CMA Guidance on Environmental Sustainability Agreements

The CMA (Competition and Markets Authority) recently published guidance on environmental sustainability agreements. Its Draft Sustainability Guidance represents a shift in the CMA’s willingness to accommodate agreements between competitors where they support the UK’s environmental and climate change goals, provided the agreements are not anti-competitive at their core.

👉 In this article we’ll explore the current UK competition law when it comes to sustainability agreements and what effect the Draft Sustainability Guidance will have.

The CMA’s Draft Sustainability Guidance is a recently published draft guidance that aims to provide companies with the support and clarity needed to undertake collaborations that genuinely give rise to sustainability benefits. The law in this area can be unnecessarily vague and unclear which means that companies may be reluctant to form agreements aimed at tackling climate change or environmental sustainability. 

The draft guidance outlines how competition law (namely the UK’s Competition Act 1998) applies to environmental sustainability agreements between firms operating at the same level on the supply chain. The draft guidance aims to support the transition to net zero by providing clear guidance and examples for companies and by adopting an open door policy that allows businesses to approach the CMA directly for guidance. 

Before we look into the details of the guidelines let’s first explore what the CMA does and what the Companies Act 1998 says with regards to agreements between companies. 

The CMA is the UK’s Competition and Markets Authority - in other words it’s the UK’s competition regulator. It is a non-ministerial government department tasked with strengthening business competition and preventing anti-competitive behaviour. 

Formed in 2013, the CMA assumed the functions of the Competition Commission and the Office of Fair Trading. It is tasked with a number of responsibilities, including: investigating mergers, carrying out market studies and investigations, investigating breaches of prohibitions under the Competition Act 1998, enforcing consumer legislation, considering regulatory appeals, and oversight of the UK internal market.

The UK Competition Act 1998 is the current major source of competition law in the UK. It prohibits anti-competitive agreements between businesses and provides a framework for identifying and dealing with restrictive business practices and abuse of a dominant market position. 

Chapter 1 of the Competition Act prohibits agreements between two or more businesses that prevent, restrict or distort competition within the UK and that might affect trade within the UK.

Examples of restricted actions that it covers include the prohibition of: 

• Agreements to fix prices or terms of trade 
• Collaboration to split markets and customers between competitors
• Bid rigging whereby a number of suppliers agree not to bid against one another on a contract or tender

However, the Chapter 1 prohibition is not absolute. Section 9 sets out an exemption to the prohibition. It applies where an agreement (even though it is anti-competitive in principle) offers benefits that outweigh any harm to competition. This is conditional on consumers receiving a fair share of the benefits, the fact that there is no other way to attain the benefits, and that the restrictions don’t lead to the elimination of competition for the substantial part of the products or services in question. 

Examples of benefits that might meet the criteria of the section 9 exception include the improvement of production or distribution, the promotion of economic or technical advancement, or where the agreement has some sort of sustainable or environmental benefit. 

The Competition Markets Authority recently published draft guidance (the Draft Sustainability Guidance) that aims to provide further clarity when it comes to the application of Chapter 1 prohibitions and section 9 exemptions to environmental sustainability agreements between competitors. The draft guidance is currently undergoing a period of consultation, and once complete we should see the finalised version of the guidance.  

👉 Note that environmental sustainability agreements also include any agreements which combat or mitigate climate change. 

❓What is a consultation period? The CMA is undertaking a consultation on its draft guidance, which means that the CMA is looking for public comment and stakeholder input. Public consultation is intended to make government policies and laws more effective by taking the views of the public and interested groups into consideration. Added benefits are that the process also improves transparency and efficiency.

The CMA has invited responses from the public and stakeholders, and has also organised several webinar and roundtable events. 

Before we look at the CMA’s recently published Draft Sustainability Guidelines, let’s first take a look at what current UK competition law says when it comes to sustainability agreements between market competitors. 

Sustainability agreements are agreements between businesses for the attainment of sustainability goals. Sustainability goals is a very wide term that encompasses a wide range of objectives in addition to tackling climate change. An example of such an agreement is where two companies agree to share expertise in order to make their products more energy efficient. 

Any agreements between companies fall under the remit of the Competition Act 1998, and particular attention must be paid to the Chapter 1 prohibition which prevents any anti-competitive agreements between companies. However, as already discussed, section 9 allows for an exemption where the benefits of the agreement outweigh any harm. Genuine environmental sustainability agreements may fall under this section 9 exemption. However, it is an area of law which has been criticised for being vague and unclear. 

As a UK Government body, the Competition and Markets Authority must support the UK Government’s commitment to transition to net zero emissions by 2050. Transitioning to a low carbon economy is therefore one of the CMAs strategic objectives. In line with this objective, the CMA wants to ensure that competition policy doesn’t create obstacles to sustainable development, nor to prevent companies from taking part in any sustainability initiatives. In order to facilitate this, the CMA has previously set out key considerations for businesses and trade associations when they enter into sustainability agreements (the CMA’s new Draft Sustainability Guidance builds on this). Let’s take a closer look at the CMA’s guidance on the application of Chapter 1 and section 9 to environmental sustainability agreements. 

Use a fair standard-setting process

Many sustainability agreements fall under the category of standard setting agreements. This means businesses (often through trade associations) set standards on the environmental performance of products, production processes, or the materials used in production.

When pertaining in this kind of activity, businesses can ensure that they’re complying with competition law by: 

• Allowing sufficient time for stakeholders to be informed of each stage of the formation of the standard, for example by publishing regular updates in trade journals
• Allowing all market competitors to participate in the standard setting process
• The standard is fair, non-discriminatory, and reasonable
• If the standard involves intellectual property rights, the licence to this must be offered to all third parties on fair, reasonable, and non-discriminatory grounds 
• Alternative standards (for example higher standards) can be developed

Avoid ‘by object’ restrictions of competition and anti-competitive behaviour

‘By object’ restrictions are agreements between companies which are likely to prevent, restrict or distort competition. This includes activities such as price fixing, output limitation, the sharing of markets and customer and bid rigging. Companies must avoid these actions in any sustainability agreements as they are almost always incompatible with competition law.

Business cartels

Cartels are one of the most serious anti-competitive behaviours and sustainability agreements must not be used as a cover for this kind of behaviour. 

In such an agreement, businesses usually agree to one of the ‘by object’ restrictions mentioned above in order to drive up prices while creating the illusion of fair competition.

Avoid sharing sensitive information

Companies must avoid sharing competitively sensitive information with competitors. This includes information on prices and output plans.

Consider exemptions

Businesses should assess the size of their market share because where this is below a certain threshold, any sustainability agreement may benefit from special exemptions. There are different thresholds depending on the type of agreement, and generally speaking if the businesses involved do not exceed the relevant threshold then their agreement is not considered to create any serious competition restrictions. 

Some sustainability agreements may also fall under one of the categories that benefit from a block exemption, for example sustainability initiatives that fall under R&D or specialisation agreements. This means that if the sustainability agreement satisfies the conditions set out in the applicable Block Exemption Regulations, it could be considered compatible with competition law despite any anti-competitive effects. 

Some agreements that do not fall under one of the block exemptions may still be allowed where the benefits they bring are considered to outweigh the disadvantages of any potential restriction of competition. In this case, businesses must be able to prove that: 

• The agreement generates efficiencies (eg, improves the quality of a product) 
• There is no better way to achieve the outcome
• The efficiencies benefit consumers
• The agreement will not eliminate market competitors 

In early 2023 the Competition and Markets Authority published draft guidance on the application of competition law to environmental sustainability agreements. This was intended to provide further clarity on the Competition Act 1998’s Chapter 1 prohibitions with regards to such agreements. 

The Draft Sustainability Guidance represents a meaningful shift in approach to UK competition law when it comes to the UK’s environmental and climate change commitments and provides further clarity on the application of competition law with regards to sustainability agreements. Let’s take a look at the key provisions below. 

First up, what kind of agreements are covered by the Draft Sustainability Guidance? 

• Environmental sustainability agreements - these are agreements between competitors that aim to prevent, mitigate or reduce the adverse impacts of economic activities on environmental sustainability. For example, agreements that aim to reduce pollution, or promote the use of sustainable materials. 
• Climate change agreements - these are sustainability agreements that contribute towards the UK’s binding climate change targets. For example this could be an agreement between competitors that aims to phase out a carbon intensive production process in order to reduce carbon emissions. 

The Draft Sustainability Guidance goes on to outline seven different types of specific agreements that are unlikely to infringe on competition law. These are: 

• Agreements which do not relate to the way that businesses compete with each other on price, quantity, quality, choice or innovation.
• Agreements to do something jointly where this would not be possible individually (ie. where each party lacks the individual resources required, or the technical expertise or capabilities). 
• Cooperation that is required by law. 
• Pooling information about suppliers or customers provided that this information doesn’t include competitively sensitive information. 
• Creation of industry standards provided this is transparent, reasonable, voluntary and non-discriminatory. 
• Phasing out of non-sustainable products or processes. 
• Industry-wide efforts to tackle climate change. 

However, it should be noted that where environmental sustainability agreements have the ‘object’ of restricting competition (ie. they involve price fixing, market allocation, limitations on output, collective boycott etc.) they will be regarded as being harmful to competition. 

In practice it can be quite difficult to determine whether agreements between businesses satisfy the requirements for exemption or not. For example, where a group of competitors agree to only purchase materials from sustainable suppliers this would ordinarily be considered to a collective boycott and therefore anti-competitive, however, if the intention is not to eliminate a competitor but to eliminate unsustainable materials from the supply chain it is unlikely to be considered as anti-competitive. 

What is crucial to meeting the requirements of exemption is that the action produces a benefit that outweighs any harmful effects - consumers must have a fair share of this benefit. The Draft Sustainability Agreement also offers some guidance on this and outlines that this benefit can include future benefits, and may also benefit direct and indirect customers. 

It’s also notable that the CMA is a little bit more lenient when it comes to climate change agreements. It allows the full benefits to all UK consumers to be considered, as opposed to only the consumers within the specific market affected by the agreement. This new approach shows a shift in position from the CMA and indicates that it is prioritising the support of green objectives. 

The new guidance published by the CMA helps to clarify the law when it comes to environmental sustainability agreements between companies. It also indicates that the CMA has adopted a more lenient approach when it comes to these types of agreements, particularly where they contribute towards the fight against climate change. It is hoped that this will encourage more businesses to work together towards achieving environmental goals. 

👉 The CMA is currently undertaking a period of consultation on the Draft Sustainability Guidance. Once complete it will work towards finalising the guidance. 

❗️Since this area of law continues to be ambiguous companies should proceed with caution when it comes to sustainability agreements and seek legal guidance and advice. 

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