UK Competition and Markets Authority Publishes Green Agreements Guidance

The UK Competition and Markets Authority (CMA) has set out guidelines for businesses that want to go green.

On October 12, 2023, the CMA published its “Guidance on the application of the Chapter I prohibition in the Competition Act 1998 to environmental sustainability agreements” (CMA Guidance). The CMA Guidance forms part of the CMA’s broader sustainability agenda, which includes initiatives such as its “Green Claims Code”; a major greenwashing investigation that opened in January 2023; and an investigation into “hydrogen-blend ready” boilers launched just this week.

The CMA states that the guidance is intended to “ensure that competition law does not impede legitimate collaboration between businesses that is necessary for the promotion or protection of environmental sustainability.” More specifically, the CMA Guidance sets out how the prohibition on anticompetitive agreements among businesses applies to environmental sustainability agreements among competitors. The CMA Guidance comes shortly after the European Commission (EC) publication of its own guidance on sustainability agreements this June (the EC Guidance).

Scope of the Guidance

Environment Only

The CMA Guidance defines “environmental sustainability agreements” as those “aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability.” While “environmental sustainability” encompasses improvements to air quality or the conservation of biodiversity, agreements that pursue broader societal objectives (e.g., working conditions) are not included. In contrast, the EC Guidance applies to agreements pursuing objectives related to human rights, ensuring a living income, and promoting animal welfare.

Climate Change Agreements

The CMA Guidance draws an important distinction between “environmental sustainability agreements” and “agreements which contribute to combating climate change” (climate change agreements). Climate change agreements are a subset of environmental sustainability agreements that “typically reduce the negative externalities arising from greenhouse gases, such as carbon dioxide and methane, emitted from the production, distribution or consumption of goods and services.” Examples include agreements to use electric vehicles or phase out CO2-heavy production processes. Under the CMA Guidance, climate change agreements can benefit from a more permissive exemption (see below). This exemption is not a feature of EC Guidance, making the CMA the more permissive regulator in this respect.

Evaluation of Environmental Sustainability Agreements

Nonproblematic agreements

Agreements deemed unlikely to infringe competition under both the CMA Guidance and EC Guidance include

• agreements that do not negatively affect parameters of competition, such as price, quantity, quality, choice, or innovation
• agreements to pool evidence-based information on the environmentally sustainability credentials of suppliers, provided these do not require parties to purchase (or refrain from purchasing) particular products
• agreements related to internal corporate conduct (e.g., industrywide environmental targets). The CMA Guidance cites agreements between shareholders to vote in favour of policies that pursue environmental sustainability as an example of such a (likely acceptable) arrangement.

With respect to other agreements, the CMA Guidance casts a wider net. Although both the CMA and EC allow for cooperation required by law, the EC restricts this to the “precise requirements or prohibitions in legally binding international treaties, agreements or conventions.” In contrast, the CMA Guidance references requirements of “law” more generally.

Further, the CMA Guidance notes that agreements to “do something jointly which none of the parties could do individually” are unlikely to create restrictive effects. While relevant to an assessment of an agreement under EU rules, the EC Guidance does not take such an explicitly broad position.

The effects assessment

Both the EC Guidance and CMA Guidance set out factors to consider when performing an effects analysis of a sustainability agreement, namely, the (i) market power and decision-making independence of the parties, (ii) market coverage of the agreement, (iii) extent to which commercially sensitive information is exchanged, and (iv) whether the agreement results in an appreciable increase in price.

Guidance on borderline cases

The CMA provides special guidance for “borderline” cases. For one, it explains that agreements typically considered to constitute “by object” restrictions may be permitted where the restriction constitutes an “ancillary restraint” to a broader and (otherwise) nonproblematic sustainability agreement. For example, banning membership to rival groups (anticompetitive restriction) may be considered an “ancillary restraint” to a (competition-compliant) cooperation to jointly purchase inputs with a low carbon footprint from major suppliers.

For another, certain restrictions typically considered to constitute “by effect” restrictions may constitute “by object” restrictions in other situations. Collective withdrawal agreements (e.g., agreements between purchasers to only buy from sustainable producers) are one example of this. In evaluating whether such agreements comply with competition law, the CMA emphasizes the distinction between a horizontal collective boycott seeking to foreclose a competitor and agreements seeking to remove unsustainable products from the supply chain. Although the former constitutes a by-object restriction, the latter should be subject to an effects analysis.

Finally, both the CMA and EC provide specific guidance regarding sustainability standardization agreements. Although the EC couches its guidance in the form of a “soft safe harbour,” both regulators identify similar factors relevant to assessing sustainability standardization agreements against competition law.

Exemptions

The General Exemption

Under UK and EU law, agreements that prohibit or restrict competition are capable of exemption in particular circumstances where benefits outweigh competitive harm (Section 9(1) of the Competition Act 1998 and Article 101(3) Treaty on the Functioning of the EU). The CMA Guidance and EC Guidance set out how this exemption is likely to be applied to environmentally sustainable agreements.

The exemption requires that any “benefits” from the contested agreement be passed on to consumers (the fair share to consumers condition). These benefits can be direct (e.g., due to improved product quality) or indirect (due to the consumers’ appreciation of their impact on the environment). Importantly, the CMA and EC will consider benefits to consumers only in (i) the same market as the product or service to which the agreement relates or (ii) markets with a substantial overlap to this market. As such, benefits to out-of-market consumers cannot outweigh any harm to competition for the purposes of the exemption.

More broadly, the CMA Guidance is couched in surprisingly permissive and enabling language, even emphasizing that by-object restrictions may nevertheless meet the exemption conditions and that parties to such agreements “should not automatically assume that they are prohibited” (emphasis added). While this is settled law, it is nevertheless illustrative that the CMA has overtly acknowledged this in its guidance.

Special approach to climate change agreements

As alluded to above, the CMA Guidance contains an important carveout to this narrow “market” restriction for climate change agreements. The CMA “considers it appropriate, in the case of climate change agreements, to depart from the general approach and exempt such agreements if the ‘fair share to consumers’ condition can be satisfied taking into account the totality of the climate change benefits to all UK consumers arising from the agreement” (emphasis added). The special treatment afforded to climate change agreements can be justified by the “exceptional nature of the harms posed by climate change,” the CMA continues. In this respect, the CMA Guidance goes materially beyond the EC Guidance.

Application of the Guidance

The CMA Guidance provides welcome clarity for environmentally conscious businesses. Although the Guidance is nonbinding, the CMA states that it does not intend to take enforcement action against agreements clearly corresponding to the principles set out in the guidance. Noting that it is “determined to help businesses who genuinely try to do the right thing in relation to environmental sustainability,” it is also operating an open-door policy for informal guidance. Businesses at an early stage in the development of an environmental sustainability agreement (or a suitable third party, in some instances) are advised to contact the CMA after conducting an initial self-assessment of their agreement against the CMA Guidance principles. The ensuing CMA assessment is intended to constitute a light touch review to identify options, concerns, risks, and possible solutions available to parties in relation to the proposed agreement. Following engagement, the CMA expects the parties to implement any necessary adjustments and take reasonable steps to review their agreements in light of future informal CMA guidance. The CMA also intends to publish a summary of the agreements (after consulting the parties regarding confidentiality), with an assessment of risks and solutions.

Implications for Businesses

It is clear that the CMA is seeking to enable competitor cooperation toward sustainability objectives. Indeed, some aspects of the CMA Guidance – such as the permissive approach toward certain collective boycotts and explicit recognition that by-object infringements can be exempted – are quite striking. These developments can be contrasted with the position in the U.S., where state Attorneys General and members of Congress are actively issuing warnings related to antitrust laws and ESG initiatives.

The CMA’s open-door policy – similar to the Commission’s commitment to provide informal guidance on sustainability agreements – is to be welcomed. However, it is unclear how effective this mechanism will be in practice, as the relevant agreements may evolve drastically as they progress (rendering the suggested early-stage CMA assessment potentially challenging in practice). Moreover, the prospect of a summary decision being published, over which the CMA is the final arbiter of what is considered confidential, may act as a deterrent to engagement.

Regardless, it is clear that neither the CMA guidance nor the open-door policy provides a carte blanche to environmental sustainability agreements, including climate change agreements, among competitors. Proper assessment of any cooperation – focusing on market coverage and the nature of the restrictions – remains key to lawful collaboration, even where this has an environmental focus.

For further discussion of ESG and antitrust, please see our Sidley Update here.

Thank you to Bronwyn Tonelli, trainee for Sidley's Antitrust practice, for her significant contribution to this Sidley Update.