Tackling the effects of climate change has never felt more urgent. Reflecting this sense of urgency and in response to growing fears that businesses were being deterred from pursuing legitimate sustainability collaborations because of concerns about competition law, the CMA introduced its pioneering Green Agreements Guidance in October 2023. paving the way for an open-door policy for such agreements. Nine months into the regime, we take stock of this new process with some initial reflections. 

1.Legal Background - Horizontal Agreements 

Chapter I of the Competition Act 1998 (“CA98”) prohibits agreements that have as their object or effect the prevention, restriction or distortion of competition, and which may affect trade within the UK (“The Chapter I prohibition”). Horizontal agreements (between actual or potential competitors) are particularly likely to fall foul of this prohibition. 

However, recognising that collaboration with competitors can in some circumstances be beneficial to consumers and innovation, the CMA has published guidance on how to assess horizontal agreements (the “Horizontal Guidance”). It sets out in detail the circumstances in which horizontal agreements will meet the stringent requirements of Section 9 CA98, exempting some from the Chapter I prohibition. The CMA renewed the Horizontal Guidance in August 2023 (you can access the full document here) and in this context, published a brand-new set of guidance for green agreements (the “Green Agreements Guidance”). 

The Green Agreements Guidance relates to agreements between actual or potential competitors, which have the purpose of improving environmental sustainability and/or addressing the climate change emergency. It details, in a clear and straightforward manner, how sustainability agreements should be assessed and the circumstances in which they meet the existing criteria for exemption under s.9 CA98. You can access the full document here.

2. The Agreements Caught by the UK’s Green Agreements Regime 

The stated goal of the Green Agreements Guidance is to support businesses that wish to collaborate on environmental sustainability without fear of breaching competition law. It reflects the fact that sustainability is one of the CMA’s strategic priorities and its commitment to help accelerate the UK’s transition to a net zero economy.

While businesses can theoretically pursue sustainability independently, they often face various competitive disadvantages: 

• Early mover disadvantage - Early adopters of sustainability initiatives face higher costs, potentially putting them at a competitive disadvantage if consumers are not willing to pay a premium for more sustainable products or goods. This is especially the case in price-sensitive markets. It can create a stalemate where everyone recognises the need for more sustainable practices, but no one is willing to act first. Collaboration can help overcome this challenge by allowing businesses to share costs and risks in the transition towards de-carbonisation.
• Free-rider issue - This happens where late entrants can “free-ride” on the first-mover’s development of the market and take advantage of the groundwork laid by first movers who have already invested in developing sustainable technologies, processes, or consumer awareness through green marketing campaigns. 
• Businesses may lack the individual resources and capabilities to achieve environmentally sustainable outcomes. For instance, a business with the necessary technical expertise may lack the R&D facilities to innovate its production processes to reduce carbon emissions. 

The CMA recognises that collective action could combat these challenges and speed up environmental sustainability developments.

Agreements unlikely to be of concern:

The Green Agreements Guidance helpfully sets out the types of sustainability agreements which are unlikely to infringe The Chapter I Prohibition, including the following. 

• Non-appreciable agreements - where the parties have a very small combined market share of the market affected by the agreement and the agreement does not have the ‘object’ of restricting competition. 
• Agreements that do not affect the main parameters of competition between the parties to the agreement, such as price, quantity, quality, choice, or innovation. This includes agreements which concern the internal corporate conduct of businesses and agreements to run a joint campaign to raise awareness about environmental sustainability.
• Creation of environmental sustainability industry standards – provided that: (i) they are developed through a transparent process and any business in markets affected by the standard can participate in its development, (ii) no business is obliged to implement the standard, (iii) any business can implement the standard on reasonable and non-discriminatory terms, (iv) businesses implementing the standards are free to go beyond it, and (v) the standard is unlikely to result in an appreciable reduction in the availability of suitable products for consumers to purchase. 
• Phasing out non sustainable products or processes – these agreements are unlikely to raise competition concerns unless they involve an appreciable increase in price or reduction in product quality or choice. 
• Industry wide environmental targets – setting non-binding targets or ambitions for the whole industry with regard to environmental sustainability objectives. 

3. Application of the Exemption (Under s.9 CA98) for Environmental Sustainability Agreements 

Section 5 of the Green Agreements Guidance is the heart of the new regime. It details the agreements which fall within the scope of the Chapter I prohibition, but which are nonetheless capable of exemption under s. 9(1) CA98, setting out how the 4 limbs of the exemption apply to horizontal green agreements: 

i. Condition 1: Benefits to production, distribution or technical or economic progress

The parties need to have evidence of objective benefits that arise from the agreement. This can include: reducing greenhouse gas emissions, or improving production or distribution processes, for example by introducing new cleaner technologies. The benefits may be felt outside the UK as well as in the UK, but the benefits to UK consumers must outweigh the harm they suffer from the agreement.

ii. Condition 2: Indispensability 

The agreement cannot restrict competition more than is necessary to achieve the benefits. Parties will need to prove that in the absence of the agreement, they would not otherwise be able to achieve the level of benefits which the agreement seeks to achieve, which can be, for instance, for economic reasons or lack of expertise. 

iii. Condition 3: Consumers receive a fair share of the benefit. 

The benefits that result from the agreement need to be passed on to UK consumers and those benefits must outweigh the harm that UK consumers will suffer as a result of the agreement. Benefits can include future as well as current benefits that accrue to direct as well as indirect users (those who purchase from direct users). 

Consumers can benefit directly where the agreement results in improved product quality or variety or lower prices. Consumers can also benefit indirectly if they value the wider environmental impact of sustainable agreements, even if it means paying higher prices (this can be substantiated by evidence such as consumer surveys). 

The focus is on consumers directly affected by the agreement (those in the relevant market). However, benefits achieved on separate but related markets can be taken into account, provided that the consumers affected by the restriction and receiving the benefit are substantially the same or substantially overlap. 

iv. Condition 4: No substantial elimination of competition 

In order to benefit from the exemption, the agreement must not eliminate competition in respect of a substantial part of the products in question. Where the agreement covers the entire market, this condition may still be satisfied if there is scope for the parties to compete on the main parameters of competition (e.g., on price or quality), even if they align other aspects of their competitive behaviour. 

The Green Agreements Guidance also notes that elimination of competition for a limited period of time, where this has no impact on the development of competition after that period elapses, is not an obstacle to satisfying this condition. 

4. The Exemption for Climate Change Agreements 

Through the Green Agreements Guidance, the CMA has established a more permissive approach for climate change agreements; a progressive and noteworthy competition law development reflecting the severity of the climate crisis. 

Whilst the assessment under s.9 CA98 follows the four conditions described above, in considering condition 3 (the need for consumers to have a fair share of the agreement’s climate change benefits), the CMA departs from the general approach and exempts such agreements if the ‘fair share to consumers’ condition can be satisfied taking into account the totality of the climate change benefits to all UK consumers arising from the agreement. 

Given the exceptional nature of the harms caused by the climate crisis, the CMA considers this approach justified and a reflection of the public concern as well as the UK’s national and international commitments. 

In addition, the CMA has indicated that it “does not expect to take enforcement action against parties to climate change agreements that correspond clearly to the principles set out in this guidance”. This should give businesses who wish to collaborate in this sphere a clear pathway and significant reassurance.

5. The CMA’s Open-Door Policy

Last, but not least, the Green Agreements Guidance sets up an open-door policy for businesses considering entering into an environmental sustainability agreement. This is not quite a step away from self-assessment as the parties are still expected to carry this out before reaching out to the CMA. Yet, it is a departure from established norms. Businesses should always consider their position carefully before interacting with the CMA. Confidential information should be flagged at the outset to ensure its redaction in the event of the publication of informal guidance. Businesses should also be confident that any initial conversations which may have taken place in relation to any collaboration were in done compliance with UK competition law. 

The CMA has added further comfort to its statement that it “does not expect to take enforcement action” in relation to an agreement discussed with them through the open-door policy. It added that it “would not issue fines” even if it subsequently concludes that the agreement infringes competition law as long as the parties did not withhold relevant information. Where parties have benefited from informal guidance, they are expected to keep their agreements under review and amend them as necessary to keep them compliant with the law. 

Using this new process, the CMA has now published two informal guidance decisions and reports suggest they have already been approached a dozen times. Not all approaches lead to informal guidance – some are just exploratory discussions but undeniably the interest demonstrates that businesses do see value in this new policy. It has also published a submission guide which sets out the information which need to be included in the request for informal guidance as well as the questions which will need to be addressed to help the CMA in their legal assessment. 

The publication of informal guidance is also particularly helpful for competition law practitioners who have noticed an increasing volume of instructions in relation to sustainability focussed collaborations. Below we have summarised the CMA’s analysis as set out in the existing decisions and what this tells us going forward. 

6. Lessons Learnt from the published informal guidance

6.1 Fairtrade Shared Impact Initiative - December 2023

The Fairtrade Foundation proposed a "Shared Impact Initiative" with UK retailers for long-term supply of Fairtrade banana, coffee, and cocoa products. This initiative aimed to enhance sustainability and resilience of food supply chains by providing producers with secure long-term contracts, enabling investment in sustainable farming practices, resulting in reduced deforestation, biodiversity loss and on-farm emissions. The retailers agreed to commit to purchase minimum additional volumes of certain goods for a three-to-five-year period. 

In the first decision of its kind, the CMA's assessment of the Fairtrade initiative concluded that it was unlikely to significantly impact the main parameters of competition, including price, output, product quality, variety, and innovation and was unlikely to have appreciable effects on competitive given the limited scale of the initiative. To the extent that any specific provisions could have restrictive effects, these were likely to be objectively necessary to implement the initiative and proportionate to achieve the overall sustainable aims. 

In its conclusion, the CMA stated that it does not expect to take enforcement action in relation to the current anticipated form of the terms of the agreement. The CMA did note that the parties should keep their agreement under review to ensure it continues to adhere to the principles of the Green Agreements Guidance.

6.2 WWF Basket – March 2024

The proposal would see five competing, leading UK supermarkets making a joint commitment to increase the number of their suppliers setting net-zero targets by an agreed date and introduce incentives and disincentives for fulfilling the collective commitment.

The CMA considered the proposal to be a climate change agreement because it is intended to reduce greenhouse gases emissions from grocery supply chains and contributes to the UK’s binding climate change target. The CMA considered that the proposal did not have the object of restricting competition because it was unlikely to eliminate or harm competing (non-participating) retailers, nor would it lead to market sharing. 

The CMA assessed the proposal's potential competitive effects at both retail and supply levels. At the retail level, the proposal was unlikely to negatively impact competition. However, at the supply level, the proposal could potentially distort competition between retailers and suppliers. This could happen through a reduced range of products sold to retailers or increased costs for suppliers, potentially forcing some out of the market. The CMA acknowledged that this risk is mitigated by the fact that not all suppliers are required to set targets and retailers have an incentive to avoid actions that weaken competition between suppliers. However, it could not reach a definitive conclusion on the proposal's potential effects on competition.

The CMA considered a potential exemption under section 9 of the CA98. While the CMA did not have enough information to definitively apply the exemption, it recognised that the proposal could meet the conditions: (i) the proposal would likely result in a relevant environmental benefit due to reduced greenhouse gas emissions; (ii) the potential benefits could outweigh any adverse effects on consumers; (iii) the proposal might be necessary due to the limited success of past unilateral actions by retailers; (iv) the proposal does not regulate price or costs; and (v) significant competition between retailers is expected to continue.

The CMA concluded that the proposal could potentially be exempt under section 9, as it could generate environmental benefits for UK consumers in the form of emissions reductions that could offset any harmful competitive effects.

7. Final thoughts 

The CMA appears to have taken on the mantle of sustainability and competition law trailblazer. This is a welcome development, which should encourage other competition authorities around the world to assess whether they can also provide reassurance to businesses who wish to collaborate on decarbonisation. 

The threats posed by climate change must be addressed by all corners of civil society and it is a welcome development that the UK competition authority is thinking outside the box and playing its part. 

Of course, international businesses, will no doubt be frustrated that a more global approach on sustainability agreements, has not yet been adopted by competition authorities. A new UK regime has limitations in terms of its geographic reach and in house teams will often follow the stricter regime as a more cautious approach from a risk perspective. In addition, the Green Agreements Guidance does not carry the legal force of legislation. This may result in reservations from certain businesses reluctant to rely on soft law as the basis of long-term investment decision making in this space. 

In parallel, the EU Commission has updated its guidelines on horizontal sustainability agreements, even opening the door to providing informal guidance (although to date there has been no published decisions). Whilst many aspects of the CMA’s Green Agreements Guidance track closely with the EU Commission’s approach, the CMA has gone further in relation to Climate Change Agreements. You can read our full update summarising the EU’s position here.  The Dutch ACM has also been particularly active in this space, although it has been somewhat restricted by the EU Commission’s approach. In October 2023, it published a “Policy Rule” setting out how it will apply the EU Commission’s Horizontal Guidelines to its own set of guidelines on sustainability agreements, notably published in 2020. You can read our full update on the ACM’s approach here.

If you need more information or further guidance in this area, please contact Ariane Le Strat, Antonio Rodrigues and Dr Saskia King.

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