How can competing businesses collaborate in the interests of environmental sustainability, without infringing competition law? To help answer this question, the Competition and Markets Authority (CMA) has published draft guidance this week on the application of competition law to environmental sustainability agreements (Draft Sustainability Guidance).

This represents a significant step forward in the interaction between UK competition law and pursuit of the UK’s green commitments and ambitions. We expect businesses will welcome the increased certainty and openness the Draft Sustainability Guidance appears to offer.

Here is our summary of the key points in the Draft Sustainability Guidance.

What type of agreements are covered by the Draft Sustainability Guidance?

The Draft Sustainability Guidance applies to:

• "Environmental sustainability agreements" – agreements or concerted practices between actual or potential competitors aimed at preventing, reducing or mitigating the adverse impact of economic activities 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. They do not include agreements that pursue broader societal objectives (for example, improving working conditions); and

• "Climate change agreements" – these are a sub-set of environmental sustainability agreements, which contribute towards the UK’s binding climate change targets under domestic or international law. Such agreements are treated more favourably under the Draft Sustainability Guidance (see below).

Examples 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 producers.

Which agreements are unlikely to infringe competition law?

The Draft Sustainability Guidance specifies seven types of agreement that either do not restrict competition at all, or are unlikely to have an appreciable effect on competition. These are:

• Agreements which do not relate to the way that businesses compete with each other (on price, quantity, quality, choice or innovation) – e.g. an agreement concerning conduct within the same corporate group, or organising a joint industry awareness campaign;
• Agreements to do something jointly which none of the parties could do individually – e.g. because each party individually lacks the resources or capabilities, such as the technical expertise, to undertake the particular type of project;
• Cooperation required by law – provided the cooperation is required by law, not simply encouraged; 
• Pooling information about suppliers or customers – provided parties are not required to purchase (or refrain from purchasing) from particular suppliers and parties do not share competitively sensitive information (the latter is likely to significantly curtail what can be shared in practice);
• Creation of industry standards – provided the participation criteria are voluntary, transparent, reasonable, and non-discriminatory. The standards set must be minimum standards that businesses are free to exceed; participating businesses must also be free to develop alternative standards and to sell products that fall outside such standards; 
• Phasing out / withdrawal of non-sustainable products or processes – where it does not involve an appreciable increase in price for consumers or an appreciable reduction in product choice; and
• Industry-wide efforts to tackle climate change – e.g. industry wide targets to reduce carbon dioxide emissions, provided such targets are not binding on the participating businesses; the development of a common methodology, which is available on an open-source basis; and the establishment of a common framework for target setting.

Which agreements could infringe competition law?

Certain environmental sustainability agreements may have the "object" of restricting competition, i.e. they are, by their very nature, regarded as being harmful to competition. Such agreements are likely to involve price fixing, market or customer allocation, limitations of output, quality or innovation, or collective boycotts. 

In practice, it is often difficult to show that such agreements satisfy the requirements for exemption. Exemption may be possible, however, in limited circumstances, such as where the restriction is regarded as an "ancillary restraint" that is directly related and necessary to the implementation of a wider permissible environmental sustainability agreement. Also, some restrictions may be regarded as "object" restrictions only in certain contexts. On this basis, an environmental sustainability agreement that involves a group of competing purchasers agreeing only to purchase from suppliers that sell sustainable products is unlikely to be regarded as a collective boycott (which ordinarily is an "object" restriction), as the intention is not to eliminate a competitor, but to eliminate unsustainable products from the supply chain.

This is likely to continue to be an area where there is the greatest risk, and ambiguity, for businesses seeking to pursue collaborative approaches in the name of sustainability and climate change. Caution, and detailed advice, will continue to be needed.

If an environmental sustainability agreement does not have the "object" of restricting competition, it may only breach competition law if it has an appreciable negative effect on competition and is not exempted. Assessment of the effects of an agreement is fact-specific, including relevant factors such as market coverage of the agreement, the parties' market power and any exchange of competitively sensitive information.

Which agreements are capable of exemption?

The Draft Sustainability Guidance provides practical guidance for parties about satisfying the criteria for exemption. General points include the following:

• the specific benefits arising from the agreement may include future benefits (although these will need to be quantified and discounted as appropriate); 
• the benefits can be passed on both to direct customers and those who purchase from them (i.e. indirect customers);
• consumers may benefit both directly and indirectly, e.g. where they value the broader environmental sustainability benefits of the agreement and the impact of those benefits on others (outside the relevant market); and
• in general, the consumers receiving a fair share of the agreement's benefits are consumers of the products or services to which the agreement relates (i.e. consumers in the relevant market). However, where two markets are related, benefits achieved on separate markets can be taken into account, provided the consumers affected by the restriction and receiving the benefit are substantially the same or substantially overlap. 

What about climate change agreements?

While the exemption criteria for climate change agreements is the same as for other types of environmental sustainability agreements, the CMA takes a more permissive approach to the requirement for consumers to have a fair share of the agreement’s benefits. For this purpose, the CMA will take into account the full benefits to all UK consumers arising from the agreement, rather than considering consumers in the market affected by the agreement (and any related market). This approach reflects the exceptional nature of the harm posed by climate change (and therefore the exceptional nature of the benefits to consumers from combating or mitigating climate change or its impact). It represents a step-change in approach from the CMA, indicating a real willingness to accommodate arrangements that pursue these critical green objectives.

What is the CMA's proposed general approach?

The Draft Sustainability Guidance says parties:

• would be able to contact the CMA to seek informal guidance about an environmental sustainability agreement, including where they are unsure about the applicability of the Guidance – contact would be via a dedicated portal: sustainabilitytaskforce@cma.gov.uk 
• would be protected from fines for all environmental sustainability agreements where parties approach the CMA to discuss their agreement and the CMA does not raise any competition concerns (or any such concerns have been addressed);
• would be protected from CMA enforcement action against environmental sustainability agreements that are consistent with the Draft Sustainability Guidance; and
• should expect the CMA typically to publish a summary of the sustainability initiatives that it has discussed with parties, together with an assessment of risks and solutions. 

Here too the Draft Sustainability Guidance appears to indicate a welcome stance of openness and cooperation from the CMA. It will be interesting to see if this stance filters into the CMA’s enforcement of the competition rules outside the sustainability arena.

Next steps

Interested parties have until 11 April 2023 to comment on the Draft Sustainability Guidance. The CMA intends this Guidance, once finalised, to be incorporated into the CMA's broader Guidance on Horizontal Agreements (which is currently in draft form).

Dentons will be preparing a submission on the Draft Sustainability Guidance. Please contact us if you would like to be involved in the consultation, or to find out more about how the CMA's proposed approach could impact your environmental sustainability initiatives.