CMA publishes Green Agreements Guidance

On 12 October 2023 the CMA published the final version of its Green Agreements Guidance (Guidance) aimed at assisting businesses with their assessment of the application of the UK competition rules to environmental sustainability agreements entered into between competitors.  The aim of the guidance is to ensure that businesses are not unnecessarily deterred from cooperating, in a competition compliant manner, in order to achieve sustainability objectives that benefit consumers.

Publication of the final Guidance follows consultation on the CMA's draft guidance in February 2023 (see our blogpost on the draft guidance here).  The final Guidance, while largely reflecting the structure and content of the draft guidance, has been expanded with more detail, further clarifications and additional practical examples which will assist businesses in assessing their agreements.

Unlike the EU sustainability guidance, which was published in June 2023 as part of the EU Commission's guidelines on horizontal cooperation agreements (see our blogpost here), the CMA Guidance has been published as stand-alone guidance, but is intended to supplement the CMA's existing Guidance on Horizontal Agreements.  The CMA makes it clear that where both sets of guidance apply to the same agreement, the parties to the agreement may rely on the relevant part of whichever of the two is the more favourable to them.  Parties to vertical agreements (who operate at different levels of the supply chain) are also encouraged to consider the Guidance, to the extent that it covers issues that are relevant to their agreement, in addition to the CMA's Guidance on the Vertical Agreements Block Exemption Order.

On the whole the assessment of sustainability agreements under the EU and the CMA Guidance is pretty much aligned, but there are differences.  The definition of sustainability agreements in the CMA Guidance is narrower and unlike the EU definition it does not include wider societal objectives such as improving working conditions.  An important difference in approach between the two sets of guidance is around climate change agreements. Here the CMA is taking a more permissive approach to the application of the 'fair share of benefits to consumers' condition when assessing whether an agreement may benefit from an exemption, whereby it will be possible to take account of climate change benefits to all UK consumers, instead of only to consumers in the relevant market, when balancing the harm to competition against the benefits resulting from the agreement.

Accelerating the UK's transition to a net zero economy and promoting environmental sustainability are listed as one of the CMA's proposed strategic priorities in its 2023/24 Annual Plan and the Guidance is an important part of the CMA's wider work in this area.  Other initiatives include the CMA's Green Claims Code which contains guidance aimed at helping businesses understand and comply with their existing consumer protection obligations when making environmental claims, to prevent consumers being misled by environmental claims.  A number of investigations are currently ongoing into potential greenwashing (the CMA is investigating the fashion and FMCG sectors) and others are expected to follow. The CMA has also indicated that it will focus its work on emerging markets for environmentally sustainable products, services and technologies, in order to ensure those markets are founded on strong competitive dynamics.  It will use its market study tool (as it did for the electric vehicle charging sector) or its advocacy function to advise governments, regulators or industry participants, "in order to ensure these emerging markets are sufficiently competitive to enable environmentally sustainable initiative to thrive" (see Sarah Cardell speech at the Scottish Competition Forum).

Scope of the Guidance

The Guidance applies to environmental sustainability agreements, which are defined as agreements between competitors or potential competitors that are aimed at preventing, reducing or mitigating the adverse effects of economic activities on the environment or assist with the transition towards environmental sustainability.  Agreements that pursue broader societal objectives, such as improving working conditions, are not included under the Guidance.

This is in contrast with the EU guidance which takes a broader approach to sustainability, that goes beyond climate change and environmental concerns and encompasses a wide variety of objectives identified by the UN Sustainable Development Goals (and include issues such as upholding human rights and ensuring a living income).

Climate change agreements are identified as a sub-category of environmental sustainability agreements that contribute to combating climate change and are designed to reduce greenhouse gases emitted from the production, distribution or consumption of goods and services.  As discussed below, climate change agreements are treated more favourably when it comes to assessing the fair share of benefits to consumers under the exemption criteria.

Mixed agreements are defined as environmental sustainability agreements that generate both climate change and other environmental benefits.

Sustainability agreements unlikely to infringe the Chapter I prohibition

The Guidance covers a range of agreements that are unlikely to raise competition concerns because they do not relate to the way businesses compete or do not have an appreciable effect on competition:

• Non-appreciable agreements where the parties have a very small combined market share of the affected market and the agreement does not restrict competition 'by object'
• Agreements which do not affect the main parameters of competition such as price, quantity, quality, choice or innovation
• Agreements to do something jointly which none of the parties could do individually (eg because they do not have the technical capabilities, or because of the level of the risk involved or the level of investment required)
• Cooperation between competitors in order to comply with a legal requirement, provided the cooperation is required as opposed to merely encouraged
• Agreements to pool objective, evidence-based information about, or provide a rating on, the environmental sustainability credentials of suppliers, provided it does not require the parties to purchase (or not purchase) from those suppliers and the parties do not share competitively sensitive information about prices or quantities purchased from those suppliers
• Creation of industry standards, provided a number of conditions around the creation of the standard and its implementation are met
• Agreements around the phasing out or withdrawal of non-sustainable products or processes, provided it does not involve an appreciable increase in price for consumers or an appreciable reduction in quality or choice
• Industry-wide environmental targets, provided that the participating businesses remain free independently to determine their own contribution and the way in which the targets are realised or exceeded
• Agreements between shareholders to vote for promoting corporate policies that pursue environmental sustainability

Sustainability agreements that could infringe the Chapter I prohibition

The CMA differentiates between sustainability agreements that restrict competition by object (and can be regarded by their very nature as being harmful to competition) and agreements that have the effect of restricting competition (for which the competition authorities need to demonstrate the negative effect on competition).

Restriction by object

Sustainability agreements that involve price fixing, market sharing, customer allocation, output limitation or limitation of quality or innovation typically restrict competition by object. Although in practice it can be difficult to demonstrate that such agreements meet the conditions for exemption, parties to such agreements should not automatically assume they are prohibited, and the Guidance contains examples of by object restrictions that may be justified on sustainability grounds.

Ancillary restraints

There are also circumstances where certain restrictions, which would otherwise be a restriction of competition by object, may be permitted because they are regarded as an ancillary restraint to a wider environmental sustainability agreement that is itself not in breach of the Chapter I prohibition or benefits from an efficiencies exemption.  An ancillary restraint will be permitted where it is objectively necessary to implement that agreement and is proportionate to the objectives of the wider environmental sustainability agreement. This will only be the case if that wider agreement would be impossible to carry out absent the restriction, taking into account its objectives and the legal and economic context.

Collective withdrawal

The Guidance clarifies that there are certain types of restriction that would in some contexts be regarded as a restriction of competition by object but would in other contexts be considered as a restriction by effect.  An example is an environmental sustainability agreement that involves a group of competing purchasers agreeing only to purchase from suppliers that sell sustainable products. In other circumstances this would be regarded as a form of collective boycott but in this case the intent is not to eliminate a competitor but to eliminate unsustainable products from the supply chain.  Similarly, an environmental sustainability agreement that involves a group of competing suppliers agreeing not to provide products or services to customers that produce environmentally damaging products or services would also be unlikely to restrict competition by object, provided the agreement does not harm the parties' competitors.

Effects assessment

The assessment of the effects on competition for sustainability agreements will be fact specific, but factors to take into account include:

• Market coverage of the agreement
• Whether the participating businesses, individually or collectively, have market power
• Extent to which the agreement constrains the freedom of action of the parties
• Ability for non-parties to participate
• Whether or not the agreement involves the exchange of commercially sensitive information not necessary for the performance of the agreement
• Whether the agreement is likely to result in an appreciable increase in price or reduction in output, variety, quality or innovation

Application of the exemption criteria to environmental sustainability agreements generally

Where an agreement is caught under the Chapter I prohibition it may benefit from an exemption, provided it meets the four conditions set out in Section 9 of the Competition Act 1998. The Guidance provides specific guidance on how the parties should demonstrate that these conditions are met in the context of a sustainability agreement.

Benefits to production, distribution or technical or economic progress

The benefits to production, distribution or technical or economic progress claimed by the parties must be objective, concrete and verifiable and need to be substantiated.  Examples of benefits include reducing greenhouse gas emissions; creating new or improved products which have a reduced impact on the environment; reducing production or distribution costs; shortening the time it takes to bring environmental sustainable products to the market; improving production or distribution processes and increasing innovation, such as developing new, more energy-efficient processes.

Helpfully, the Guidance recognises that future benefits can be taken into account, as it is not unusual in the context of environmental sustainability for benefits to materialise over a relatively long period of time.

Benefits may also be felt outside the UK as well as in the UK, but the agreement will only benefit from an exemption if the benefits to UK consumers outweigh the harm they suffer as a result.

Indispensability

An agreement or a restriction is likely to be considered indispensable or reasonably necessary to achieve the claimed benefits if the parties can demonstrate that, without the agreement or restriction, they would not be able to achieve the same level of benefits or would achieve them in a less efficient manner (eg at greater cost or over a longer timeframe).  This does not provide a general basis to justify moving away from competition on the developments of greener technologies, supply chains or products and the Guidance provides a range of examples where restrictions would or would not be considered indispensable.

Consumers receive a fair share of the benefits

The parties need to be able to demonstrate that the benefits resulting from the agreement are passed on to UK consumers, and that those benefits outweigh the harm suffered by UK consumers as a result of the agreement.  The relevant consumers for this purpose are consumers of the product or services to which the agreement relates (consumers in the relevant market).  The cost to those consumers of the restrictive effect must therefore be offset by the benefits those consumers receive.  Where two markets are related the benefits achieved on separate markets can be taken into account, provided the consumers affected by the restriction and those receiving the benefit are substantially the same or substantially overlap.

The Guidance recognises that consumers may benefit directly, as a result of their consumption or use of the products covered by the agreement, but that they may also benefit indirectly, for example where they value the broader environmental sustainability benefits of the agreement and the impact of those benefits on others.  In order for such indirect benefits to be taken into account the parties to the agreement would be expected to provide evidence to demonstrate that consumers value those benefits, for example through consumer survey evidence.

The parties will also need to demonstrate that the benefits are sufficiently substantial in order to offset the restriction of competition.  Where it is not clear that the benefits are of a sufficient scale to offset the harm to competition it may be necessary to quantify the benefits.  The Guidance lists a number of methodologies for the quantification of environmental benefits, but other methods may be equally appropriate, provided businesses follow best practice applicable to the relevant industry and the environmental benefits.

No substantial elimination of competition

Finally, the agreement should not eliminate competition in respect of a substantial part of the products concerned. Where the agreement covers the entire market this condition can still be met if there remains scope for the parties to compete on key parameters such as price or quality.  Similarly, elimination of competition for a limited period of time, and where this has no impact on competition after that period lapses, should also not prevent this condition being met.

Exemption for climate change agreements

The Guidance adopts a more permissive approach when applying the exemption criteria for climate change agreements.  For those agreements the 'fair share to consumers' condition can be satisfied by taking into account the totality of the benefits resulting from the agreement to all UK consumers, instead of apportioning those benefits between consumers on the market affected by the agreement.  The CMA considers this approach is justified by the exceptional nature of the harms caused by climate change and reflects the degree of public concern, as well as the national and international commitments entered into by the UK government.

To benefit from this approach the parties to the agreement will need to demonstrate that the benefits are in line with existing legally-binding requirements or established national or international targets, that UK consumers benefit from the agreement and that the benefits offset the harm.

For 'mixed agreements', which generate both climate change benefits and other environmental benefits, the climate change benefits arising from the agreement should be assessed using the above method, whereas the other environmental benefits are to be assessed under the general approach.

CMA's open-door policy, enforcement action and protection from fines

The CMA will operate an open-door policy under which businesses can approach it for informal guidance on their proposed agreements, either because they raise issues not covered by the Guidance or where it is not clear how the Guidance will apply. Parties should contact sustainabilityguidance@cma.gov.uk with their request for informal guidance.  The CMA will also accept requests from representative bodies such as trade associations or NGOs, where a number of businesses are involved in an agreement or where the representative body has been coordinating the development of the agreement within the industry.

The CMA does not expect to take enforcement action in relation to an agreement that was discussed in advance under its open-door policy and where the CMA did not raise concerns or where any concerns that were raised have been addressed by the parties.

If the CMA subsequently concludes that further investigation of the agreement is necessary, it will not impose fines or director disqualification measures where it concludes that the agreement is in breach of the Chapter I prohibition, provided the parties did not withhold relevant information from the CMA that would have made a material difference to its initial assessment.  Parties are also expected to keep their agreements under review in light of the informal guidance provided by the CMA and will need to reassess compliance with the competition rules if the basis on which the informal guidance was given no longer applies.

The CMA will typically publish a confidential summary of the agreements for which informal guidance is sought, with its assessment of risks and proposed solutions, to assist companies considering similar initiatives.

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