New Guidance from UK Competition & Markets Authority on Environmental Sustainability Agreements

This Alert provides a brief summary of the UK Competition & Markets Authority (“CMA”) October 12 guidance concerning the application of UK competition/antitrust law to environmental sustainability (“ESG”) agreements, including climate change agreements. The CMA’s guidance establishes a framework under which certain ESG agreements can expect to be exempt from enforcement under Chapter I of the Competition Act 1998 (which prohibits anticompetitive agreements).

The CMA’s guidance also establishes the CMA’s “open-door policy” – a mechanism through which parties that are drafting ESG agreements, or that already have an ESG agreement, can seek informal guidance from the CMA. The CMA indicates that it will provide “light touch” feedback on such agreements, including any changes that it believes are required by law. If parties implement those changes, the CMA suggests that it will not pursue fines against such parties.

• The Guidance establishes a framework to assess whether environmental sustainability agreements and climate change agreements between competing businesses are likely to be exempt from Chapter I enforcement in the UK. The Guidance establishes categories of agreements that the CMA is unlikely to enforce against, agreements that are likely to be restrictions “by object”, four conditions for an ESG agreement to be exempt, and an informal consultation mechanism.

• The Guidance defines:

  • “Environmental sustainability agreements” as those aimed at preventing, reducing, or mitigating the adverse impact that economic activities have on the environment or that assist with the transition towards environmental sustainability. For example, agreements aimed at improving air or water quality, conserving biodiversity and natural habitats, or promoting the use of raw materials (“ESG agreements”).

  • “Climate change agreements” are a subset of ESG agreements that contribute to combating climate change (i.e., reducing negative externalities arising from greenhouse gases emitted from the production, distribution, or consumption of goods or services). For example, a climate change agreement would be an agreement between financial service providers not to provide support to fossil field projects.

• Section 3 introduces various categories of ESG agreements that the CMA is unlikely to bring a Chapter I enforcement action against. For example, agreements that:

  • Do not impact key parameters of competition such as price, quantity, quality, choice, or innovation. For example, agreements concerning internal corporate policies and joint campaigns to raise awareness.

  • Provide for cooperation where businesses individually could not achieve the relevant ESG benefits (e.g., because they lack the resources, technical capabilities, or the risk was too high).

  • Pool objective information about customer or supplier ESG credentials/ratings.

  • Set industry ESG standards (subject to certain conditions on, for example, transparency and non-discriminatory access) or industry-wide targets.

  • Phase out non-sustainable products or processes (provided it does not eliminate competitors).

  • Shareholders enter into to promote or require policies or agreements in line with the above agreements.

  • Reflect cooperation required by law.

• Section 4 introduces types of ESG agreements that are restrictions ‘by object’. This comprises infringements that are already well understood in competition law (e.g., price fixing, market or customer allocation, and output, quality, or innovation limitations). It greenlights vertical collective boycotts (i.e., competitors agreeing not to source from a particular supplier or sell to a particular customer because of their ESG track record). It also introduces the concept of ancillary restraints, which must be “objectively necessary to implement, and proportionate to the [ESG] objectives” (the CMA states that the wider agreement must be “impossible” to execute without the restriction).

• Section 4 also identifies factors to consider when assessing the possible restrictive effects of an ESG agreement (namely market coverage, market power, the freedom of the parties (e.g., to sell competing non-standard products or to go beyond the minimum standards), the ability of competitors to participate at any stage, whether competitively sensitive information exchange is necessary, and whether the ESG agreement will have an appreciable impact on price, output, variety, quality, or innovation).

• Section 5 introduces four conditions for an ESG agreement to be exempt. Specifically:

  • Quantifiable benefits. The agreement must contribute to the improvement of production or distribution, or to promoting technical or economic progress. These must be objective, concrete, and verifiable (e.g., a quantifiable reduction in greenhouse gases).

  • Indispensability. The agreement and any restrictions on competition must be indispensable (or “reasonably necessary”) to achieving the benefits. The Guidance sets out considerations such as whether you could have done it alone, does doing it collectively enable the parties to achieve the benefits quicker or at lower cost, or does doing it collectively overcome the “first mover disadvantage” (e.g., the competitive disadvantage sustained by switching to a more sustainable but costlier good when rivals do not switch).

  • Consumers must receive a fair share. Consumer benefits must outweigh the harm to competition. This effectively requires the quantification of direct benefits (e.g., lower prices, higher quality) and indirect benefits (e.g., not contributing to deforestation by buying sustainably sourced furniture) for direct consumers of the affected product/services and their customers in the UK. Unless it is immediately obvious that the benefits far outweigh the detriment to competition, the CMA recommends using established instruments that express non-monetary benefits in monetary values, such as HM Treasury’s Green Book.

  • No substantial elimination of competition. Agreements can cover entire markets, provided there is still scope to compete on the core parameters (price, quality etc.). And the Guidance acknowledges that the elimination of competition for a short period of time (e.g., agreeing to stop production of a particular unsustainable product for a short period of time to raise awareness), can be ok if it does not impact long term competition.

• Section 6 introduces a different assessment of consumer benefits under climate change agreements compared to environmental sustainability agreements. The only meaningful implication of the different definitions applies when assessing the consumer benefits of a climate change agreement – enterprises may consider the benefit to UK consumers in their totality (i.e., not just the UK consumers concerned by the affected market). Whereas in other ESG agreements, enterprises only take account of the proportion of any wider societal benefit enjoyed by consumers of the product in question.

• Section 7 describes the CMA’s consultation mechanism and approach to fines. It refers to this as its “open-door policy”. The CMA effectively states that:

  • It does not expect to enforce Chapter I against agreements that abide by the Guidance.

  • It will offer informal guidance to parties that consult the CMA, which will comprise a light touch assessment where the CMA may identify risks and changes that the parties should make. It may ultimately publish a non-confidential version of the agreement to provide guidance to future parties.

  • It will not fine companies if:

    • They seek guidance in advance and the ESG agreement is not problematic, or the parties implement the changes advised by the CMA.

    • The CMA subsequently investigates an ESG agreement that it provided informal guidance on and finds an infringement, provided the parties disclosed all relevant information during the informal consultation.

    • If parties to an ESG agreement seek informal guidance and agree to make adjustments advised by the CMA to bring the ESG agreement into compliance with the law.

  • It will not seek to disqualify directors in the above circumstances.

  • It may withdraw the protection from fines if parties fail to implement the changes required.