The CMA publishes its draft environmental sustainability guidance

Introduction

On 28 February 28 2023, the UK’s Competition and Markets Authority (CMA) opened a consultation on its intended approach towards agreements between businesses that pursue environmental sustainability goals (the Draft Guidance). The Draft Guidance remains open for comment until 11 April 2023.

The Draft Guidance covers “environmental sustainability agreements”, referring to agreements or practices “which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability”. This extends to both environmental sustainability agreements and climate change agreements (a sub-set of “environmental sustainability agreements” which contribute towards the UK’s binding climate change targets under domestic or international law). This includes agreements aimed at reducing greenhouse gas emissions, improving air or water quality, conserving biodiversity or promoting sustainable use of raw materials. However, the Draft Guidance does not cover agreements pursuing broader societal objectives, such as improving working conditions. In this respect, the more limited scope of the Draft Guidance diverges from the approach adopted by other European competition watchdogs, including the Dutch Authority for Consumers and Markets (ACM) and the European Commission (the Commission).

The Draft Guidance is long-awaited: leading authorities around the world have issued guidance on how competition laws should adapt to enable businesses to collaborate on sustainability initiatives, driving the debate forward on a global issue. In releasing the Draft Guidance, the CMA has sent a clear signal of the part it wishes to play in this global jigsaw, recognising the scale of the (global) challenge to address environmental sustainability, particularly climate change. As such, the Draft Guidance aims to ensure the growth of a sustainable economy through the restriction of competition barriers and to prevent businesses from being deterred from collaborating due to competition law compliance concerns. In the words of Sarah Cardell, CEO of the CMA, “[the CMA’s] final area of focus is to ensure that competition law is not an unnecessary barrier to companies seeking to pursue environmental sustainability initiatives”.¹ In doing so, the CMA may also arguably be seeking to maintain the UK’s position as an attractive forum for business post-Brexit.

Agreements covered by the Draft Guidance

The Draft Guidance covers three categories of environmental sustainability agreements as follows:

1. Environmental sustainability agreements which are unlikely to infringe the Chapter I prohibition, either because they do not relate to how businesses compete or because they will not have an appreciably adverse effect on competition. Examples may include agreements concerning the internal corporate conduct of business (such as to eliminate single-use plastic in their business premises), agreements to pool funds to engage in activities to mitigate the effects of greenhouse gas emissions, joint lobbying for policy or legislative changes, the creation of industry standards aimed at making products or processes more sustainable, and setting non-binding targets or ambitions for the whole industry with regard to environmental sustainability.

2. Environmental sustainability agreements which could infringe the Chapter I prohibition unless they benefit from the exemptions for environmental sustainability agreements generally or for climate change agreements specifically. In addressing these types of agreements, the CMA highlights the distinction between “object” restrictions (where harm is assumed) and “effects” restrictions (where harmful effects must be shown). Particular caution is needed for agreements which involve price-fixing, market or customer allocation, limitations of output or limitations of quality or innovation as these typically restrict competition by “object”. The CMA simultaneously advises that parties to such agreements should not automatically assume that they are prohibited, and should instead consider whether they might benefit from the exemptions.

3. Environmental sustainability agreements which can benefit from exemption. In order to benefit from exemption, parties must be able to demonstrate that: (1) the agreement contributes to certain benefits, namely improving production or distribution, or contributes to promoting technical or economic progress; (2) the agreement is indispensable to the achievement of those benefits; (3) consumers will receive a fair share of the benefits; and (4) the agreement does not eliminate competition in respect of a substantial part of the products concerned. In order to qualify for exemption, those stated benefits must be substantiated, objective, concrete and verifiable. Although arguably a high threshold, the CMA goes on to recognise that benefits may only materialise in the long-term. Similarly, when assessing whether consumers will receive a fair share of the benefits, these can include future as well as current benefits, and to direct and indirect customers.

The CMA demonstrates its willingness to further flex the arms of competition law in addressing “climate change agreements”. In recognition of the “exceptional nature of the harms posed by climate change”, the CMA is willing to take into account the totality of benefits to all UK consumers arising from the agreement, rather than apportioning those benefits between consumers within the relevant product market affected by the agreement and those in other markets. This marks a significant departure from the accepted approach to horizontal agreements under EU and UK competition law and aligns the CMA more closely with the ACM’s stance on such agreements.

The wider sustainability debate

A primary driver of the CMA in publishing the Draft Guidance is to assist the UK in achieving its net zero ambitions. Against a backdrop of increasing pressure – from governments, shareholders, other stakeholders and society more widely – on companies to meet ambitious sustainability goals, policy makers across Europe have similarly taken steps to avoid competition laws being viewed as an obstacle to legitimate sustainability collaborations.

Whilst competition authorities have mutually recognised the role of antitrust law in enabling countries to meet a net zero economy, there remains a lack of consensus on approach – including whether benefits are assessed by reference to consumers alone (as per the Draft Guidance) or society at large. To understand where the CMA fits into this wider framework, we compare the approach adopted by the CMA with that taken by the Commission, the ACM and the Greek Authority in the table below:

Broadly, the CMA and the ACM appear to be adopting a more progressive approach as compared with the Commission. Although the HCC’s final guidelines are awaited, its Staff Discussion Paper suggests that the tenor of the text will be closer to proposals made by the ACM and the CMA. While the EC Guidelines provide helpful guidance, they do not go as far as the text of some national competition authorities, particularly in their assessment of benefits to the consumer when assessing the fair share requisite.

The EC Guidelines may reflect President Vestager’s comments as to the (more limited) role of competition law in addressing environmental objectives. Commenting on the purpose of competition policy and the need to call out the “green bluff” – the term given to companies shielding behind sustainability goals to lessen competition – she recently observed that it “is by no means the main tool to reach our green goals. There are more direct instruments to make our economy greener - such as environmental regulation, taxation, and green investment”.² By contrast, at the same conference, the Head of the ACM, Martijn Snoep, noted that enforcers would have to accept “short-term restrictions of competition” to make the transition to net zero work, and indeed stated that enforcers have a ”democratic duty” to use Article 101(3) because “there are many complex supply chains that need to be changed in a relatively small period of time”.³

Looking forward

Competition authorities worldwide do not therefore fully align on how, if at all, competition law should address climate change and sustainability challenges. Those divergences have sharpened with the publication of the CMA’s Draft Guidance. There remains a considerable degree of uncertainty on the approach that should be adopted by businesses seeking to collaborate on environmental sustainability issues. Given climate change agreements are likely to be cross-border in scope, this lack of international consensus as to how authorities assess environmental benefits remains a key challenge.

Notwithstanding the above, the Draft Guidance appears to be a significant step in the flexing of competition law to address environmental concerns. Perhaps recognising the continuing lack of clarity in this area, the CMA makes clear its “open door” policy, providing an opportunity for companies that are considering entering into an environmental sustainability agreement to receive informal guidance from the CMA. Another helpful development is the CMA’s proposed policy that it will not fine companies that implement an agreement which was discussed with the CMA in advance and where the CMA did not raise any competition concerns (or where any concerns raised by the CMA were addressed).

The CMA has expressed an interest in hearing from companies with comments, questions or concerns on any aspects of the Draft Guidance, or those looking for clarity on how the Draft Guidance will be applied. The CMA will then prepare the final version of the guidance. In practice, the efficacy of the guidance will largely rest on the extent to which the CMA are willing to enforce its policy and, crucially, give to collaborating firms the benefit of the doubt in relation to any necessary restrictions on competition. To date, the ACM has led the way in this respect and has published a number of helpful opinions and decisions blessing co-operation arrangements (see the comparative table above). It is to be hoped that the CMA’s ultimate practice will follow suit.

Should you need assistance, have any further questions regarding the Draft Guidance or are interested in preparing a response, please do not hesitate to contact any of the individuals listed or your usual contact at Simmons & Simmons.

¹ “Sustainability – Exploring the possible”, A Speech by Sarah Cardell (CEO of the CMA), to the Scottish Competition Forum, delivered on 24 January 2023.
² Executive Vice-President Vestager, Keynote (Antitrust, Regulation and the Political Economy), Brussels and online (2 March 2023).
³ Martijn Snoep, “Plugging gaps in antitrust enforcement” (Antitrust, Regulation and the Political Economy), Brussels and online (2 March 2023).