The UK Competition and Markets Authority (CMA) has published its third informal opinion since adopting its "open door policy" under the October 2023 Green Agreements Guidance.

In this case, the CMA has blessed a trade association-led agreement appointing a single firm as the recommended provider of an ESG supply chain ratings platform to all UK builders merchants.

The opinion provides a useful blueprint for how other industries may standardise ESG ratings industry-wide when using third-party providers, without falling foul of competition law.

We outline below some of the key takeaways from the CMA's opinion.

Importance of transparency in setting standards, data portability and facilitating switching to other third-party providers

The CMA identified two core concerns with the Builders Merchants Federation's (BMF) proposal, namely: (i) using a single service provider may foreclose other providers from servicing the market; and (ii) selecting the provider at the launch of the scheme without immediately running a new competitive process could provide them with market power that could be exploited in the initial period.

However, the CMA considered that these risks were reduced by the following additional features offered by BMF:

• developing a standard ESG questionnaire for the industry, which will be "open source" to enable competitors to develop alternative solutions;
• running a competitive process within 24 months (and on an ongoing basis) to determine which assurance provider to recommend;
• ensuring data can be readily extracted and ported to another provider; and
• implementing safeguards on the flows of competitively sensitive information.

Trade associations can play an important role in ensuring competition law compliance

This marks the first informal opinion directed at a trade association issued by the CMA under its Green Agreements Guidance. BMF helped secure the CMA's approval by agreeing to take reasonable measures to review and reassess the proposal's compliance with competition law, such as:

• retaining ownership and responsibility for the development of the supply chain questionnaire;
• considering whether: (i) the 24-month term of recommendation is appropriate going forward; and (ii) the provider is satisfactory in terms of pricing and quality in the initial term; and
• implementing feedback from both members and non-members.

The CMA's "light touch" approach to trading off green benefits v. anti-competitive effects

The CMA adopted an explicitly "light-touch" approach to analysing the anti-competitive effects of the transaction versus the cost and green benefits, employing a relatively flexible evidential standard predicated on the plausibility and reasonable prospect of benefits.

Nevertheless, an economic assessment to quantify both the cost benefits to suppliers and merchants using a single platform was carried out, using cost modelling obtained from the parties and emission reduction estimates using government data.

Moreover, the CMA's assessment of the proposal as a "mixed agreement" allowed for consideration of the benefits for all UK consumers, concluding that the proposal would have environmental benefits for all UK consumers through mitigating the impact of climate change.

Beware greenwashing risks

While the informal opinion gives the parties comfort on competition law compliance, it does not touch on whether the scheme may fall foul of greenwashing rules (particularly under the CMA's Green Claims Code). With the CMA's direct enforcement powers recently coming into force (see our recent client alert here), it is essential that consumer law risks are not overlooked when implementing similar schemes.

Comfort comes at a price

Despite many aspects of the BMF's proposal falling squarely within the existing Green Agreements Guidance, the initiative took more than a year to secure informal comfort, during which the BMF had to provide revisions to its proposal which could make it significantly less attractive to the selected preferred service provider.

It is also noteworthy that the CMA's assurance that it will not pursue the initiative for enforcement action (and, if it did, it would not be subject to fines) remains subject to some important caveats regarding BMF's ongoing monitoring of the scheme.