The CMA consults on draft guidance on environmental sustainability agreements

On 28 February 2023, the Competition and Markets Authority ("CMA") published its promised draft guidance on the application of the Chapter 1 prohibition to sustainability agreements between businesses operating at the same level of the supply chain ("Draft Sustainability Guidance"). The CMA is seeking responses by 11 April 2023. 

Key takeaways

• The guidance is intended to provide greater certainty for businesses on how competition rules apply to agreements aimed at achieving environmental and sustainability goals.
• The Draft Sustainability Guidance sets out a more permissive approach for agreements which are intended specifically to combat or mitigate climate change.
• Parties will be able to seek informal guidance from the CMA in relation to their sustainability initiatives. The CMA will not issue fines where the agreement has been discussed with the CMA in advance.
• The CMA's Draft Sustainability Guidance is a significant contribution to the debate on how competition law can help, and avoid hindering, the attainment of sustainability-related targets, which may require collaboration between market participants.

Background

The CMA has shown an increasing interest in the potential impact of competition law on companies' willingness to collaborate on sustainability initiatives. 

• In January 2021, the CMA published guidance for companies on how competition law applies to environmental sustainability agreements.
• Following a consultation process, in March 2022, the CMA published its advice to the government on how competition and consumer law can help meet the UK's environmental goals.
• In its draft Annual Plan for 2023/24, the CMA included a commitment to accelerate the UK's transition to a net zero economy and promotion of environmental sustainability among its medium term strategic priorities.

The CMA considers that it can ensure markets for sustainable products or services develop in competitive ways, assist consumers in making informed choices about the environmental impact of goods and services they consume, and ensure that competition law does not operate as an unnecessary barrier to companies pursuing sustainability goals. The CMA has established a Sustainability Taskforce to lead and coordinate its work, across both competition and consumer law.

The CMA has published the Draft Sustainability Guidance to provide clarity to companies on the application of the Chapter 1 prohibition to environmental sustainability agreements between competitors. This guidance will be integrated into the CMA's broader revised guidance on the application of the Chapter 1 prohibition to horizontal agreements, which is also currently out for consultation. Unlike the previous guidance published in January 2021, the Draft Sustainability Guidance proposes a more flexible approach to certain types of sustainability agreements. 

Agreements covered by the guidance 

The Draft Sustainability Guidance applies to agreements or concerted practices between actual or potential competitors which aim to prevent, reduce or mitigate adverse impacts on the environment from their economic activities or to monitor the impact of their activities on environmental sustainability. Examples of these agreements include those aimed at improving air or water quality, conserving biodiversity, or promoting the sustainable use of raw materials.

The CMA has identified three categories of agreement in the context of the Chapter 1 prohibition: 

• sustainability agreements which do not breach the Chapter 1 prohibition;
• sustainability agreements which could infringe the Chapter 1 prohibition; and
• sustainability agreements which are capable of exemption under section 9(1) of the Competition Act 1998 on the basis that the benefits of the agreement outweigh the harm to competition.

The CMA has also identified a sub-set of sustainability agreements related to climate change, which will benefit from a more permissive approach. This sub-set relates to agreements which contribute towards the UK's binding climate change targets under domestic and international law . Examples cited by the CMA include: an agreement between manufacturers to phase out a particular production process which involves the emission of carbon dioxide; an agreement between delivery companies to switch to using electric vehicles; and an agreement not to provide support such as financing or insurance to fossil fuel providers.  

Sustainability agreements which are unlikely to infringe the prohibition

In the Draft Sustainability Guidance, the CMA acknowledges that many sustainability agreements are unlikely to raise any competition concerns and will therefore not fall within the parameters of the Chapter 1 prohibition. 

While the guidance makes clear each agreement will be assessed on its own facts, the CMA has provided the following examples of agreements which are unlikely to infringe the prohibition: 

• Agreements which do not affect the main parameters of competition such as price, quantity, quality, choice or innovation. For example, agreements concerning use of plastic or paper internally within each organisation, agreements to organise a joint awareness-raising campaign or joint lobbying for legislative changes.
• Agreements to jointly undertake an activity which neither party could do individually because, for example, the parties have complementary skills.
• Cooperation which is required by law is automatically excluded from the Chapter 1 prohibition.
• Information pooling on the sustainability credentials of suppliers and customers so long as there is no obligation to purchase from certain suppliers and no competitively sensitive information is shared.
• Creation of industry standards or codes aimed at improving sustainability of goods and services. The usual guidance on standard-setting applies (i.e., the participation criteria must be transparent, it must be possible for any firm to participate on non-discriminatory terms and firms must not be obliged to participate). It must also be possible for firms which are participating to sell products outside the code and develop alternative standards. Businesses must also be free to go beyond the minimum sustainability targets.
• Withdrawal of non-sustainable products. The CMA considers it unlikely that withdrawing products or processes that are not environmentally sustainable will have a negative impact on competition.
• Industry-wide efforts to address climate change. The CMA states that setting non-binding targets for the whole industry, such as a reduction in carbon dioxide emissions, is unlikely to negatively impact competition provided that the targets are not binding.

Environmental sustainability agreements which could infringe the Chapter 1 prohibition

The CMA's Draft Sustainability Guidance distinguishes between sustainability agreements which infringe the Chapter 1 prohibition because they have the "object" of restricting competition and those which infringe the prohibition by having the "effect" of restricting competition. It notes, however, that collaboration between competitors may well involve parts that fall into either or both types of infringement.

The Draft Sustainability Guidance emphasises that particular caution is required in relation to agreements which involve price fixing, market or customer allocation, limitations on output, quality or innovation, as these are typically considered to be agreements which restrict competition by object, irrespective of their sustainability goals. 

Following a careful analysis of the facts of the case, it is possible that a sustainability agreement that restricts competition by object may nevertheless meet the conditions for exemption. In practice, however, it has proven very difficult to establish that the exemption criteria are met in relation to restrictions by object, and it is not clear that the Draft Sustainability Guidance will change this position in relation to sustainability agreements. 

Where a restriction is categorised as an "ancillary restraint" (i.e. where it directly relates to and is necessary for the implementation of a sustainability agreement which is not itself prohibited by Chapter 1) it may be permitted. The guidance provides the example of a group of competitors cooperating to jointly purchase inputs with a low carbon footprint from large suppliers, so as to encourage production and purchase of alternative products with a lower carbon footprint. To make this arrangement effective, the purchasing group may restrict its members from joining other purchasing groups. The guidance notes that such a restrictions may be treated as ancillary.

On the question of whether a sustainability agreement would have an appreciable negative effect on competition, the Draft Sustainability Guidance emphasises that the effects of each agreement need to be reviewed on a case by case basis. The guidance notes that this assessment should consider the following factors: 

• the market coverage of the agreement;
• whether the businesses involved have market power;
• the extent to which the agreement constrains the freedom of action of the parties;
• the scope for non-parties to participate;
• whether the agreement involves the exchange of competitively sensitive information; and
• whether the agreement is likely to lead to an appreciable increase in price or reduction in output, product variety, quality or innovation.

Exemptions for environmental sustainability agreements

The Draft Sustainability Guidance provides specific guidance on when sustainability agreements may be capable of exemption under section 9(1) of the Competition Act 1998. To benefit from the exemption, the benefits of the agreement must outweigh the competitive harm. This is assessed by reference to four cumulative conditions: 

• the agreement must contribute to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress;
• the agreement and any restrictions of competition within the agreement must be indispensable to the achievement of those benefits;
• consumers must receive a fair share of the benefits; and
• the agreement must not eliminate competition in respect of a substantial part of the products concerned.

Condition 1: benefits to production, distribution or technical or economic progress

The agreement must produce benefits to production, distribution or technical or economic progress. These benefits must be objective, concrete and verifiable. For example, sustainability benefits may arise by reducing greenhouse gas emissions, development of new energy-efficient processes or cleaner technologies. 

The CMA acknowledges that some benefits of environmental sustainability may not be immediately apparent, but it is "legitimate to have regard to such future benefits". The CMA notes that a number of methodologies may be available to quantify environmental benefits (including ways of quantifying non-monetary benefits in monetary terms), as well as techniques of discounting the value of such benefits. The CMA invites parties to discuss their proposed approach.

Condition 2: indispensability

Parties should demonstrate that the agreement is no more restrictive of competition than is required to achieve the benefits. This means there must be no less restrictive, but as effective, alternative available. In practice, parties will be required to show that without the agreement they would not be able to achieve the level of benefits or that they would not be able to achieve the benefits this efficiently. Careful consideration should be given to the scope and duration of the restrictions. 

For example, an agreement to adopt a more sustainable input may be considered indispensable if the agreement enables companies to achieve economies of scale by significantly increasing demand and this results in lower costs than otherwise.

Condition 3: fair share for consumers

UK consumers must receive a fair share of the benefits and the benefits must outweigh the harm. As noted above, the Draft Sustainability Guidance recognises that relevant benefits can include future benefits. It also recognises that there may be benefits to both the direct users of the products/services covered by the agreement and consumers more widely who value the broader sustainability benefits of the agreement.

In assessing this condition, the relevant consumers will typically only be the consumers in the relevant market for the agreement's products or services. However, the Draft Sustainability Guidance recognises that it may be appropriate to take into account a proportion of the wider societal benefits where they are also enjoyed by the consumers of the relevant products. It is for the parties to decide which type of benefits, whether direct, indirect, collective benefits or a combination of the types, they wish to bring forward. Notably, a different approach is taken to climate change agreements (see below). 

Further, the parties need to demonstrate that the benefits are substantial enough to offset the restriction of competition. Depending on the case, it may be necessary to quantify the benefits if it is not clear that the benefits are of a sufficient scale to offset the harm. In the context of sustainability agreements, the Draft Sustainability Guidance explains that parties are expected to assess both environmental benefits/harms and the effect on competition of the agreement, noting again that the benefits may accrue over a longer time period.

Condition 4: no elimination of competition

The fourth condition requires that there must be some remaining competition on the market affected by the agreement or that there is still competition on key parameters (such as price or quality) where the whole market is covered by the agreement. 

Specific exemption rules for climate change agreements

In broad terms, "climate change agreements" would be assessed by reference to the exemption criteria set out above. However, in relation to condition 3 (the need for consumers to receive a fair share of the benefits), the Draft Sustainability Guidance proposes to adopt a more permissive approach in assessing the relevant consumer. 

This is in recognition of the "exceptional nature" of the threat posed by climate change and the "exceptional nature" of the benefits to consumers from mitigating climate change or its impact. In light of this, the CMA proposes to take into account the totality of the benefits to all UK consumers when assessing whether the "fair share to consumers" condition is satisfied. 

To benefit from this more permissive approach, parties would also need to demonstrate that the benefits are in line with existing legally-binding requirements or well-established national or international targets.

Approaching the CMA for informal guidance

The Draft Sustainability Guidance invites businesses to approach the CMA at an early stage in the development of sustainability initiatives and agreements, and provides a dedicated email address (sustainabilitytaskforce@cma.gov.uk) for seeking informal guidance from the CMA. 

Notably, the CMA will not issue fines against parties that implement an agreement which was discussed with the CMA and where the CMA did not raise any competition concerns (or where any concerns were addressed). Where informal guidance has been sought, the CMA also intends to publish summaries of the initiative, risk assessment and any solutions proposed. This will likely provide helpful guidance to companies considering similar initiatives. 

Comment

Once finalised, the guidance will provide helpful clarity to businesses seeking to enter into environmental sustainability initiatives on the types of agreements that will not usually infringe competition law and how the CMA will apply the exemption criteria. The ability to seek informal guidance from the CMA will also provide further certainty to businesses.

National competition authorities and the European Commission have also been considering how competition law should apply to sustainability initiatives and agreements in recent years. In particular, there has been debate amongst academics and regulators about what sustainability benefits can and should be taken into account when considering whether a sustainability agreement may benefit from an exemption. 

The Dutch and Austrian competition authorities have advocated taking into account a broader scope of efficiencies covering the environmental benefits for society as a whole (i.e. not limited to consumers on the relevant market). See our October 2021 newsletter. The CMA's Draft Sustainability Guidance incorporates elements of the Dutch approach, including the more permissive approach to climate change agreements and providing an informal advice mechanism to encourage companies to come forward with proposed initiatives and obtain comfort that their plans comply with competition law. 

The final position of the European Commission is expected in the coming months as part of its revised Horizontal Guidance. In March 2022, it released its draft guidance for consultation (see our April 2022 briefing). Unlike the CMA and the Dutch competition authority, the European Commission did not propose a different treatment for agreements relating to climate change but did indicate that in some circumstances collective benefits (i.e. those outside the relevant market) may be taken into account. 

With thanks to Florence Chan and Eleanor Popplewell of Ashurst for their contribution.