With businesses increasingly concerned with ensuring environmental sustainability and tackling climate change, agreements between competitors relating to these topics are accordingly increasingly common. While tackling climate change and ensuring environmental sustainability are universally applauded aims and more can be achieved when businesses cooperate together to achieve these aims, this also presents scope for abuse and restrictions of competition.
Environmental sustainability agreements are defined as 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. Examples of environmental sustainability agreements range from agreements between manufactures to stop using materials which contribute to microplastic pollution in bodies of water, to agreements between farmers to reduce usage of pesticides.
Climate change agreements are considered to be a sub-set of environmental sustainability agreements and are typically concerned with reducing the negative externalities arising from greenhouse gases. Examples include agreements between financial service providers not to provide support such as financing or insurance to fossil fuel projects, or an agreement between delivery companies to switch to using electric vehicles.
Many businesses are reluctant to enter into such agreements with competitors due to lack of understanding surrounding whether such agreements will comply with competition law, and therefore fear of breach of relevant law. Perhaps the most high profile illustration of this widespread concern and confusion is the Net Zero Insurance Alliance, a United Nations convened initiative which was launched in 2021 with the goal of bringing together insurers to commit to transitioning their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas emissions by 2050. However, several prominent insurers have left the Alliance in 2023, citing concerns of exposing their organisations to antitrust risks. The Dutch competition authority, the Authority for Consumers and Markets (ACM), has been particularly active in this area, having found a number of sustainability agreements to be in breach of competition law, including an agreement between energy companies to close a number of coal power plants. In that case, the ACM found that the agreement harmed consumers whilst offering too few environmental benefits to offset this impact.
The Competition and Markets Authority (CMA) has now published a Green Agreements Guidance document ("the Guidance") in October 2023, with the aim of demystifying how competition law applies to environmental sustainability agreements, and ensuring that competition law consequently does not impede legitimate collaboration between businesses as is sometimes necessary for the promotion or protection of sustainability and climate change mitigation goals.
The Guidance explains how competition rules in the Competition Act 1998 (which prohibit agreements between businesses which restrict competition under the "Chapter I prohibition") apply to environmental sustainability agreements between competitors. The Guidance sets out:
- types of agreement which are unlikely to infringe the Chapter I prohibition;
- agreements which could infringe the prohibition; and
- circumstance where agreements may benefit from an exemption from the prohibition.
We summarise each of these below.
Agreements which are unlikely to infringe competition law:
- Non-appreciable agreements: where the parties to an agreement have a very small combined market share of the market affected by the agreement and the agreement does not have the ‘object’ of restricting competition;
- Agreements which do not affect the main parameters of competition: with these main parameters being price, quantity, quality, choice or innovation. An example of such an agreement may be one concerning internal corporate conduct reflecting industry-wide guidelines;
- Agreements to do something jointly which none of the parties could do individually: for example, due to lacking technical capabilities;
- Cooperation required by law; i.e. things compelled by relevant laws;
- Pooling information regarding sustainability credentials about suppliers or customers: provided there is no obligation on the parties to purchase or refrain from purchasing from those suppliers, to or to share competitively sensitive information;
- Creation of industry standards or codes of practice: provided that certain criteria are satisfied, including that the process for developing the standard is transparent, it is possible for any business in markets affected by the standard to participate in its development, and no business is obliged to implement the standard if it does not wish;
- Phasing out / withdrawal of non-sustainable products or processes: so long as it does not involve either an appreciable increase in price, or reduction in product quality or choice for consumers, and provided that this does not have the object of eliminating or harming the parties’ competitors or market sharing;
- Industry-wide environmental targets: participating businesses must remain free to independently determine their own contribution and the way in which the targets are realised or exceeded; and
- Agreements between shareholders to vote for promoting corporate policies that pursue environmental sustainability.
Agreements which could infringe competition law:
These are agreements which will be prohibited if they have the object or effect of restricting competition (unless they benefit from an exemption on the grounds set out below).
- Environmental sustainability agreements with the ‘object’ of restricting competition: these are likely to involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation. For example, an agreement between competitors on the price at which they will sell products meeting an agreed environmental sustainability standard is likely to restrict competition by object.
- Environmental sustainability agreements with the ‘effect’ of restricting competition: to establish whether the environmental sustainability agreement has an appreciable negative effect on competition, a number of factors must be considered, including whether the agreement covers all or only part of the relevant market, the market power of the businesses participating in the agreement, and the ability for non-parties to participate.
However, it should be noted that there are some circumstances where restrictions which would otherwise be a restriction of competition by object may still be permitted. This is where the restriction is objectively necessary to implement and proportionate to the objectives of wider environmental sustainability, such that the agreement would be impossible to carry out without the restriction. Put another way, a restriction by effect may be unavoidable and excusable under certain circumstances when shown to be strictly necessary to a broader and objective environmental purpose, but this would be the exception not the rule and require the strongest of evidence based justification before it could be entered into at all safely.
Exemptions for environmental sustainability agreements:
In simplest terms, restrictive agreements may be exempted provided the benefits of the agreement can be seen to outweigh the competitive harm. Parties seeking to benefit from such exemption must be able to demonstrate that their agreement meets each of the following four 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.
Exemptions for climate change agreements:
The criteria for exemption applicable to climate change agreements are the same as those set out above in relation to environmental sustainability agreements. However, when considering condition number three (the need for consumers to have a fair share of the agreement’s climate change benefits), the CMA considers that a more permissive approach is appropriate in assessing who are the relevant consumers. This means that the impact on all UK consumers can be considered, not just those within the market affected by the agreement. The justification for this difference is the sheer magnitude of the risk that climate change presents and the particular need for urgent action in relation to it.
Businesses who still remain uncertain about the application of competition law to their environmental sustainability agreements are encouraged to approach the CMA for informal guidance on their proposed agreement. The CMA will indicate any options, concerns, risks and possible solutions available to parties in relation to the proposed agreement. A significant advantage to parties who participate in these open-door discussions is that the CMA does not expect to take enforcement action in relation to an agreement which was discussed with the CMA in advance under the open-door policy and where the CMA did not raise concerns. This can therefore help to provide businesses with reassurance that they are not at the risk of facing fines.
However, parties to environmental sustainability agreements should remain aware that the Guidance is intended to supplement and not replace the CMA's Guidance on Horizontal Agreements. Where an environmental sustainability agreement also concerns a type of cooperation described in the Guidance on Horizontal Agreements (e.g. the application of the Specialisation Agreements Block Exemption and the Research and Development Block Exemption), businesses should also have regard to the relevant part of that guidance, and make sure that their agreement complies.
Additionally, businesses should be aware that there are some differences between the CMA's guidance and the European Commission's Horizontal Guidelines chapter on Sustainability Agreements, which applies to agreements which may affect trade between European Union Member States. Differences include the Commission taking a broader approach to the definition of sustainability agreements, with sustainability objectives covered by it including animal welfare and facilitating a shift to healthy and nutritious food. Additionally, unlike the CMA, the Commission does not provide a more permissive exemption criteria for climate change agreements.
Other developments to be aware of from the Commission in relation to environmental sustainability include its proposed Corporate Sustainability Due Diligence Directive, due to be adopted in 2024. This Directive aims to ensure that businesses address environmentally adverse impacts of their actions in their value chains, both inside and outside Europe. It will require action beyond mere reporting, and it comes with a regulatory, civil enforcement and compensation mechanism. This is indicative of an increasing expectation of businesses to take proactive steps to ensure environmental sustainability is embedded within their governance structure. For further information on how to prepare for the Directive, please see our insight on the topic.
It is clear that the CMA is keen to ensure that businesses are not deterred from taking steps to tackle climate change and ensure environmental sustainability in their practices, as evidenced by not just the publication of this Guidance, but also their open-door policy in relation to businesses with queries regarding environmental sustainability agreements. However, equally, business cannot abuse climate change as a false cover for restricting competition. Cooperations that deliver important benefits for climate change may allow certain restrictions on competition that would otherwise be frowned upon but this must be carefully managed to ensure there is a link and direct proportionality between the benefits to be obtained and the restrictions contemplated.
We would recommend that businesses familiarise themselves with the new Guidance (and additionally the European Commission guidance, if that is applicable to their sustainability agreements). Given that there are numerous examples throughout the Guidance, this should provide a useful basis for establishing whether a proposed draft sustainability agreement with competitors is compliant with competition law. However, given the CMA's open-door policy, seeking further clarification from the CMA remains a helpful potential tool where there is lack of clarity in the guidance on a particular scenario or kind of agreement.
If you have any questions about the Guidance, or are concerned about ensuring your environmental sustainability and climate change agreements comply with competition law, please contact one of the authors.