Green Agreements: Collaborating with competitors on environmental sustainability

As of 16th January 2024, the alert has been updated to include reference to the CMA’s first informal guidance on a Green Agreement.

On 12 October 2023, the Competition and Markets Authority (‘CMA’) issued its new ‘Green Agreements Guidance’.

This explains how UK competition law applies to environmental sustainability and climate change agreements (‘Green Agreements’) and largely augments the CMA’s earlier draft guidance through the addition of new examples and the use of tighter language.

The CMA continues to acknowledge that industry collaboration is likely to make an important contribution to meeting the UK’s binding international commitments and domestic legislative obligations to achieve a net zero economy. It is ‘keen to help businesses take action on climate change and environmental sustainability, without undue fear of breaching competition law’ and emphasises its ‘open-door policy’ to provide informal guidance in the case of uncertainty.

The new guidance clarifies the circumstances in which collaboration with competitors to promote environmental sustainability may be permitted – and when it may be prohibited as anti-competitive under the UK competition law prohibition of anti-competitive agreements/ practices (the ‘Prohibition’).

It covers three broad situations:

• Green Agreements which are unlikely to infringe the Prohibition.
• Green Agreements which could infringe the Prohibition.
• Exemption to permit Green Agreements that would otherwise infringe the Prohibition.

Businesses currently participating in, or seeking to enter into, Green Agreements with competing businesses should review the guidance carefully and seek specialist competition law advice. The CMA’s separate Guidance on Horizontal Agreements may also be of relevance.

Green Agreements

Still referred to throughout the new guidance as ‘environmental sustainability agreements’ (with Green Agreements only referred to in the title), the new definition encapsulates ‘agreements between competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability.’ As usual, agreements include practices and competitors include potential competitors.

Examples include agreements aimed at improving air or water quality, conserving biodiversity and natural habitats or promoting the sustainable use of raw materials.

The new definition still includes ‘climate change agreements’, now defined as ‘agreements which contribute to combating climate change’. Seven examples of climate change agreements are given, including the three from the draft guidance (manufacturers phasing out carbon dioxide emitting production processes; delivery companies switching to electric vehicles; and financial services providers agreeing not to support fossil fuel projects with finance or insurance), plus:

• An agreement to pool funds, technology or expertise to support the development of more effective technology to capture and store carbon dioxide.
• An agreement between manufacturers to phase out the sourcing of an input, where its production causes greenhouse gas emissions;
• An agreement between home builders only to purchase and install products that perform above a minimum energy efficiency standard, so reducing future emissions produced by heating or cooling the home.
• An agreement between retail businesses to require or incentivise suppliers to phase down their greenhouse gas emissions to reduce scope 3 emissions in their supply chains.

The new guidance now also covers ‘mixed agreements’ that ‘generate both climate change benefits and other environmental benefits’.

Agreements which pursue broader societal objectives (for example, improving working conditions), however, remain outside the scope of the guidance.

i. Green Agreements which are unlikely to infringe the Prohibition

The guidance now lists nine (up from seven) types of Green Agreements which will generally be permitted (with the two new types italicised below):

• Non-appreciable agreements (such as those between SMEs with a very small combined market share that do not have the ‘object’ of restricting competition).

• Agreements which do not affect the main parameters of competition such as price, quantity, quality, choice or innovation. Examples include agreements which involve: the internal corporate conduct of the businesses (such as to eliminate single-use plastic in their business premises); pooling funds to engage in activities to mitigate the effects of greenhouse gas emissions; and joint campaigning to raise awareness about sustainability issues or joint lobbying for policy or legislative changes.

• Agreements to do something jointly which none of the parties could do individually (unless the project could have been undertaken by co-operation that is less restrictive of competition).

• Cooperation required by law.

• Pooling information about the environmental sustainability credentials of suppliers or customers (without requiring the parties to purchase, or to refrain from purchasing, from those suppliers or to share competitively sensitive information including information about customers, or about prices or quantities purchased from suppliers or by customers).

• Creation of industry standards/ codes of practice (provided that:

1. 1. The process for developing the standard is transparent and any affected business can participate in its development.
   2. No business is obliged to implement the standard.
   3. Any business can implement the standard on reasonable and non-discriminatory terms.
   4. Businesses implementing the standard are free to go beyond its minimum environmental sustainability requirements or to develop additional higher standards.
   5. The standard is unlikely to appreciably reduce the availability of suitable products for consumers to purchase, as participating businesses
      1. have low combined market shares (e.g. below 20%)
      2. remain free both to sell alternative competing products outside of the standard and to independently determine which of their products the standard will apply to)

• Phasing out/ withdrawal of non-sustainable products or processes (where this does not appreciably increase the price for consumers or reduce product quality or choice and does not have the ‘object’ of eliminating or harming the parties’ competitors or market sharing).

• Industry-wide environmental targets – setting non-binding targets or ambitions for the whole industry with regard to environmental sustainability objectives (provided the participants remain free independently to determine their own contribution/ how to meet the targets).

• Agreements between shareholders to vote for promoting corporate policies that pursue environmental sustainability (e.g. an agreement between competing asset manager shareholders in a company to vote in support of/ lobby jointly for pro-climate change/ environmental sustainability policies or against policies that do not have those objectives).

ii. Green Agreements which could infringe the Prohibition

This section captures Green Agreements which have the ‘object’ of restricting competition and those which infringe the Prohibition by having the ‘effect’ of restricting competition (which must be appreciable). These agreements will be prohibited unless they benefit from exemption (see below). The new guidance now also covers ancillary restraints and collective withdrawal in this section.

Green Agreements with the ‘object’ of restricting competition

These agreements, by their very nature, are regarded as being harmful to the proper functioning of normal competition. Green Agreements which involve price fixing, market or customer allocation, limitations of output or limitations of quality or innovation will typically restrict competition by ‘object’. Examples include an agreement between competitors on the sales prices of products meeting an agreed environmental sustainability standard, or an agreement that limits the parties’ or others’ ability or incentive to innovate (e.g. by agreeing not to adopt a new less polluting production process).

Ancillary restraints – restrictions necessary and proportionate to a permitted Green Agreement

This new section of the guidance clarifies that an ‘ancillary restraint’ to a wider permitted Green Agreement will also be permitted provided:

1. 1. It is objectively necessary to implement, and proportionate to the objectives of, that wider Green Agreement.
   2. The wider agreement would be impossible (not merely more difficult/ less profitable) to carry out without the ancillary restraint.

The new guidance includes an example of an ancillary restraint in the context of joint purchasing.

Collective withdrawal

A vertical ‘collective withdrawal agreement’ (as opposed to a horizontal ‘collective boycott’ agreement) designed to remove unsustainable products from the supply chain – by agreeing not to deal with upstream suppliers/ downstream customers engaging in unsustainable supply/ production – is unlikely to restrict competition by ‘object’ provided the agreement does not harm the parties’ competitors. An effects analysis will typically be required instead.

Green Agreements with the appreciable ‘effect’ of restricting competition

Green Agreements may lead to various types of restrictive effects, such as increased prices, reduced output/ innovation/ product quality or variety. Any assessment for anti-competitive effects will be case specific. That said, the CMA has said that it will consider the following factors:

• • Whether the agreement covers all or only part of the relevant market(s).
  • Whether the businesses participating in the agreement, individually or collectively, have market power in the affected relevant market(s).
  • The extent to which the parties’ activities are constrained.
  • The ability for non-parties to participate.
  • Whether or not the agreement involves the exchange of unnecessary commercially sensitive information.
  • The likelihood of an appreciable increase in price or reduction in output, innovation, product quality or variety.

iii.Exemption for Green Agreements generally and for Climate Change Agreements

To benefit from exemption, the parties must be able to demonstrate that:

(i) The Green Agreement contributes to certain benefits, namely improving production or distribution, or contributes to promoting technical or economic progress.

(ii) The Green Agreement and any restrictions of competition it contains must be indispensable to the achievement of those benefits.

(iii) Consumers must receive a fair share of the benefits.

(iv) The Green Agreement must not eliminate competition in respect of a substantial part of the products concerned.

The guidance emphasises that the relevant benefits need to be objective, concrete, verifiable and substantiated; they cannot simply be assumed. It does note, however, that they may materialise in future, over a relatively long period of time and that it is legitimate to have regard to such future benefits.

In relation to climate change agreements, the guidance provides a permissive approach to assessing consumer benefits. More specifically, the ‘fair share to consumers condition’ above ‘can be satisfied taking into account the totality of the benefits to all UK consumers arising from the agreement, rather than apportioning those benefits between consumers within the market affected by the agreement and those in other markets’ (as is standard practice under general competition law rules).

Mixed agreements (such as an agreement between competing businesses to eliminate deforestation from their supply chains with both climate change and biodiversity benefits) will require consideration under both the general exemption approach and the alternative climate change exemption approach.

The CMA does not expect to take enforcement action against parties to climate change agreements – or other Green Agreements – that correspond clearly to the principles set out in the new guidance.

It emphasises its ‘open-door policy’, where businesses, trade associations, NGOs or nominated representatives can approach the CMA for informal guidance in the case of uncertainty on how to apply the new guidance but notes that this is intended to be ‘a light touch review’. Approaching the CMA in this manner can provide some protection from fines and director disqualification.

Practical pointers:

1. Be aware that good intentions (including environmental aims) are not a defence to a competition law breach.
2. Seek specialist competition law advice before agreeing to participate in joint/ collective sustainability or climate change initiatives, or creating industry standards.
3. Record details of all joint/ collective sustainability or climate change initiatives and remember not to share competitively sensitive information with current or potential competitors.
4. Keep your Green Agreements (including climate change agreements) under review to ensure they remain competition law compliant and make any necessary adjustments if they do not.

Conclusion

The CMA’s new ‘Green Agreements Guidance’ demonstrates its commitment to promoting environmental sustainability and providing greater clarity for competing businesses seeking to collaborate on Green Agreements. Businesses currently participating in (or seeking to enter into) Green Agreements should review the guidance carefully and seek specialist competition law advice.

For more information on Green Agreements, contact Andrew Maxwell, or another member of our Competition Team.