The Competition and Markets Authority (CMA) has published new draft guidance (under consultation) explaining how competition law applies to environmental sustainability agreements between firms operating at the same level of the supply chain. With an increasing number of businesses implementing Environmental, Social and Governance (ESG) frameworks, and ESG becoming an increasingly central consideration in the boardroom, this guidance may empower businesses to take further action on climate change and environmental sustainability without undue fear of breaching competition rules. The CMA advised the government last year that businesses need more clarity about what is legal when working together towards sustainability goals.
The Competition Act 1998 (CA98) prohibits anti-competitive agreements between businesses ("the Chapter I prohibition"). However, there are situations where anticompetitive agreements can, on balance, be beneficial to consumers, and are therefore exempted under the CA98.
The guidance sets out environmental sustainability agreements which are unlikely to infringe the Chapter I prohibition, along with agreements which could infringe the Chapter I prohibition but may nonetheless be permitted because they meet the conditions for exemption on the basis that the benefits of the agreement outweigh the competitive harm.
What are sustainability agreements?
"Environmental sustainability agreements" are agreements or concerted practices between actual and potential competitors which aim at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability or assessing the impact of their activities on environmental sustainability. Examples include agreements aimed at improving air or water quality, conserving biodiversity or promoting the sustainable use of raw materials.
Environmental sustainability agreements unlikely to infringe the prohibition:
- Agreements which do not affect the way those businesses compete (i.e. does not affect main parameters of competition such as price, quantity or choice). An example might be an agreement which concerns the internal corporate conduct of businesses by eliminating the use of single-use plastic in their premises.
- Agreements to do something jointly which none of the parties could do individually e.g. parties with complementary skills cooperating in early-stage scientific or technological research with an environmental sustainability objective.
- Cooperation required by law.
- Pooling information about the environmental sustainability credentials of suppliers or customers.
- Creation of industry standards or codes of practice aimed at making products or processes more sustainable.
- Agreements to phase out/withdraw non-sustainable products or processes.
- Industry-wide efforts to tackle climate change e.g. setting of non-binding targets for the whole industry regarding sustainability objectives.
Environmental sustainability agreements which could infringe the prohibition (unless they benefit from an exemption):
- Environmental sustainability agreements with the object of restricting competition e.g. an agreement between competitors on the price they will sell products meeting an environmental sustainability standard.
- Agreements with an appreciable negative effect on competition.
Environmental sustainability agreements which restrict competition appreciably are capable of exemption if they meet four conditions:
- the agreement must contribute to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress:
- for example, these benefits may include reducing greenhouse gas emissions in the production of goods or services that the market has failed to address, improving production and distribution processes via the introduction of new cleaner technology, or increasing innovation by developing new more energy-efficient processes;
- the agreement and any restrictions of competition within the agreement must be indispensable to the achievement of those benefits:
- for example, manufacturers collectively agreeing to use a new less polluting material in a scenario where they are individually not incentivised to use it, due to it making products more expensive and requiring additional investments to promote- this agreement would help to overcome the first mover disadvantage and ensure that environmental benefits can materialise;
- consumers must receive a fair share of the benefits:
- this could be a direct or indirect benefit- for example, an agreement to replace plastic packaging with more sustainable materials could directly benefit consumers by increasing the longevity of the products, or consumers may indirectly benefit from broader sustainability benefits such as reducing deforestation, if this is something they value; and;
- the agreement must not eliminate competition in respect of a substantial part of the products concerned.
Climate change agreements
"Climate change agreements" are treated as a sub-set of environmental sustainability agreements. These are agreements which contribute towards the UK’s binding climate change targets under domestic or international law. Such agreements will typically reduce the negative externalities from greenhouse gases- e.g. agreement between manufacturers to phase out a production process involving the emission of carbon dioxide.
The criteria for exemption applicable to climate change agreements are the same as the four conditions set out above – save that, in considering condition 3, the need for consumers to have a fair share of the agreement’s benefits, the CMA considers that a more permissive approach is appropriate in assessing who are the relevant consumers. This can therefore be satisfied by taking into account the totality of the benefits to all UK consumers arising from the agreement.
This guidance is intended to supplement and not replace the other parts of the CMA’s Guidance on Horizontal Agreements. Where an environmental sustainability agreement also concerns a type of cooperation described in other parts of the CMA’s Guidance on Horizontal Agreements, businesses should also have regard to the relevant part of that guidance.
The draft guidance invites parties to approach the CMA for informal advice, in what it is calling an ‘open-door policy’. Where parties approach the CMA to discuss their agreement and the CMA does not raise any competition concerns (or where any concerns that were raised by the CMA have been addressed), the CMA will not issue fines against the parties that implement the agreement.
The CMA has launched a consultation on the draft guidance and is seeking feedback from interested parties by 11 April 2023. After the consultation, the CMA will prepare the final version of the guidance.
Please see the documentation below:
If you have any questions about the new guidance, its impact on your ESG framework, and how to ensure that your environmental sustainability agreements comply with competition law, please get in touch. We can also advise more broadly on other kinds of horizontal agreements between competitors and the recent legislative changes affecting them.