Environmental sustainability agreements: UK guidance to cooperating competitors
Partner Global Co-Head Antitrust
Partner, Global Co-Head International Trade and Regulatory Law Group
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Nearly a year after the UK Competition and Markets Authority (CMA) announced its Sustainability Taskforce, it has issued for consultation draft guidance to show how businesses can pursue green cooperation without fear of infringing UK competition law. The draft guidance is an important step in the right direction but there remain gaps and grey areas, notably in respect of whether an agreement gives rise to objective benefits for environmental sustainability.
The CMA is one of a number of antitrust authorities considering how to give businesses a clear view on legitimate cooperation in relation to environmental sustainability. This is a positive development as industry collaboration is likely required to meet ambitious sustainability-related goals quickly and efficiently.
The CMA’s draft guidance is similar in some regards to the guidelines proposed by the European Commission (EC) last year. However, there are significant differences, with the CMA clearly keen to position itself as among the more ‘cooperation-friendly’ regulators given the importance of these topics to consumers and public policy more generally. In particular, the CMA has set out an approach that is more permissive in relation to climate change agreements, where there is now clear water between the UK and the EU. We explore the divergences in international approaches further below.
- The draft guidance provides examples of ‘environmental sustainability agreements’ that are unlikely to infringe UK competition law and those that, while capable of restricting competition, may be permitted because of the benefits that they create.
- For ‘climate change agreements’ (a sub-set of environmental sustainability agreements), the CMA proposes a more permissive approach given the “special category of threat” that climate change presents. The CMA’s approach will be to allow parties to justify such cooperation based on a wider range of benefits flowing from the cooperation.
- Helpfully, the guidance provides a number of concrete examples on which parties will be able to rely to assess the compliance of their conduct with UK competition law. The guidance will therefore be a useful starting point for businesses looking to collaborate on environmental issues.
- However, the guidance does not outline how the CMA intends to determine whether an agreement gives rise to “objective benefits” for environmental sustainability. Businesses will therefore need to exercise care and caution in describing and quantifying the benefits expected to arise from an agreement, or be at risk of greenwashing.
- The CMA notes that the guidance cannot provide answers to all questions that businesses may have. It will therefore publish updated guidance in the future and will adopt an “open door policy” to give informal guidance to businesses who want to understand how the guidance would be applied to a particular project or initiative.
- Importantly, businesses that approach and engage with the CMA for informal advice will receive a degree of protection from CMA enforcement and/or fines. However, businesses may still face private enforcement risks and reputational harm for greenwashing, if the environmental benefits anticipated under the agreement fail to materialise as described.
- When seeking informal CMA advice, parties will be expected to provide full details on the intended initiative and engage early (having first conducted a self-assessment in accordance with the guidance). The CMA will also expect parties to make changes to an arrangement as necessary to protect competition. It will usually publish a (non-confidential) summary of the arrangements to assist other businesses considering similar cooperation in the future.
Environmental sustainability agreements are defined broadly
The CMA defines “environmental sustainability agreements” to cover a broad range of conduct aimed at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability or assessing the impact of businesses’ activities on environmental sustainability. Examples include agreements aimed at improving water quality, conserving biodiversity or promoting the sustainable use of raw materials.
Interestingly, the CMA’s definition has a narrower scope than the EC’s definition of “sustainability agreements” which extends to also cover respecting human rights and ensuring animal welfare.
In the clear – environmental sustainability agreements that do not raise antitrust concerns
The CMA lists a number of types of environmental sustainability agreements that are unlikely to raise concerns:
- Agreements that do not affect the main parameters of competition ie that do not relate to price, quantity, quality, choice or innovation. Examples include agreements limiting internal corporate conduct, agreements relating to the organisation of joint environmental awareness campaigns and joint funds established by businesses to mitigate, adapt or compensate for greenhouse gas emissions. This can also include joint lobbying for policy or legislative changes, although this is subject to certain caveats eg that the lobbying should not be used to seek the exclusion of a competitor.
- Agreements to do something jointly which none of the parties could do individually. Examples include joint initiatives where businesses objectively lack the resources, expertise or capabilities – whether technical, scientific or other – to independently conduct the project. The CMA specifically notes that this may include early-stage scientific or technological research with an environmental sustainability objective.
- Cooperation required by law. For this exclusion to apply, the cooperation must be compulsory rather than just encouraged.
- Pooling information about the environmental sustainability credentials of suppliers or customers. This is likely to be permissible provided there is no sharing of competitively sensitive information about prices or quantities and, in relation to suppliers, parties are not required to purchase (or refrain from purchasing) from those suppliers.
- Creation of industry standards. The CMA considers that collaboration to develop industry standards or codes of practice aimed at making products or processes more sustainable is unlikely to have an appreciable negative effect on competition, provided that: (i) participation criteria are transparent; (ii) no firm is obliged to participate in the standard; (iii) any firm may participate or benefit from the standards on reasonable and non-discriminatory terms; (iv) participating businesses are free to develop alternative standards and to sell products falling outside such standards or codes; and (v) participating businesses may go beyond minimum sustainability targets set by the standard. This guidance is broadly similar to the ‘sustainability soft harbour’ set out in the EC’s draft horizontal guidance. However, unlike the EC’s safe harbour rules, the CMA does not appear to intend to require businesses to have a monitoring system to verify compliance with standards, nor to require that there is no resulting significant increase in price or significant reduction in choice of products.
- Phasing out/withdrawal of non-sustainable products or processes. The CMA notes that agreeing to replace processes and products with more sustainable alternatives is unlikely to be problematic if it does not involve an appreciable increase in price or reduction in product choice.
- Industry-wide efforts to tackle climate change. One example is the establishment of a common framework for non-binding target setting, allowing for the unilateral setting, disclosure and reporting of the participants’ targets, as well as how – in broad terms – the participants intend to meet their targets and the participants’ progress towards meeting those targets.
Possibly in the clear – environmental sustainability agreements that benefit from exemption
Environmental sustainability agreements that may give rise to competition concerns and fall within the scope of the UK prohibition on anti-competitive agreements could still benefit from an individual exemption if four cumulative conditions are met.
The CMA even notes that parties should not presume that agreements containing restrictions that are usually treated as restrictive of competition “by object” – price fixing, market or customer allocation, limitations of output or limitations of quality or innovation – cannot be justified. However, because of the nature of the terms, a careful analysis of the exemption criteria will be vital. The CMA has provided examples of how the four cumulative criteria can be met by environmental sustainability agreements:
1. Contribute benefits to production, distribution or technical or economic progress. This could include, for example, new cleaner technologies and more energy-efficient processes. The benefits must be substantiated, objective and verifiable but could materialise in future, over a relatively long period. Businesses would need to demonstrate as concretely as possible that such benefits would arise.
2. Be no more restrictive of competition than is indispensable (or reasonably necessary) to achieving the benefits. In practice, the parties must demonstrate that they would not otherwise be able to achieve the level of benefits or achieve the benefits as efficiently (eg at a reduced cost or more quickly).
3. Ensure that consumers receive a fair share of the benefits. The benefits can include future as well as current benefits, and those that accrue to direct and indirect customers/users. Consumers may also benefit indirectly where they value the broader environmental sustainability benefits of the agreement and the impact of those benefits on others (eg sustainably-grown wooden furniture which could help reduce deforestation). Quantification of the benefits might be required – the CMA expects parties to employ established techniques and follow industry best practice, and can be approached for advice where necessary.
4. Not eliminate competition, ie there must be some remaining competition on the market(s) affected by the agreement.
To avoid greenwashing, companies will need to adopt a robust approach when describing and quantifying benefits. The guidance does not currently outline how the CMA intends to determine whether an agreement gives rise to “objective benefits” for environmental sustainability, particularly in the absence of a UK green taxonomy. The potential difficulties in quantifying precise environmental benefits are briefly acknowledged in the guidance. Businesses will therefore need to exercise care and caution in describing and quantifying the benefits expected to arise from an agreement.
A more relaxed approach for climate change agreements
The CMA gives extensive guidance on the third exemption criterion on a “fair share to consumers”. Significantly, it draws out “climate change agreements” as a sub-set of environmental sustainability agreements, where a more permissible approach is appropriate.
Climate change agreements are those that contribute towards the UK’s binding climate change targets under domestic or international law. Examples include agreements between manufacturers to phase out carbon dioxide-emitting production processes and agreements not to provide financing or insurance support to fossil fuel producers.
Under the draft guidance, the “fair share to consumers” condition generally requires an assessment of whether the harm to consumers of the agreement’s products is offset by benefits to substantially the same set of consumers (ie to consumers ‘within the market’ related to the agreement). With limited exceptions, potential wider benefits to consumers in other markets are not relevant to this assessment. In other words, where benefits arise across multiple markets, only the proportion of the benefit that accrues to the consumers harmed by the agreement is taken into account.
However, the CMA considers that a more liberal approach to climate change agreements is justified given the magnitude of the climate change risk, the degree of public concern about it and the binding commitments that UK governments have entered into.
The CMA therefore considers it appropriate to “exceptionally” exempt climate change agreements if the “fair share to consumers” condition can be satisfied taking into account the totality of the benefits to all UK consumers arising from the agreement. Delivery companies agreeing to switch to electric vehicles could, for example, take into account the totality of the carbon dioxide emissions reduction (benefitting all UK consumers) to compensate for any harm to their direct customers resulting from the agreement.
There is no free pass, however, and companies will have to demonstrate that: (i) the benefits are in line with existing legally-binding requirements or well-established national or international targets; (ii) UK consumers benefit from the agreement; and (iii) the benefits (direct or indirect, current or future) offset the harm. It is unclear what criteria the CMA will adopt to assess whether benefits are in line with climate targets; the guidance does not confirm, for example, how the CMA will treat agreements underpinning transitional activities and activities that enable third parties to make a substantial contribution to climate targets. It will remain an area ripe for informal advice from the CMA.
Notably, the CMA does not propose to apply this permissive approach to other sub-sets of environmental sustainability agreements, such as agreements that contribute to meeting the UK’s legally binding biodiversity targets. This is unlikely to resonate well with those who regard climate change and biodiversity as intertwined existential risks.
Gaps and grey areas – the CMA’s open door should provide further comfort
With the use of a number of practical examples, the CMA’s draft guidance goes a good way to providing reassurance and clarity for businesses. The CMA promises that it will not take enforcement action against agreements that clearly correspond to examples used and principles set out in the guidance. It will publish summaries of initiatives brought to its attention, with an assessment of risks and solutions. It will use these cases and its evolving understanding to publish updated guidance.
However, the CMA acknowledges that the draft guidance cannot answer all of the questions that businesses may have about whether their environmental sustainability initiatives are compatible with UK competition law. It therefore commits to an open-door policy, encouraging businesses to approach it for informal guidance on their proposed arrangements.
Crucially for businesses, approaching the CMA for informal guidance will provide a level of protection against subsequent enforcement action by the CMA. The CMA indicates that where businesses seek informal guidance in good faith and it later transpires that their agreement infringes competition law, the CMA expects to work with the parties to agree adjustments to ensure the agreement is compliant.
Further, where parties approach the CMA to discuss their agreement in advance and the CMA does not raise any competition concerns (or any concerns raised have been addressed), the CMA will not issue fines against parties that implement the agreement.
However, businesses may still face private enforcement risks and reputational harm if the environmental benefits anticipated under an agreement fail to materialise as described. It will therefore be essential for companies to conduct a robust appraisal of the environmental benefits and negative effects of a proposed agreement, to avoid greenwashing.
Diverging approaches internationally
Antitrust authorities both in and outside the EU are considering how best to provide guidance to businesses on how they can cooperate on green and sustainability projects.
Notably, while much of the CMA’s draft guidance accords with the EC’s draft guidelines, the CMA does depart in its approach to factoring the collective benefits from climate change agreements into the analysis of whether an agreement is exempted from competition law. The EC’s view is that efficiencies derived from collective benefits achieved on separate markets can only be taken into account if the group of consumers affected by the restriction and benefitting from the efficiency gains is substantially the same. The CMA adopts a similar approach for most environmental sustainability agreements, but views climate change agreements as exceptional and worthy of a more relaxed approach.
In comparison, the Dutch Authority for Consumers and Markets, like the CMA but for a broader range of “environmental-damage agreements”, considers that out of market efficiencies benefitting consumers other than those directly affected by the restriction of competition can be taken into account, with no requirement for the negatively affected consumers to be fully compensated.
Businesses will welcome increased guidance on how sustainability agreements will be assessed under antitrust rules. Indeed, they are increasingly likely to face legal requirements to collaborate to achieve important sustainability-related goals. However, the abundance of parallel initiatives across jurisdictions evidently brings with it a risk of diverging approaches. Companies should tread carefully – in this area of fast-developing policy, arrangements that might be permitted by one antitrust authority will not necessarily be treated in the same way by others.
The CMA’s guidance is an important step forward in providing companies with confidence that it is “determined to help businesses who genuinely try to do the right thing in relation to environmental sustainability”. The message is clear that collaborations that genuinely give rise to environmental sustainability benefits, which outweigh competitive harm, should not be hindered by the CMA’s enforcement action. This development should motivate more companies to identify areas for collaboration to achieve global environmental sustainability goals.
In terms of next steps for the CMA’s draft guidance, the authority is inviting views until 11 April 2023. In the meantime, the CMA’s Sustainability Taskforce is most likely primed to respond to requests for informal advice on options, concerns, risks and possible solutions for proposed agreements.