On 28 February 2023, the UK’s Competition and Markets Authority (CMA) published draft guidance on its intended approach towards business collaborations that pursue environmental sustainability goals (the Draft Guidance). Interested parties are invited to submit views by 11 April 2023.
The Draft Guidance is limited to “environmental sustainability agreements” (agreements or practices which are aimed at preventing, reducing or mitigating the adverse impact of economic activities on environmental sustainability). These include agreements aimed at reducing greenhouse gas emissions, improving air or water quality, conserving biodiversity or promoting sustainable use of raw materials. Unlike guidance published by some other authorities in Europe (including the Dutch ACM and European Commission), it does not extend to agreements which pursue broader societal objectives, such as improving working conditions or animal welfare standards.
A significant contribution to the on-going debate
The Draft Guidance positions the CMA amongst other leading authorities that are driving the global debate on how competition laws should adapt (if at all) to enable businesses to collaborate on sustainability initiatives. Proponents of reform consider that collaboration between businesses is required given the size of the challenge posed by climate change (and other environmental sustainability issues). They are concerned that without the green light to collaborate on sustainability initiatives, businesses will be disincentivised from taking important action given the risk of breaching competition law and the potential “first mover” disadvantage of acting unilaterally.
Against a backdrop of increasing pressure – from governments, shareholders, other stakeholders and society at large – on companies to meet ambitious sustainability goals, many policy makers have been taking steps to avoid competition laws being seen as an obstacle to legitimate sustainability collaborations. But there remains a lack of clarity and consensus on some key issues which are central to any antitrust risk assessment (see our earlier briefing). Much of the debate focuses on two key issues:
1. If a collaboration restricts competition, which “sustainability benefits” can be taken into account when weighing the benefits of the collaboration against its negative effects – and to whom and when must such benefits accrue: consumers who are directly affected by the potential harms (e.g. those paying higher prices or facing reduced choice) or everyone who benefits (e.g. society as a whole benefiting from reduced greenhouse gas emissions) – and what about future consumers and society?
2. How should future sustainability benefits be measured and evidenced in an era of tougher enforcement, heavy corporate and individual penalties and an ever-increasing threat of litigation by impacted or otherwise disaffected groups?
Approaches so far in Europe have ranged from:
- tailored guidance to help companies self-assess their arrangements within the traditional legal frameworks – an approach currently adopted by the European Commission (see our blog);
- more flexible policies for agreements which reduce “environmental damage” (as adopted by the Dutch competition authority – see our blog) or make a demonstrable contribution to climate change goals (as proposed by the CMA) – where the authorities depart from the traditional approach by allowing benefits which accrue to consumers outside the relevant market to be taken into account provided certain conditions are met;
- to legislative reforms which explicitly allow the authority to take sustainability considerations into account in the assessment (as adopted in Austria – see our blog).
Key points to note in the Draft Guidance
Mirroring the EU’s legal framework, the UK’s Competition Act 1998 (Competition Act) prohibits firms from entering into anti-competitive agreements (the Chapter I prohibition) but provides a limited exemption when the benefits of the agreement, in terms of production, distribution or economic progress, outweigh the harms, and customers receive a fair share of those benefits.
The Draft Guidance discusses three categories of “environmental sustainability agreements” within this framework:
1. Environmental sustainability agreements which are unlikely to infringe the Chapter I prohibition, either because they do not relate to how businesses compete or because they will not have an appreciably adverse effect on competition. Examples could include agreements which relate to internal corporate conduct of business (such as to eliminate single-use plastic in their business premises), joint campaigns to raise awareness about environmental sustainability issues, the creation of industry standards aimed at making products or processes more sustainable, setting non-binding targets or ambitions for the whole industry with regard to environmental sustainability (e.g. non-binding targets to reduce carbon dioxide emissions) and initiatives which none of the parties could have carried out on their own (provided certain conditions are met).
2. Environmental sustainability agreements which could infringe the Chapter I prohibition, and which will be prohibited unless they benefit from the exemptions for environmental sustainability agreements generally or for climate change agreements specifically. The CMA highlights the distinction between “object” restrictions (where harm is assumed) and “effects” restrictions (where harmful effects must be shown). Particular caution is needed for any agreements which involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation as these typically restrict competition by “object”. At the same time, the CMA points out that parties to such agreements, or proposals for such agreements, should not automatically assume that they are prohibited, and should instead consider whether they might benefit from the exemptions. A helpful distinction, for example, is made between competing purchasers agreeing to only purchase from sustainable suppliers and agreements which are intended to eliminate a competitor (a “horizontal collective boycott”).
3. Environmental sustainability agreements which can benefit from exemption. As for all potentially anti-competitive agreements, parties seeking to benefit from exemption from the Chapter I prohibition must be able to demonstrate that: (1) the agreement contributes to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress; (2) the agreement is indispensable to the achievement of those benefits; (3) consumers will receive a fair share of the benefits; and (4) the agreement does not eliminate competition in respect of a substantial part of the products concerned.
Helpfully, the CMA confirms that a range of environmental benefits can form part of the assessment provided those benefits can be substantiated. When assessing whether benefits are passed on to consumers, the CMA also confirms that benefits can include future as well as current benefits that accrue to direct as well as indirect users and provides guidance on how businesses can evidence this (which the CMA acknowledges may sometimes be difficult in practice and that the necessary level of specificity/precision of the evidence will vary case-by-case).
An important distinction is, however, made for “climate change agreements” (a sub-set of “environmental sustainability agreements” which contribute towards the UK’s binding climate change targets under domestic or international law) where the CMA proposes a more permissive approach. As part of its strategic priorities, the CMA has committed to help accelerate the UK’s transition to net zero, describing climate change as “a special category of threat”. Significantly, rather than limiting eligible benefits to those accruing to consumers in the relevant product market, for this special category of agreements, the CMA intends to take account of the totality of benefits for all UK consumers arising from the agreement provided a number of conditions are met:
(i) the benefits are in line with existing legally-binding requirements or well-established national or international targets;
(ii) UK consumers benefit; and
(iii) the benefits offset the harm.
Parties will need to carefully assess the environmental benefits and negative effects and, where appropriate, quantify the benefits in accordance with recognised industry practice. This marks a notable departure from the traditional approach to horizontal agreements under EU and UK competition law and aligns the CMA more closely with the Dutch authority’s proposed approach for “environmental damage agreements”.
Businesses will welcome the CMA’s “open door” policy and offer of informal guidance for companies that are considering entering into an environmental sustainability agreement. Another welcome development is the CMA’s proposed policy that it will not fine companies that implement an agreement which was discussed with the CMA in advance and where the CMA did not raise any competition concerns (or where any concerns that were raised by the CMA have been addressed).
The consultation closes on 11 April 2023. The CMA has expressed an interest in hearing from companies with comments, questions or concerns on any aspects of the Draft Guidance, or those looking for clarity on how the Draft Guidance will be applied.
The CMA is keen to ensure that its guidance is commercially workable for companies having to meet environmental goals. A key challenge however remains for the many climate change agreements which are cross-border in scope: the lack of consensus internationally on how authorities assess environmental benefits and negative effects. Other leading authorities are continuing to review their approaches – not least the European Commission which is due to publish final guidance in June 2023 – and, outside of Europe, the Japanese Fair Trade Commission, which is currently consulting on its draft guidelines. Further consensus would be welcome given the views expressed by several leading authorities – including in the US - that there are no exemptions or carve-outs for sustainability-related collaborations and the often politically charged debate on climate change and environmental sustainability.
We will be responding to the CMA and engaging in discussions over the coming weeks. We would be delighted to assist with any response you are considering preparing and to discuss the Draft Guidance and the current risk landscape internationally. Please get in touch for more details.