Virginia Zarin
By Virginia Zarin, Green Path to Global
The UK Competition and Markets Authority (CMA) recently published its long-awaited Green Agreements Guidance. The Guidance helps businesses understand how the prohibition of anti-competitive behaviour applies to environmental sustainability agreements. The CMA aims to ensure that UK competition law does not impede businesses from collaborating to achieve sustainability or combat climate change. While the Guidance provides much-needed clarity for businesses by using real-world examples of permissible sustainability agreements, significant hurdles remain. This article provides a brief overview of the Guidance and examines its advantages and limitations.
Overview of the Green Agreements Guidance
It is important to note that the Guidance includes an extremely wide definition of green agreements. “Environmental sustainability agreements” are defined as those between competitors that aim to prevent, reduce, or mitigate the adverse impact of economic activities on the environment, or that assist the transition towards environmental sustainability. A sub-set of these agreements, referred to as “climate change agreements”, covers agreements that contribute to combating climate change, such as reducing greenhouse gas emissions.
Green agreements fall into two main categories: (1) those agreements that are unlikely to infringe the prohibition of anti-competitive behaviour (because they either do not relate to how businesses compete, or they do not have an “appreciable adverse effect” on competition); and (2) agreements that could infringe the prohibition but that benefit from exemption.
The Guidance helpfully contains examples of the first category of agreements: those that do not affect the main parameters of competition between businesses, namely price, quantity, quality, choice, or innovation. Examples include an agreement regarding internal corporate conduct or internal policy changes (such as limiting the number of printed materials that businesses produce) or an agreement to run a joint campaign to raise awareness of environmental issues within an industry or among consumers (provided it does not involve the joint advertising of products or services). Other types of agreements that are unlikely to infringe competition law include:
- Agreements to act jointly where none of the parties have the technical capabilities to do so individually (or it would be too risky).
- Agreements that are necessary to comply with a legally binding obligation, provided there are no limits to the parties’ freedom to exceed the minimum legal requirements.
- Agreements to pool objective information about the sustainability credentials of suppliers or customers, provided there is no sharing of commercially sensitive information and no restrictions placed on purchasing from those suppliers.
- Agreements to phase out or withdraw non-sustainable products or processes, as long as there is no appreciable increase in price or reduction in product choice or quality and the agreement is not intended to harm another competitor.
Section 3 of the Guidance sets out further examples of agreements that are permitted.
Other types of agreements will be deemed to infringe competition – either by “object” or “effect” – and are therefore prohibited under the Competition Act unless they benefit from the exemption. Elements such as price fixing, market allocation, or limitation of output, quality, or innovation are highly likely to make an agreement fall within the category of restricting competition by object. Although not impossible, such an agreement is less likely to satisfy the conditions for exemption. Agreements that are anti-competitive by effect only are more likely to be acceptable, and the CMA has set out factors to consider whether an agreement negatively affects competition.
To qualify for exemption, the agreement’s benefits must outweigh their competitive harm. Certain conditions must be satisfied:
- The agreement must contribute to certain benefits, such as eliminating or reducing harmful effects of production or consumption of goods, improving product variety or quality, or improving production processes using cleaner technology etc.
- The agreement, and any competitive restrictions, must be indispensable to achieving those benefits.
- Consumers must receive a fair share of the benefits.
- There must be no elimination of competition for a substantial part of the products concerned.
The environmental benefits must be objective, concrete and verifiable but future benefits can also legitimately be considered. The agreement must be the only means by which the parties can realise the intended benefits, either at all or as efficiently. The benefits must pass to UK consumers in the market to which the agreement relates (not just generally to all consumers), and they must outweigh any harm suffered. The CMA expects businesses to quantify the environmental benefits to consumers in monetary terms. The agreement must not substantially eliminate competition in the market: some meaningful competition must remain.
Climate change agreements must still satisfy the above conditions, but the CMA takes a more lenient approach to assessing benefits to consumers. It is sufficient if the agreement provides climate change benefits to all UK consumers generally, instead of only those in the specific market. When it comes to mixed agreements (involving climate change and environmental sustainability benefits) both methods should be used accordingly to assess the benefits to consumers.
What does the Guidance get right?
The Guidance provides real-world examples of sustainability agreements, which considerably aids its interpretation. A significant number of those agreements will not even fall within the scope of the Competition Act prohibition at all. Combined with reassurances that the CMA will not take enforcement action against agreements that correspond clearly to the principles and examples set out in the Guidance, businesses should be free to enter into a large variety of sustainability agreements without facing accusations of anti-competitive behaviour.
The CMA is adopting a permissive rather than punitive approach from a compliance perspective. The Guidance sets out the CMA’s intended “open-door” policy, allowing businesses to ask questions, seek advice on draft agreements, and implement adjustments to existing sustainability agreements without fear of enforcement or fines. This regulatory safety net will likely cause businesses to act more boldly and experiment more freely with implementing different types of green agreements.
Furthermore, the CMA accepts that the Guidance will require modification as businesses trial its implementation and as more concrete examples of sustainability agreements are brought to the CMA for review. Flexibility is key for any legal instrument relating to sustainability because of the constantly evolving scientific landscape.
The Guidance acknowledges that consumers may value an indirect sustainability benefit that is felt outside their relevant market and may be willing to pay higher prices for sustainable products even if they receive no tangible benefit from them. The CMA will accept evidence of this in the form of customer surveys, and this should empower consumers to influence the steps businesses take to promote sustainability. In the long term, it may help close the “say-do” gap, whereby consumers’ actual purchasing behaviours contradict their stated values on shopping sustainably. Businesses that are incentivised to enter into green agreements based on their customers’ views and preferences will in turn increase the availability of sustainable products and services on the market, thereby supporting consumers to act on their values.
Finally, by publishing details of all green agreements brought to it for approval, the CMA shows its commitment to a transparent and organic process where businesses, civil society, and even consumers, will shape how competition law applies to sustainability agreements.
What could be improved?
Disappointingly, the Guidance is restricted to environmental sustainability and climate change agreements only and does not apply to other ESG-related agreements, such as those aimed at preventing worker exploitation, forced labour, and human rights abuses in supply chains. Given the intersectionality of environmental and human rights issues, the CMA’s approach seems short-sighted.
It may also prove difficult for businesses to quantify non-financial benefits to consumers in monetary terms, and an inability to do so in some cases may result in many worthwhile green agreements being abandoned because they cannot satisfy the conditions for exemption from prohibition. It is also unclear why the CMA’s more lenient approach to demonstrating benefits to consumers in respect of climate change agreements does not apply to all types of environmental sustainability agreements. The CMA acknowledges that climate change poses an existential threat to humanity, but that is equally true of other environmental issues such as deforestation, biodiversity loss, desertification, and water pollution.
The Guidance only applies to the UK, but there are other jurisdictions with less permissible rules regarding horizontal agreements. Most of the sustainability agreements envisaged by the CMA are likely to involve collaboration between businesses across multiple borders. Companies may therefore find themselves constrained by competition laws in other countries and unable to implement the types of sustainability agreements outlined in the CMA’s Guidance. Therefore, despite its stated aims, the Guidance does not go far enough in facilitating business collaboration on sustainability.
Advice for businesses
Businesses should review any existing agreements with their competitors to check whether they: (1) fall within the scope of the Guidance; (2) require adjustment to achieve compliance with the Guidance; and/or (3) could be brought to the CMA’s attention for review and advice. Businesses must consult with their target consumers to understand the environmental benefits that customers value in the relevant market, to inform future sustainability collaboration with their competitors. Only time will tell if the Guidance has an appreciable effect on fostering cooperation between businesses on the very pressing environmental issues shaping our societies and future.
References
Competition & Markets Authority, Green Agreements Guidance, (October 2023): Green agreements guidance (publishing.service.gov.uk)
Ipsos, Addressing the Sustainability Say-Do Gap, (July 2021): Ipsos-Views_Addressing-the-Sustainability-Say-Do-Gap.pdf