CMA Guidance on Environmental Agreements

1. Introduction

The CMA published its guidance on environmental sustainability agreements in October 2023 (the "Guidance"). The Guidance clarifies how the general prohibition on anti-competitive agreements (the "Chapter I prohibition") will be applied, and indeed not applied, to agreements between competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment, or assist with the transition towards environmental sustainability ("environmental sustainability agreements" or "ESAs") including climate change. Certain of the principles in the Guidance, however, also apply to vertical agreements and show more generally, the CMA's possible approach to green issues across its portfolio – in particular, the approach to climate change agreements in the Guidance will apply to vertical agreements. The Guidance does not, however, apply to agreements pursuing wider societal objectives, such as human rights-related issues. In other words, it applies only to agreements relating to the "E" in "ESG". The Guidance was published after what the CMA has described as an 'intense period' of consultation and modifications. This is not surprising given the prominence of green issues across the UK government, and further afield as well as the complexity of sometimes competing policy considerations in play: how can competitors work together in a way which helps the environment but not unduly restrict competition?

The Guidance should be read as part of a broader programme of green action by the CMA, using all the tools in its armoury, as part of its public commitment to promote environmental sustainability and help accelerate the UK's transition to a net zero economy in line with its published priorities in its latest annual plan. To this end, the Guidance sets out to give businesses the confidence to collaborate in this space, without undue fear of competition law enforcement impeding legitimate cooperation. The CMA observes that this is important, because industry collaboration is likely to be necessary to meet the UK's net zero economy ambitions and binding international commitments (Guidance, paragraph 1.5.).

To the extent that the Guidance provides businesses with more concrete examples of situations which will or will not be found to fall on the right side of UK competition law, and guidance on methodological and evidential considerations in assessing environmental benefits, this is a positive development. Nevertheless, given the inherent complexities of business agreements in the ESG sphere, as well as the notably fragmented approach of competition authorities to these issues globally, the legal risks in this area should not be underestimated.

The content of this article broadly follows the structure of the CMA’s Guidance and covers:

1. ESAs which are unlikely to infringe the Chapter I prohibition at all – in other words, for which there is no, or no appreciable, problematic restriction on competition ( see section 2).
2. ESAs which could infringe competition but benefit from an exemption, since the environmental benefits outweigh any harm caused by the agreement. In particular, there is a more permissive approach applied to ESAs that combat or mitigate climate change ("climate change agreements") (see sections 3).
3. Mixed ESA agreements which give rise to climate change benefits as well as other environmental benefits (see section 4).
4. How the CMA's "open-door policy" for ESAs will operate and how companies can best prepare for CMA engagement (see more on this: Climate change: the CMA’s open door | Insights | Mayer Brown). Critically, the Guidance also sets out the protection that compliance with the Guidance and CMA engagement can offer in terms of non-enforcement and non-fining (see section 5).
5. Finally, a brief discussion of the global landscape within which many companies will be evaluating competition law compliance of their ESG strategies (see section 6).

2. Agreements unlikely to infringe competition law

The Guidance provides categories of ESAs which are unlikely to raise any competition concerns, provided certain conditions are met, and therefore likely to fall outside the Chapter I prohibition altogether, either because they do not relate to the way that businesses compete with each other, or because they do not have an appreciable adverse effect on competition. In other words, for these categories of agreement, there is no need to consider the exemption criteria – a process which can be cumbersome, complex and introduces uncertainty (in particular, due to the need for self-assessment). These are:

1. agreements which do not affect the main parameters of competition (price, quantity, quality, choice, etc);
2. agreements to do something jointly which none of the parties could do individually;
3. cooperation required by law;
4. pooling information about suppliers or customers;
5. creation of industry standards;
6. phasing out / withdrawal of non-sustainable products or processes;
7. industry-wide efforts to tackle climate change; and
8. agreements between shareholders to vote for promoting corporate policies that pursue environmental sustainability (Guidance, paragraphs 3.3 to 3.27).

Each of these categories tends to be subject to important conditions, which may in practice mean that they are less clearcut than at first appears. Nonetheless, several of the categories provided by the CMA are wide ranging and will be of use to many companies planning their environmental strategies. We consider in further detail below four of the categories above, which we consider to be particularly useful and potentially wide-ranging (items (d) – (g)).

Industry-wide efforts to tackle climate change

Two categories of agreement are identified under this section as being unlikely to have an appreciable negative effect on competition:

1. The setting of non-binding targets or ambitions for the whole industry regarding environmental sustainability objectives (e.g., in respect of greenhouse gases (“GHG”) emissions), provided that the participating businesses remain free independently to determine their own contribution and the way in which the targets are realised/exceeded; and
2. Cooperation to support capacity building and to better enable firms within an industry to set and monitor their own sustainability targets, provided that it does not prevent or restrict additional unilateral action by participants. Three helpful examples are given: 1) the development of a common methodology available on an open-source basis which would allow industry participants to calculate and report the emissions associated with their business activities in absolute terms; 2) the establishment of a common framework for target setting, including which emissions and business activities are within the scope of the common framework and the duration and timing of the targets – this framework would allow for the unilateral setting, disclosure and reporting of the participants' targets and how the participants intend to meet their targets; and 3) joint development by competitors of materials to support their suppliers in meeting the supplier's own emissions targets.

Creation of industry standards

The Guidance provides that competitors' collaboration to develop industry standards or codes of practice aimed at making products or processes more sustainable is unlikely to have an appreciable negative effect on competition, provided that the following conditions are met:

1. the process for developing the standard is transparent and allows businesses affected to participate;
2. no business is obliged to participate in the standard (although the standard may oblige the businesses who have committed to participate in the standard to comply with the standard, and may provide a monitoring mechanism);
3. any business can implement the standard on reasonable and non-discriminatory terms;
4. the participating businesses are free to exceed the minimum requirements of the standard and/or develop or implement higher standards. (if parties agree not to operate outside the standard, the agreement will be examined under the exemption criteria detailed in section 3 below); and
5. the standard does not lead to an appreciable reduction in the availability of suitable products for consumers to purchase. This is unlikely where participating businesses are free to sell products that fall outside of such standards or codes and/or the combined market share of the participating businesses is sufficiently small (e.g., <20%).

Phasing out / withdrawal of non-sustainable products or processes

ESAs to phase out particular non-environmentally sustainable processes, or to cease procuring or supplying certain non-environmentally sustainable products are unlikely to have an appreciable negative impact on competition, provided that these agreements do not involve an appreciable increase in price for consumers, an appreciable reduction in product choice or have the objective of eliminating competition or harming the parties' competitors and/or market sharing. The Guidance gives the example of an agreement to stop using a particular type of packaging which does not lead to an appreciable price increase, and where product choice from the parties or other businesses in the market is not reduced. In practice, we consider that parties pursuing agreements under this heading would be well advised to consider the exemption criteria and may wish to seek informal guidance from the CMA.

Pooling information about suppliers or customers

Agreements to pool objective, evidence-based information about, or provide a rating on, the environmental sustainability credentials of suppliers (e.g. suppliers which have environmentally sustainable value chains or production processes) or customers (e.g. customers which recycle appropriately) are unlikely to have an appreciable negative effect on competition. This is provided that the agreements do not require the parties to purchase (or refrain from purchasing) from suppliers or supply (or refrain from supplying) to customers and do not involve the sharing of competitively sensitive information about prices or quantities purchased from suppliers or by customers.

3. Agreements which could infringe Competition law BUT may benefit from exemption

The Guidance identifies two types of agreements which could infringe the Chapter I prohibition unless they benefit from exemption.

(a) Agreements which can be regarded, by their very nature, as being harmful to the proper functioning of normal competition ('by object' restrictions).

1. These include ESAs involving price fixing, market or customer allocation, limitations of output or limitations of quality or innovation. The Guidance gives the example of an agreement between competitors on the price at which they will sell products meeting an agreed environmental sustainability standard.
2. Although there is no need to examine the effects of by object restrictions, the Guidance recalls that such agreements are not automatically prohibited and are still capable, in principle, of benefitting from exemption, even it "has sometimes proved difficult" to demonstrate that such agreements meet the conditions for exemption.

(b) Agreements which infringe the prohibition by virtue of having the 'effect' of restricting competition. ESAs leading to restrictive effects, such as increased prices, reduced output, product quality, product variety or innovation, market allocation or anti-competitive foreclosure of other competitors, will infringe the Chapter I prohibition if they cannot benefit from exemption. The Guidance provides a list of factors to consider when assessing the effects of ESAs, which include the market coverage of the agreement and the ability for non-parties to participate.

The Guidance goes on to explain how the exemption criteria apply to ESAs – in other words, an anticompetitive agreement may be lawful where its benefits to consumers outweigh its anticompetitive effect (Section 9 Competition Act 1998). Parties to an ESA seeking to benefit from exemption must be able to demonstrate that their agreement meets each of the following four conditions:

1. the agreement must contribute to certain benefits, namely improving production or distribution or promoting technical or economic progress;
2. the agreement and any restrictions of competition within the agreement must be indispensable to the achievement of those benefits;
3. consumers must receive a fair share of the benefits; and
4. the agreement must not eliminate competition in respect of a substantial part of the products concerned.

The Guidance contains helpful guidance regarding the application of these criteria in the context of ESAs, including in particular:

1. the reduction of GHG emissions (including outside of the UK) will be presumed to benefit UK consumers. Therefore, only the scale of those benefits relative to the harm of the agreement will require consideration;
2. despite the CMA's generally accommodative approach to ESAs, the benefits of an agreement need to be substantiated and cannot simply be assumed (other than for GHG's above). They also need to be objective, concrete and verifiable;
3. long-term benefits can be considered, although it may be necessary to consider a suitable method for discounting such benefits to reflect the timescale;
4. regarding indispensability, among other matters, this condition can be met even where there is demand for firms to produce sustainable products individually, if there remains insufficient market coverage or economies of scale. In this case, collaboration between competitors could be necessary, in order to obtain the benefits more quickly, more cost-efficiently or with wider market coverage. On the other hand, where there is sufficient demand and it cannot be shown that consumers do not have sufficient willingness to pay, the CMA would expect companies to compete normally;
5. typically, noting the more permissive approach for climate change agreements discussed below, the benefits must accrue to direct and indirect users of the relevant products/services in question. In other words, the benefit must accrue to substantially the same set of consumers who suffer the harm. The UK Supreme Court has held that it is not normally appropriate to offset the harm caused to customers in one market against the benefits accruing to customers in another unrelated market. It may, therefore, be necessary to take into account only the proportion of the benefits resulting from the agreement (i.e., those accruing to the relevant customers), although direct, indirect and (a proportion of) collective benefits can all be taken into account;
6. the parties to an agreement will need to appraise both the benefits of the agreement and its effects on competition. The benefits must be substantial and demonstrable. However, the CMA will not expect these to be quantified precisely in all cases – for instance, where the benefits obviously outweigh the harm, a more qualitative approach may be acceptable. On the other hand, where it is unclear whether the benefits do outweigh the harm, the CMA would expect there to be quantification – the Guidance provides examples of the methodologies that could be applied.

Permissive approach to exemption for climate change agreements

Climate change agreements are a sub-set of ESAs, which covers agreements which contribute towards the UK's binding climate change targets under domestic or international law. These agreements will typically reduce the negative externalities from greenhouse gases, such as carbon dioxide and methane, emitted from the production and consumption of goods and services.

The criteria for exemption applicable to climate change agreements are the same as above, except that when considering the third condition (consumer benefits), the CMA applies a more permissive approach in assessing who are the relevant consumers. Instead of considering the direct and indirect customers harmed by an agreement, the CMA will exempt climate change agreements if the 'fair share to consumers' condition can be satisfied taking into account the totality of the benefits to all UK consumers arising from the agreement, without apportioning those benefits between in-market and out-of-market consumers. The CMA explains this departure from the general approach to the 'fair share to consumers' condition due to the "exceptional nature of the harms posed by climate change", and the fact that climate change agreements seek to limit negative externalities which are "likely to have devastating effects" inside and outside the UK. The European Commission’s equivalent guidelines, by contrast, do not highlight this different approach for climate change agreements (see further below).

4. Mixed agreements

In recognition of the fact that it's very hard in practice to put agreements in this area into either the ESA or climate change agreement box, the Guidance states that where an agreement gives rise to both climate change benefits and environmental benefits, a hybrid analysis is appropriate. In other words the agreement's climate change benefits should be analysed in line with that section of the guidance, and the broader environmental benefits, in line with the wider ESA rules (and therefore the narrower definition of relevant consumers for the purpose of assessing any benefit).

What is significant about this approach is that the CMA indicates that these benefits should be added together in order to identify the consumer benefit – i.e., any climate change benefit can be added to any wider environmental benefits. The Guidance gives an example of an agreement to reduce deforestation, which may reduce GHG emissions and may also benefit biodiversity. It is hoped that this approach will allow companies to receive the full credit for their actions (for instance considering the GHG reduction element in using more sustainable materials, in addition to waste reduction/ pollution considerations), although we will have to wait and see how the CMA approaches this in practice.

5. cma enforcement priorities and its Open door policy

As noted, the CMA is very clear that it has an open-door policy for those seeking to collaborate with competitors to achieve environmental sustainability aims. The Guidance provides details regarding preparing for engagement with the CMA and what it would expect. It also notes the CMA's dedicated email address for such engagement sustainabilityguidance@cma.gov.uk.

In terms of the informal guidance process:

1. the CMA may be prepared to provide a view regarding whether the conditions for exemption are met based on the information received;
2. the CMA is likely to wish to publish details of informal guidance (after consultation with parties and recognising confidentiality considerations); and
3. in the event of private litigation in respect of a matter it has given informal guidance the CMA will consider intervening in the litigation.
   
   Finally, as regards enforcement, the CMA states that:
4. it will not take enforcement action against ESAs, including climate change agreements, that clearly correspond to examples used in the Guidance and that are consistent with the principles set out in the Guidance. In these cases, parties are encouraged to approach the CMA to discuss their agreement.
5. Where companies approach the CMA under its open-door policy, the CMA would not only not expect to take enforcement action, but if it were to do so, the CMA indicates that it "would not issue fines" against parties implementing the agreement in question nor impose any director disqualification orders (provided no relevant information was withheld). Being familiar with the categories above will therefore be important for businesses defining their ESG strategies to avoid enforcement action.

6. global picture

Companies operating globally will need to consider their ESG strategies, and any collaboration with competitors and industry stakeholders that this may entail, against the patchwork of guidance on the application of competition law to such agreements. Notably, there is no such guidance in the US and none is expected, at least in the near term. There have also been a number of actual or threatened legal challenges in relation to ESG initiatives, such as by certain State Attorneys General.

Closer to home, whilst broadly similar, the CMA's Guidance presents some notable differences to, and is generally more permissive than, the equivalent chapter on sustainability agreements contained in the European Commission's new Guidance on Horizontal agreements (the "EU Guidelines"). In particular, there is no concept in the EU Guidelines of "climate change agreements" and there is therefore no different interpretation of the 'fair share to consumers' condition. On the other hand, the EU Horizontal Guidelines have a wider scope, applying to "sustainability agreements" (not just environmental sustainability agreements), which encompass "activities that support economic, environmental and social (including labour and human rights) development". Whilst the difference in the EU and UK approaches seems to be more one of degree than radical divergence, businesses should take note and consider how best to frame their agreements in the ESG sphere to ensure global compliance, speaking to the relevant regulators as appropriate.

At Mayer Brown, we provide our clients with market-leading advice that enables them to navigate these kind of complex, broad-ranging and rapidly evolving ESG issues in an increasingly connected, global business environment. With the benefit of our established relationships with key stakeholders in Europe and the US, we are well-placed to assist multinational corporations in navigating the field of ever-increasing ESG requirements.