The Competition and Markets Authority has today published its long awaited Draft Guidance on Environmental Sustainability Agreements.

The Draft Sustainability Guidance is intended to provide more certainty on antitrust risk for businesses who enter into agreements aimed at achieving environmental goals and reflects calls by businesses and practitioners for more clarity amid concerns that legal uncertainty could chill legitimate efforts to work together to combat climate change.

We welcome the CMA’s contribution to the sustainability debate and the introduction of the Draft Guidance. If published in its current form, we believe it would significantly assist businesses to manage their antitrust risk exposure and open the door for more businesses to pursue environmental initiatives at industry level.

The consultation is open until 11 April 2023. If you would like to discuss your response or contribute to the Linklaters submission, please get in touch with the authors or your usual Linklaters contact.

Application to environmental agreements and not broader sustainability themes

The Draft Guidance applies to environmental sustainability agreements focusing on improving air or water quality, conserving biodiversity or promoting sustainable use of raw materials. Broader societal objectives such as improving working conditions are, unsurprisingly and in our view rightly, excluded.

Within environmental sustainability agreements, the CMA identifies a sub-set of “climate change agreements” which are agreements contributing towards the UK’s binding climate change targets. These are designed to reduce greenhouse gases and examples include agreements not to provide support such as financing or insurance to fossil fuel producers – an issue which has recently hit the headlines in the context of the various financial sector-specific net zero Alliances – see our blog here.

Exemptions for agreements that could restrict competition

The Guidance notably signals the CMA’s willingness to take a clear position on the most heated topics of debate in this area. Namely, when do the positive environmental effects of an agreement outweigh restrictive effects such as increased prices, reduced output or restrictions on variety.

An agreement that results in an appreciable restriction of competition can be exempted from the Chapter I prohibition (the UK equivalent of Article 101 TFEU) where it fulfils four conditions:

• The agreement contributes to, and the parties can produce evidence of, benefits such as improving production or distribution or contributing to technical or economic progress – benefits will include reducing greenhouse gas emissions, reducing the environmental impact of products, introducing cleaner technologies or developing more energy-efficient processes; and
• The agreement and any restrictions of competition within the agreement must be indispensable to achieve those benefits; and
• Consumers must receive a fair share of the benefits and the benefits must be substantial and demonstrable; and
• The agreement must not eliminate competition.

The key areas of debate have been around what benefits are relevant to the assessment (and how these are demonstrated / evidenced) and who are the relevant “consumers”. The CMA adopts a broad approach to both concepts in the Draft Guidance.

Future benefits and non-monetary benefits relevant to the assessment

The CMA confirms in the Draft Guidance that future benefits are relevant to the assessment and not just current benefits. This is crucial in the context of sustainability agreements where benefits may materialise over a relatively long period of time and given it is future generations who will suffer most from inaction today. The CMA notes that there are a number of economic techniques that can be used to assist in quantification of future benefits and non-monetary benefits and highlights that the CMA is willing to discuss with business the appropriate way to quantify benefits as part of its open-door policy.

Broad Interpretation of the Relevant Consumer

In general, when assessing whether they receive a fair share of the benefits of an agreement, competition law has considered the relevant consumers to be the purchasers of the product or service to which an agreement relates (i.e., those within the market). For these consumers the restrictive effect of the agreement must be directly off-set by the benefit. The Guidance confirms that ordinarily it is only the proportion of any wider societal benefits that can be apportioned to consumers of the product in question that will be relevant.

However, in a welcome step-change from this approach, the Guidance indicates that there may be circumstances where it would also be appropriate to take into account consumers on a separate but related market. This will be the case where this second bucket of consumers are substantially the same as, or substantially overlap with, those within the direct market. 

Special Exemption for Climate Change Agreements

For Climate Change Agreements (i.e. those that contribute to reducing greenhouse gas emissions) the CMA takes an even broader approach to the relevant consumer. For these agreements, the benefit of the agreement is the benefit to all UK consumers arising from the agreement. The CMA takes this position “exceptionally” because of the exceptional nature of the harms posed by climate change (and therefore the exceptional nature of the benefits to consumers from mitigating the impact of climate change).

An example of this in action is an agreement between delivery companies to switch to electric vehicles to reduce CO2 emissions. The harm to competition that results can be off-set by looking at the benefit to all UK consumers and not only customers of those delivery companies.

Informal Guidance and Protection from Fines

Days of the ‘fireside’ chat are back, with businesses being encouraged to approach the CMA, at an early stage, for informal guidance on their environmental sustainability initiatives through its dedicated channel (via email to sustainabilitytaskforce@cma.gov.uk). Consistent with the approach of other authorities, this open-door engagement avenue will be anchored in the Guidance, with parties invited to highlight specific issues they consider remain unclear following their own self-assessment. We anticipate the CMA will turn back approaches which do not make clear that the Guidance has already been considered in detail.

In addition to publicly available information about the initiative, the CMA’s informal assessment will also consider documents and information received from the parties, including via meetings. In some circumstances, the CMA may provide comfort that it does not consider competition law is engaged or that it considers conditions for an exemption are met. In others, the CMA may agree adjustments to the initiative with the parties – it expects these to be implemented and will monitor and consult as needed regarding further adjustments.

The CMA acknowledges that its approach to environmental sustainability initiatives will need to evolve, flagging that the Guidance may be updated or supplemented, which is welcome given the rapid pace of developments in this arena. Businesses should also expect that the CMA, following consultation with the parties on e.g., confidentiality, will publish a summary of initiatives it has considered informally, containing an assessment of identified risks and proposed solutions.

On the enforcement front, businesses should take comfort from clear statements that the CMA will not:

• take enforcement action against agreements that clearly correspond to examples in, and are consistent with the principles set out in the Guidance; or
• issue fines against parties that implement agreements discussed informally with the CMA in advance, where the CMA’s competition concerns (if any) were addressed by the parties (provided that the parties did not withhold any relevant information from the CMA during its assessment phase which would have made a material difference to the outcome).

What else?

As well as tackling the key points head-on, the Guidance also provides helpful clarity in other areas including: (i) examples of agreements that will not usually infringe competition law; and (ii) clarity that agreements which restrict competition “by object” such as price fixing or market sharing will not generally benefit from any exemption.

What next?

By issuing this guidance the CMA joins other regulators, notably the Dutch and Austrian regulators, at the vanguard of the antitrust and sustainability debate. The European Commission is also set to issue guidance as part of its forthcoming Horizontal package this spring although elements of the EC’s proposal do not go as far as the CMA goes in this Draft.

The Guidance is most welcome and includes a number of practical and concrete examples that will bring more certainty to business. The period of consultation may provide more such examples as well as commentary from businesses and advisors who are grappling with how the legal principles apply in practice. Linklaters will be submitting a response to the Consultation and would welcome the chance to discuss our views further with interested businesses.