes (as long as there is no exchange of competitively sensitive information or attempts to exclude specific competitors).
The Guidance also provides indications of the types of agreements that are unlikely to have an appreciable adverse effect on competition, For example, agreements:
- governing cooperation between competitors that is required by law;
- to pool objective, evidence-based information about, or provide a rating on, the environmental sustainability credentials of suppliers (as long as parties are not required to purchase / refrain from purchasing from those suppliers and there is no sharing of competitively sensitive information);
- for the creation of industry standards, provided that:
- the process for developing the standard is transparent and it is possible for any business on the affected markets to be involve in its development;
- no business is obliged to implement the standard;
- any business can implement the standard on reasonable and non-discriminatory terms;
- business are free to go beyond the minimum requirements set by the standard or to develop and implement higher standards; and
- the standard is unlikely to result in an appreciable reduction in the availability of suitable products for consumers to purchase (i.e. (i) participating businesses are free to sell alternative competing products outside of the standard on the markets where the standard applies and they remain free to determine independently to which products the standard applies, or (ii) the combined market share of the participating business is sufficiently low (e.g. <20%) to offer adequate alternative choice));
- to phase out particular non-environmentally sustainable processes or cease procuring or supplying certain non-environmentally sustainable products, provided there is no appreciable increase in price, reduction in product quality or choice for consumers, and there is no intention to eliminate / harm competitors or engage in market sharing;
- to set non-binding environmental sustainability targets or ambitions, as long as participating businesses remain free independently to determine their own contribution and method for reaching / exceeding the targets; and
- between shareholders to vote for promoting corporate policies that pursue environmental sustainability.
The CMA notes that where businesses cooperate in circumstances where they would not be able to carry out an initiative independently, for example owing to a lack of technical capabilities, the relevant agreement is unlikely to give rise to restrictive effects on competition, unless they could have carried out the project using a form of cooperation that was less restrictive of competition.
Any information exchanged between the parties, either directly or indirectly, would also not raise competition concerns as long as the exchange does not go beyond what is objectively necessary to implement the agreement and is proportionate to its objectives. As with all forms of agreement between competitors, the CMA is keen to avoid such agreements being used as a cover or excuse for the illegal exchange of competitively sensitive information.
(ii) Agreements that could benefit from exemption
The Guidance is very clear that environmental sustainability agreements with the main purpose (“object”) or effect of restricting competition will be prohibited, unless (i) they fall within one of the exemptions set out by the authority, or (ii) they are ancillary restraints that are necessary to implement and proportionate to the objectives of a permitted environmental sustainability agreement.
Companies that want to be able exempt their environmental sustainability agreement from breaching competition law, will need to be able to demonstrate that it meets the following four conditions:
- The agreement contributes certain benefits (e.g. eliminates or reduces the harmful effects arising from the production or consumption of particular goods or services that the market has failed to address, such as greenhouse gas emissions) to UK consumers that outweigh harm they may suffer as a result of the agreement and are objective, concrete and verifiable;
- The agreement and any restrictions of competition within the agreement are indispensable to the achievement of those benefits (i.e. there must be no less restrictive, but equally effective, alternative);
- UK consumers on the relevant market(s) receive a fair share of the benefits (both current and future) and those benefits are substantial and demonstrable, and outweigh the harm that UK consumers will suffer as a result of the agreement; and
- The agreement does not eliminate competition in respect of a substantial part of the products covered by the agreement (i.e. there must be meaningful remaining competition on the market(s) affected by the agreement).
The same four exemption criteria apply to climate change agreements, except that in considering condition 3 (consumer benefit), the CMA considers that a more permissive approach is appropriate in assessing who are the relevant consumers, i.e. the benefits are not just limited to UK consumers on the relevant market(s). The CMA considers that the full climate change benefits to all UK consumers should be taken into account because of the exceptional nature of the harm posed by climate change (and therefore the exceptional nature of the benefits to consumers from combating or mitigating climate change or its impact); climate change represents a special category of threat that sets it apart and requires a different approach to the pass-on criterion. In this regard, the CMA’s approach to assessing consumer benefits is very forward-thinking, offering far more flexibility than the European Commission’s parallel provisions at EU level.
The Guidance notes that there are some environmental sustainability agreements that may generate both climate change benefits and other environmental benefits. The CMA considers that the climate change benefits that arise from these environmental sustainability agreements should be assessed using the alternative criteria and that any other environmental benefits should be assessed using the general approach (set out at condition 3 above).
Positive message for businesses looking to do the right thing
The CMA makes it clear that it does not anticipate taking any action against businesses that enter into environmental sustainability agreements or climate change agreements that comply with the Guidance. The CMA does however encourage businesses to keep their agreements under constant review, in particular as its Guidance is updated in coming years with the development its standard practices for assessing such agreements.
Interestingly, the CMA also actively encourages companies to take advantage of its new “open-door policy” and reach out to the authority proactively in the event of any uncertainty about whether an environmental sustainability or climate change agreement is compliant. In fact, it incentivises businesses to make such active contact by stating in the Guidance that it would not expect to take enforcement action where parties approach the CMA to discuss a particular agreement and the CMA does not raise any competition concerns, but the authority later investigates the agreement and finds a breach of competition law. In those circumstances, the CMA would not issue fines against the parties, provided that they had not withheld relevant information from the authority that would have altered its assessment during the initial discussions.
The authority also intends to publish a summary of agreements that it has been asked to consider, with an assessment of risks and solutions. These examples will give businesses a degree of confidence when assessing similar agreements.
By issuing specific guidance in this area, the CMA is making a positive effort to encourage companies to collaborate on key sustainability issues. The use of practical examples is particularly helpful. The open invitation to businesses to engage with the CMA on any compliance concerns is also a further sign of encouragement. Provided such agreements are properly thought out, designed and implemented, the Guidance will assist companies wishing to explore such initiatives.