Going Green - Draft Sustainability Guidance from the CMA
The Competition and Markets Authority (the "CMA") has recently published for consultation draft guidance on the application of UK competition law to environmental sustainability agreements (see here). The aim of the guidance is to provide greater clarity for businesses, when seeking to work together on environmental sustainability initiatives, as to what may or may not be permitted under the UK competition rules and how the prohibition on anti-competitive agreements and concerted practices (the "Chapter I Prohibition" under the Competition Act 1998) applies to such collaborations. This guidance is a significant development in the CMA's commitment to promoting environmental sustainability and helping to accelerate the UK's transition to a net zero economy (both medium-term strategic priorities in the CMA's draft Annual Plan for 2023/4).
In addition to the proposed guidance and the CMA's intention to publish updates as experience develops in this ever-evolving landscape, it is also to be welcomed that the CMA is proposing to offer an 'open-door policy' or a return to its 'fire-side chat', whereby businesses will be able to approach the CMA for informal guidance on their proposed initiatives. In the draft guidance, the CMA has also made clear its intentions with regard to enforcement action and fines.
The CMA is keen to ensure that concerns about competition law compliance (given that there are potentially serious consequences for infringing the Chapter I prohibition) do not impede businesses from engaging in legitimate and lawful collaboration in relation to environmental sustainability, and the CMA's draft guidance and proposed approach should provide some much needed comfort to businesses. As the CMA has confirmed, it "is determined to help businesses who genuinely try to do the right thing in relation to environmental sustainability."
The CMA's draft guidance applies to environmental sustainability agreements ("ESAs") and not to other agreements which pursue broader societal objectives (such as improving working conditions). ESAs are agreements, or concerted practices, between actual and/or potential competitors which aim to prevent, reduce or mitigate the adverse impact of their activities on environmental sustainability, or aim to assess their impact. Such agreements include those aimed at improving air or water quality, conserving biodiversity or promoting the sustainable use of raw materials.
Agreements Unlikely to Infringe the Chapter I Prohibition
- Agreements that do not affect the way that the businesses compete with each other i.e. 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 (unless the initiative could have been undertaken involving co-operation which is less restrictive of competition).
- Co-operation required by law (this is automatically excluded from the Chapter I prohibition, but the exclusion does not cover where the law only encourages, rather than requires, such co-operation).
- Pooling information about the environmental sustainability credentials of suppliers or customers (without requiring the parties to purchase, or to refrain from purchasing, from those suppliers and without sharing competitively sensitive information about prices or quantities purchased from suppliers or by customers).
- Creating industry standards or codes of practice aimed at making products or processes more sustainable (provided that the participation criteria are transparent, the standard is voluntary, and any participants can develop alternatives or exceed the standard's minimum targets, and that any business may participate in/benefit from the standard or code on reasonable and non-discriminatory terms).
- Phasing out/ withdrawing non-environmentally sustainable products or processes and replacing them with more sustainable alternatives (where this does not appreciably increase the price for consumers or reduce product choice).
- Setting of industry-wide non-binding targets.
Agreements which Could Infringe the Chapter I Prohibition
The draft guidance covers both ESAs which have as their 'object' the restriction of competition and which, by their very nature, are assumed to adversely affect competition, and those agreements whose 'effect' on competition must be assessed to determine whether or not there is an appreciable adverse effect.
It is important to carefully assess any proposed ESAs which involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation i.e. 'by object' restrictions. Although generally agreements involving such restrictions do not satisfy the criteria for exemption from the Chapter I prohibition (discussed further below), the CMA reiterates that it should not be assumed that such an ESA is automatically prohibited. It may be permitted where, for example, it benefits from exemption, or the restriction is considered to be an ‘ancillary restraint’, i.e. it is directly related and necessary to the implementation of a wider environmental sustainability agreement, which is itself compatible with competition law. In other words, the agreement is impossible to carry out without the restriction.
In addition, the draft guidance highlights the importance of the actual context of the ESA. For example, an agreement between competitors to only purchase from suppliers selling sustainable products is unlikely to be restrictive of competition 'by object' and may be distinguished from a collective boycott by competitors (usually a 'by object' restriction) as the aim is to eliminate unsustainable products from the supply chain rather than to eliminate a market participant.
In relation to an ESA which does not involve 'by object' restrictions, the Chapter I prohibition will only be infringed if there is an appreciable effect on competition. Inevitably, the 'effects' assessment will be dependent on the specific facts, but the following factors are relevant: the market coverage of the ESA; the market power of the parties; the extent to which the parties' activities are constrained; the ability of third parties to participate on non-discriminatory terms; the exchange of commercially sensitive information; and the likelihood of an appreciable price increase or reduction in output, quality or innovation. In circumstances where there is an appreciable adverse effect on competition, the ESA should then be assessed to determine whether the exemption conditions are met.
Exemption from the Chapter I Prohibition
ESAs, which potentially fall within the Chapter I prohibition, may still be permitted if they benefit from the exemption. A business must be able to demonstrate that its agreement meets each of the four exemption conditions and the draft guidance provides further clarification as to how ESAs can be assessed:
1. The agreement contributes to certain benefits, i.e. improving production or distribution or contributing to promoting technical or economic progress:
These benefits must be substantiated, objective, concrete and verifiable. Examples given include reducing greenhouse gas emissions, introducing new cleaner technologies, and developing new, more energy-efficient processes.
2. The agreement and any restrictions are indispensable to the achievement of these benefits, or at least are reasonably necessary:
This may be the case where the parties can demonstrate that the agreement enables them to achieve the level of benefits which they would not be able to achieve (or not as efficiently) without the agreement. The draft guidance provides examples of what may and may not satisfy this criterion. Importantly, there must be no less restrictive, but equally effective, alternative to achieving the benefits. The scope and duration of the restrictions are important considerations.
3. Consumers will receive a fair share of the benefits and these benefits outweigh any harm:
The draft guidance makes clear that these benefits include not only current, but also future, benefits, which is particularly important for ESAs where the benefits may take some time to materialise. Furthermore, consumers may benefit directly (for example, through improved quality of the product purchased) and indirectly, through broader environmental sustainability benefits being achieved (for example, not contributing to deforestation), in respect of which the parties should have evidence that consumers value those benefits – for example, through consumer survey evidence.
An important consideration is the question of the relevant consumers for these purposes. The general principle is that these are the consumers of the products or services to which the agreement relates. In relation to wider societal benefits, only the proportion of these benefits attributable to the consumers of those goods or services, and not to consumers more widely, can be taken into account.
However, the draft guidance also indicates that there may be circumstances where there are two related markets and the consumers are substantially the same or substantially overlap, such that the benefits achieved on the separate markets can be taken into account.
Significantly, in relation to climate change agreements, the draft guidance sets out a more permissive approach. Given the exceptional nature of the harm/threat posed by climate change (and, thus, the exceptional nature of the benefits to consumers from combatting or mitigating climate change), the CMA has confirmed that the benefits to all UK consumers arising from the climate change agreement can be taken into account when assessing whether the 'fair share to consumers' condition is satisfied and that the benefits outweigh the harm. In order to benefit from this approach, the parties to the climate change agreement would need to demonstrate that the benefits are in line with existing, legally binding requirements or well-established national or international targets.
In many cases it will not be necessary to quantify the benefits precisely as it will be clear that the benefits are substantial enough to offset any harm. However, in some cases, some quantification will be required. The CMA has confirmed its willingness to discuss with businesses their approach to quantifying the benefits and negative effects as part of its open-door policy.
4. The agreement does not eliminate competition for a substantial part of the products:
There must be some remaining competition in the market whether this is in the form of other businesses operating in the market or, where the agreement covers the whole market, the parties can still compete on key parameters, such as price or quality.
The CMA's Proposed Approach
Informal guidance: The CMA is introducing an 'open door' policy, whereby businesses can seek informal guidance on their proposed environmental sustainability initiatives. The CMA's expectation is that businesses will approach it (by email to firstname.lastname@example.org) at an early stage of the process, but after carrying out their own initial competition law self-assessment. Businesses are being encouraged to seek informal guidance in relation to questions or issues which are not covered by the guidance itself or for further clarity or comfort on how the guidance applies to their particular initiative.
Further guidance: As its understanding of the issues develops over time, the CMA may update or supplement its guidance. In addition, subject to confidentiality considerations, and following consultation with the parties, the CMA is looking to publish a summary of the initiatives on which informal guidance is sought, along with an assessment of the risks identified and proposed solutions.
Fining approach: The CMA has confirmed that it will not issue fines against parties to an ESA where they have discussed their agreement in advance with the CMA and the latter either does not raise any competition law concerns or, if it does, these concerns are addressed (provided that relevant information was not withheld from the CMA at the time which would have made a material difference to its assessment). If, at a later stage, an ESA is nevertheless considered to have an appreciable adverse effect on competition, the CMA will seek to consult with the parties and agree adjustments to remedy the competition concerns.
Enforcement action: The CMA has also confirmed that it will not take enforcement action against ESAs which 'clearly correspond' to the examples and are consistent with the principles, as set out in the guidance.
The deadline for commenting on the draft guidance is 11 April 2023. Businesses should review the draft guidance carefully and consider responding to the consultation to help shape the final guidance. Once the consultation process has concluded and the environmental sustainability guidance has been finalised, the CMA intends to incorporate it into its wider guidance on the application of the Chapter I prohibition to horizontal agreements, which has yet to be finalised.