Navigating the CMA's Competition Law Guidance for Environmental Sustainability Agreements

Tereza Kamari
Legal Trainee
LMA

On 12 October 2023, the Competition and Markets Authority (CMA) released its long-anticipated Green Agreements Guidance, following a short consultation period at the beginning of 2023.

The guidance clarifies how competition law applies to environmental sustainability agreements, with the aim of encouraging the development of such agreements where previously, such agreements may have stalled because of fears that they would fall foul of the Chapter I prohibition contained within the Competition Act 1998. In particular, the guidance sets out a more permissive approach toward climate change agreements.

What is an environmental sustainability agreement?

The guidance defines environmental sustainability agreements as agreements aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or which assist with the transition towards environmental sustainability. Examples of such agreements include agreements aimed at improving air/water quality, conserving biodiversity and natural habitats, or promoting sustainable use of raw materials. Climate change agreements are a sub-category of environmental sustainability agreements, and are those which set out to combat climate change, for example, by reducing emissions within a particular supply chain.

Green agreements and the exemption

The guidance does not give the green light to businesses to enter into agreements that would have previously been deemed anti-competitive, simply because they have sustainability or the combatting of climate change as one of their aims. Instead, it sets out how businesses may avail themselves of the exemption from the application of Chapter I prohibition under section 9 of the Competition Act 1998. The guidance frames the section 9 exemption requirements as follows:

the agreement must contribute benefits to production, distribution or technical or economic progress;
the agreement and any restrictions of competition within the agreement must be indispensable to the achievement of those benefits;
consumers must receive a fair share of the benefits; and
the agreement must not eliminate competition in respect of a substantial part of the products concerned.

In order for parties to demonstrate they have met condition 1, the benefits of the agreement need to be concrete and verifiable, and the parties to the agreement should be able to clearly and objectively describe the benefits the agreement is expected to provide.

As for condition 2, indispensability means that the level of restriction of competition must be necessary to achieve the desired benefits, therefore there must be no less restrictive alternative to achieve them.

With respect to climate change agreements, the guidance states that the CMA will adopt a more permissive approach, in particular when assessing whether the agreement in question satisfies condition 3 above, namely whether a fair share of the benefits of the agreement can be enjoyed by consumers. For the purposes of the guidance, consumers include not just the direct customers of the parties to the agreement, but also those who purchase from those customers. While the benefits may also be received by consumers outside the UK, the agreement will qualify for exemption where the benefits to UK consumers outweigh the harm that the agreement would have on the relevant market for consumers, for example. higher costs. Nevertheless, the guidance says that the CMA will consider the total climate change benefits to all UK consumers, not just those in the relevant market. This is justified by the exceptional nature of the threat and the benefits of combating or mitigating climate change.

The guidance gives an example of an agreement between financial service providers not to provide insurance to fossil fuel projects as an example of a climate change agreement. Such an agreement could be considered a collective withdrawal agreement, which, while not having as its object the restriction of competition, could have an appreciably negative effect on competition, depending on particular circumstances. Absent the guidance, such an agreement would have been likely to infringe competition law if it was found that it had as its effect the prevention, reduction or distortion of competition. However, following the guidance, if the agreement falls under the definition of a climate change agreement, and meets the four conditions outlined above, it will benefit from the exemption.

How can businesses comply?

Not all agreements are black and white, meaning that not all agreements fall into the categories of likely to infringe or unlikely to infringe the Chapter I prohibition. For example, businesses pooling information about the environmental sustainability credentials of customers is unlikely to have an appreciable negative effect on competition and infringe the Chapter I prohibition. However, that is only where there is no sharing of competitively sensitive information about customers, prices or the quantities those customers purchase.

In order to reduce the uncertainty, the guidance encourages businesses to contact the CMA at the early stages in the development of their environmental sustainability agreement, in order to get specific advice on their agreement. As part of the CMA’s “open door policy”, businesses can expect to receive advice as to whether the agreement infringes competition law, and what the parties could do in order to benefit from the section 9 exemption. The guidance sets out a helpful framework for businesses to follow if they want to enter into an environmental sustainability agreement:

Review and Self-Assessment: Businesses should review their draft environmental sustainability agreements in detail to ensure they comply with the guidelines set out in the CMA's guidance. This self-assessment should be conducted in line with the guidelines and examples provided in the guidance. The guidelines set out in the CMA guidance explain both where an agreement would be unlikely to infringe competition law in the first place, which parties should strive for first, and where the agreement is potentially infringing, how the parties could benefit from the exemption.
Engage with the CMA: Where the parties are unsure about the application of the guidance or have specific questions that have not already been addressed by the CMA, the parties may approach the CMA in order to get tailored advice. This can be done by contacting sustainabilityguidance@cma.gov.uk.
Informal Assessment: The CMA will conduct a light-touch review of the draft agreement and any accompanying information provided. The review will be “proportionate to the size, complexity and likely impact of the agreement”. After reviewing the information provided plus relevant information in the public domain, the CMA will provide guidance and indicate options, concerns, risks and potential solutions.
Keep agreements under review: If circumstances change in relation to the agreement (for example, there is a material change to the structure of the relevant market), the parties should recontact the CMA and make any adjustments recommended by them.
Businesses that engage with the CMA in advance, that do not withhold information from the CMA, which receive informal CMA guidance following contact can expect to benefit from the exemption.

Practical steps for managing agents

While contacting the CMA is not a prerequisite to benefit from the section 9 exemption, it would seem in most circumstances sensible that any insurer wishing to enter into a collaborative environmental sustainability agreement with other insurers should make sure to consult the CMA early on. We note, in particular, that there are no timescales referred to in the guidance for the CMA to complete its review, so erring on the side of caution in a timing sense would be sensible.

It should also be noted that the guidance states it is without prejudice to the application of EU competition law or the competition laws of other jurisdictions, which is a timely reminder of the obvious – just because the agreement is exempt from Chapter I of the Competition Act, it does not mean that the agreement will comply or be exempt from the rules of other countries or regions. In particular, the US has some states which are actively discouraging “green agreements”, as explained in a presentation given at the Lloyd’s Market Association (LMA) in September 2023 by lawyers from McDermott Will & Emery, regarding ESG and anti-ESG legal developments in the US. Fossil fuel states, such as Texas and Louisiana, are at the forefront of anti-ESG legislation, mainly in the form of anti-boycott legislation, whereby states would be required to refuse to do business with companies considered to be boycotting fossil fuels and other related industries. No such legislation has been introduced into law to date, however, the repeated attempts of the anti-ESG movement to pass anti-boycott legislation highlights the differing attitudes between jurisdictions towards “green agreements”.

The jury is therefore out on how useful this guidance will be going forward. It would be very useful to see other regulators following this initiative to encourage green projects.