CMA guidance to help businesses collaborate on environmental sustainability

This sustainability guidance (47 pages / 712KB PDF) follows a public consultation the CMA conducted between 28 February and 11 April on a draft version of the guidance; a process which elicited substantial stakeholder engagement and responses. The CMA ultimately decided to issue the sustainability guidance separately from its wider-ranging guidance on horizontal agreements that it had published in August.

The sustainability guidance largely reiterates provisions of the consultation draft, including the CMA’s approach to assessing environmental sustainability agreements and proposing a new business-friendly ‘open-door policy’.

The distinction between general environmental sustainability agreements, and a narrower subset of so-called ‘climate change’ agreements, remains. Environmental sustainability agreements include horizontal agreements aimed at, for example, improving air or water quality, conserving biodiversity, or promoting the sustainable use of raw materials; but they do not extend to agreements which pursue broader societal objectives such as human rights or improving working conditions.

Climate change agreements, which are a subset of environmental sustainability agreements, contribute towards the UK’s binding climate change targets under domestic or international law. This would include, for example, joint agreements aimed at lowering greenhouse gas emissions in a particular industry sector.

As in the draft version, the CMA has adopted a more permissive approach toward assessing consumer benefits stemming from climate change agreements. In other words, wider, out-of-market benefits may be considered when evaluating if benefits arising from climate change agreements outweigh any resulting restriction of competition that could cause consumer harm.

Substantive refinements

Various aspects of the sustainability guidance have been expanded or clarified in light of stakeholder feedback received during the consultation. For example, it clarifies that, where an agreement falls under both the horizontal guidance and the sustainability guidance, parties can rely on the relevant part of either guidance that is more favourable to them, including in joint research and development (R&D) projects.

The finalised sustainability guidance has been expanded to include the types of environmental sustainability agreements that are unlikely to infringe chapter 1 of the 1998 Competition Act. It also contains more detail concerning:

• pooling information about suppliers or customers;
• creating industry standards on sustainability, such as in the fashion industry. The finalised guidance broadly reflects the ‘soft safe harbour’ for sustainability standardisation agreements in the corresponding EU horizontal guidelines;
• agreements relating to phasing out or withdrawal of non-sustainable products or processes; and
• setting of industry-wide environmental targets.

In the context of industry standards on sustainability, the CMA expressly reminds businesses to ensure compliance with parallel consumer protection laws that prohibit ‘greenwashing’ claims and refers to the CMA’s environmental claims guidance. It also clarifies that where an agreement between businesses is unlikely to raise competition issues under the sustainability guidance, it is also unlikely to raise concerns where members of a trade association or NGO enter into such agreements.

The sustainability guidance contains new content on agreements that do not appreciably restrict competition, and explains that agreements between shareholders to vote for promoting corporate policies that pursue environmental sustainability are unlikely to infringe competition law.

Regarding environmental sustainability agreements that could potentially infringe chapter 1 of the Competition Act, the guidance contains further clarification on:

• ancillary restraints – restrictions necessary and proportionate to achieving the objective of a permitted environmental sustainability agreement; and
• collective withdrawal agreements, such as where a group of competing purchasers agree only to purchase from suppliers that sell sustainable products.

There is further clarification of how the CMA intends to apply the four conditions for exempting environmental sustainability agreements, including:

• ·new examples for assessing the indispensability condition in an R&D context;
• how the fair share of benefits accruing to consumers may be quantified, noting the three different type of consumer benefits: direct, indirect, or collective;
• ·noting that “meaningful” competition must remain on the market(s) affected by the agreement, while also clarifying that a temporary elimination of competition is not an obstacle to meeting the “no elimination of competition” condition.

Importantly, the sustainability guidance explains how “mixed agreements” should be assessed. It states that, where certain environmental sustainability agreements generate both climate change benefits and other environmental benefits, the climate change benefits are to be assessed under the separate, more permissive, principles and the other environmental benefits will be assessed under the general principles in the guidance. The climate change and general environmental benefits are then added together and weighed against harm arising from any restriction of competition the mixed agreement leads to.

Engagement with the CMA

In an attempt help businesses contemplating environmental sustainability agreements, the sustainability guidance clarifies the CMA’s open-door policy, and approach to enforcement action and protection from fines.

Businesses are encouraged to approach the CMA under its open-door policy if any uncertainty remains despite the sustainability guidance, or regarding application of the guidance. Parties are encouraged to seek the CMA’s informal guidance in the early stages of developing an environmental sustainability agreement.

Indeed, businesses may wish to approach the CMA even before they start developing an environmental sustainability agreement. The CMA may then “consider draft submissions and provide feedback to businesses if this is likely to help to improve the efficiency of the open-door process in a particular case”. The CMA intends the open-door process to be a “light touch review that is proportionate to the size, complexity and likely impact of the agreement”.

There is a recognition that in certain circumstances an organisation may be better-placed to approach the CMA for informal guidance – such as an NGO, trade association, or the parties’ nominated representative. In such cases the CMA may still contact the parties to the agreement for further information. The CMA said it “does not expect to” take enforcement action against environmental or climate change agreements that “correspond clearly” to principles set out in the sustainability guidance.

The CMA does, however, expect parties to keep “under review” any agreements the CMA has greenlighted under its informal guidance, so that if material facts or assumptions underpinning that agreement change over time, the agreement may need to be adjusted to ensure it continues to correspond with the sustainability guidance. Otherwise the CMA may withdraw its forbearance from pursuing fines in respect of such agreement.

The CMA does not expect to take enforcement action in respect of agreements that were discussed in advance with the CMA under the open-door policy. If, in the future, the CMA decided to further investigate one of these agreements and ultimately found that it did infringe competition law, it would not fine the parties provided that relevant information was not withheld from the CMA when the initial assessment under the open-door policy was made and informal guidance was given.

Importantly, the CMA will also not seek director disqualifications where it does not seek fines in respect of environmental sustainability agreements.

Non-confidential examples of environmental sustainability agreements, where the CMA provides informal guidance under its open-door policy, will also be published to help guide other businesses seeking to pursue similar initiatives.

The CMA will consult relevant sector regulators when considering requests for informal guidance if the agreement involves one of the UK regulated sectors. Separately, the CMA may seek to intervene in any private litigation that arises from an environmental sustainability agreement where it had provided informal guidance.

UK and EU divergence

The CMA’s guidance diverges from the EU horizontal guidelines in some key respects. This creates potential legal uncertainty for multinational businesses which will need to take into account key areas of UK and EU divergence when contemplating and developing sustainability agreements.

For example, the EU concept of “sustainability” is much broader than the UK approach, encompassing various societal objectives beyond environmental protection. The UK approach to sustainability is limited to environmental protection aspects.

Although the EU guidelines do not afford special, more flexible, treatment for climate change agreements that take into account broader, out-of-market, consumer benefits, they do provide that “agreements that aim solely to ensure compliance with sufficiently precise requirements or prohibitions in legally binding international treaties, agreements or conventions, whether or not they have been implemented in national law …. and which are not fully implemented or enforced by a signatory State” fall outside the scope of Article 101 TFEU. This seems more permissive than the UK’s flexible approach to assessing climate change agreements – which are agreements relating to binding national and international commitments that the UK government has entered into.

Guidance on sustainability agreements forms part of the wide-ranging EU horizonal guidelines. While in the UK businesses will need to read both the CMA’s sustainability guidance and the horizontal agreements guidance together, and apply relevant guidance principles to appropriate provisions of their agreements, potentially leading to more complexity.

Co-written by Tadeusz Gielas of Pinsent Masons.