On 28 February the CMA published its long-awaited draft guidance on sustainability agreements, setting out the circumstances under which collaboration between competitors aimed at protecting or enhancing sustainability may be compatible with competition law. 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.
In adopting its draft guidance the CMA follows in the footsteps of other competition regulators such as the Dutch, Austrian, Greek regulators and the EU Commission, who all recognise that sustainability growth may in some instances require a collaborative approach. For the most part, the CMA has aligned its draft guidance with the draft EU guidance, in order to avoid businesses having to comply with very different regimes.
One area where the CMA draft guidance differs from the current EU draft guidance is in its approach to climate change agreements. Here the CMA takes a more permissive approach to the application of the exemption criteria of Section 9 of the Competition Act 1998 (CA98) (the equivalent of Article 101(3) TFEU). It proposes to take into account here the benefit of the agreement to all UK consumers when offsetting the harm to competition, as opposed to just for the consumers of the products or services that are subject of the agreement, on the basis of the exceptional nature of the harm caused by climate change.
Also, in order to further support businesses in this area, the CMA will operate an open-door policy giving businesses the opportunity to seek informal guidance on their proposed initiatives. Fines will not be imposed for agreements discussed with the CMA and where the CMA does not raise any competition concerns or where any concerns raised by the CMA have been addressed.
The guidance sets out practical examples and case studies and the CMA also intends to publish updates over time, based on its experience in applying the guidance and in light of questions raised by businesses approaching it.
We have set out below a summary of the draft guidance. The CMA is currently inviting comments on its draft guidance and the consultation is open until 11 April 2023.
Sustainability agreements and climate change agreements
Environmental sustainability agreements are defined in the draft guidance as agreements between competitors or potential competitors that are aimed at preventing, reducing or mitigating the adverse effect of economic activities on environmental sustainability. Agreements that pursue broader societal objectives, such as improving working conditions, are not included.
The CMA has also identified a sub-category of sustainability agreements that contribute towards the UK’s binding climate change targets and are designed to reduce greenhouse gases. Climate change agreements are a sub-category of sustainability agreements that contribute towards the UK’s binding climate change targets and are designed to reduce greenhouse gases. Examples include agreements to phase out a particular production process that involves the emission of carbon dioxide or an agreement not to provide support such as financing or insurance to fossil fuel producers.
Sustainability agreements unlikely to infringe the Chapter I prohibition
The draft 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. This includes the following categories of agreement:
- Agreements which do not affect the main parameters of competition (eg price, quantity, quality, choice or innovation)
- Agreements to do something jointly which the parties cannot do individually (eg because they do not have the technical capabilities)
- Cooperation between competitors in order to comply with a legal requirement
- Agreements to pool information about the environmental sustainability credentials of suppliers or customers but which do not involve the sharing of competitively sensitive information about prices or quantities
- Collaboration to develop industry standards or codes
- 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 choice
- Industry-wide efforts to tackle climate change
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).
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 draft guidance contains examples of by object restrictions that may be justified on sustainability grounds.
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 have market power
- Extent to which the agreement constrains the freedom of action of the parties
- Ability for non-parties to participate
- Whether 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 sustainability agreements
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 CA98. The draft 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. The draft guidance lists a number of methodologies for the quantification of environmental benefits but other methods may be equally appropriate.
Helpfully, the draft 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.
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).
Consumers receive a fair share of the benefits
The requirement for consumers to receive a fair share of the benefits is generally interpreted as relating to the consumers of the product or services to which the agreement relates (consumers in the market). The CMA, like the EU Commission, proposes to adopt the same approach for sustainability agreements in its draft guidance. Where two markets are related, the benefits achieved on separate markets can be taken into account, as long as the consumers affected by the restriction and those receiving the benefit are substantially the same or substantially overlap. For climate change agreements the CMA proposes a more flexible approach (see below).
In order to meet the fair share condition the parties will need to be able to demonstrate that the benefits are substantial enough to offset the harm caused by the restriction of competition. Where it is unclear whether the total benefits are sufficient to outweigh the total harm, the parties to the agreement may need to quantify the benefits and negative effects in line with industry best practice. It will also be possible to approach the CMA and discuss the approach under the CMA’s open door policy (see below).
No 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.
Application of the exemption criteria to climate change agreements
The draft 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 to all UK consumers resulting from the agreement, 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 about it and the binding national and international commitments entered into by the UK government.
CMA’s open-door policy
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. Non-confidential summaries of these individual assessments will be published in order to provide guidance for similar initiatives.
The CMA will not impose fines on parties to an agreement that was discussed with the CMA and where the CMA did not raise any competition concerns, or where any concerns raised have been addressed, as long as no information relevant to the assessment had been withheld.
The CMA’s wider focus on environmental sustainability
The draft guidance is part of a wider range of CMA initiatives around environmental sustainability. “Supporting the transition to low carbon growth, including through the development of healthy competitive markets in sustainable products and services” is one of the CMA’s top priorities set out in its Annual Plan.
The CMA market study into the electric vehicle charging sector sets out a number of recommendations for government in order to ensure that a comprehensive and competitive national network of EV charge points is in place, ahead of the 2030 ban on new petrol and diesel cars (see our blog post here). It also resulted in a competition investigation into long-term exclusive arrangements between a chargepoint provider and motorway service operators.
The CMA’s Green Claims Code contains guidance aimed at helping businesses understand and comply with their existing consumer protection obligations when making environmental claims in order to prevent people being misled by environmental claims. The CMA is currently investigation green claims made by a number of fashion brands in marketing their products to consumers. It has also recently expanded its scrutiny of misleading green claims to the fast-moving consumer goods sector (see our blog post here).
For further information, please contact:
Susan Black, Partner, Herbert Smith Freehills
susan.black@hsf.com
