Collaborating on ESG: the UK's CMA publishes Green Agreements Guidance
Published on 25th Oct 2023
Businesses will have more certainty on how to structure and deliver green collaborations and comply with competition law
The UK's Competition and Markets Authority (CMA) has published its final version of the long-awaited Green Agreements Guidance for businesses on how to comply with competition law when engaging in collaborations with competitors on environmental objectives.
The publication on 12 October 2023 follows the CMA's consultation on environmental sustainability agreements earlier this year, and comes as the European Commission and the Netherlands' Authority for Consumers and Markets have also been developing their approach to guidance in this area and environmental, social and governance (ESG) goals.
Who should consult the guidance?
The CMA's Green Agreements Guidance is relevant to any business looking to cooperate with a competitor on an environmental sustainability issue, or a trade association or non-governmental organisation (NGO) coordinating any such arrangement. For example:
- A group of fashion houses agree to set targets for gradually increasing the amount of sustainable materials used in their clothing ranges.
- Two energy companies come together to conduct research and development in zero-carbon energy generation.
- A trade association for food producers brings together its members to discuss and share information on the sustainability credentials of warehousing suppliers.
- White goods manufacturers come together to reduce the carbon footprint of their logistics requirements by combining their logistics activities and optimising distribution routes and schedules.
What is the aim of the guidance?
The guidance aims to give businesses more certainty on how green collaborations can be structured and delivered in compliance with competition law.
In general, competition law ensures that competitors compete effectively with each other to drive down prices and to achieve innovations and improvements in quality. Accordingly, competition law restricts the extent to which competitors can collaborate: competitor collaborations are only permitted where they result in benefits which are passed on to consumers (for example, working together, the competitors can deliver a project or product at a lower cost and or/with better quality working, or the agreement overcomes "first mover-disadvantage") and which go no further than necessary to achieve those benefits.
Until recently, there was little guidance on how that legal framework applies to green collaborations, for example:
- What efficiencies and benefits can be taken into account? It is clear that lower prices and better quality products are considered to be benefits for the purposes of competition law, but what about contributions to combating climate change, reducing pollution and improving biodiversity?
- Must the efficiencies benefit the consumer who is buying the product, or can they extend to society as a whole? For example, what if the individual consumer pays more for a jointly developed low-carbon product but society as a whole benefits from the lower environmental impact of that product?
In face of these uncertainties, and of substantial fines for getting it wrong, businesses have been understandably nervous about concluding environmental collaborations.
As Sarah Cardell, the chief executive of the CMA, explains, the guidance aims to address those uncertainties: "We know that tackling climate change and promoting environmental sustainability matters, and supporting businesses to do this is a priority for the CMA. So, we have developed the Green Agreements Guidance for all companies who are considering collaborating so they can understand how to agree green goals without breaking the law.
"The guidance goes further than before - it gives firms greater certainty about when agreements that genuinely contribute to addressing climate change will be exempt from competition law. Our open-door policy means we can work with companies to give them tailored informal guidance on how they can work together to boost the green economy."
Low-risk green collaborations
The guidance confirms that agreements that do not relate to the way that businesses compete or may compete with each other, or do not have an appreciable adverse effect on competition, are unlikely to infringe competition law, including:
- Agreements concerning internal corporate conduct of businesses, such as limiting the number of printed materials within the businesses.
- Joint funding of activities to mitigate, adapt or compensate for the effects of greenhouse gas emissions; for example, funding training to develop or encourage the use of more sustainable practices or processes in the industry.
- Campaigning to raise awareness about environmental sustainability issues within an industry, provided that the campaign does not amount to joint selling or advertising of specific products.
- Lobbying for policy or legislative changes, such as on carbon pricing. Care must however be taken not to share competitively sensitive information.
- Agreements to do something jointly which none of the parties could do individually.
- Pooling objective, evidence-based information about or providing a rating on the environmental sustainability credentials of suppliers, provided participants are not requiring parties to purchase (or refrain from purchasing) from those suppliers.
- Devising a common methodology on an open-source basis for measuring environmental impact.
- Competing businesses jointly developing materials to support their suppliers to meet the suppliers’ own emissions targets.
- Agreements between shareholders of a single business to vote in support of corporate policies that pursue climate change or environmental sustainability agreements.
- Agreeing to phase out particular non-environmentally sustainable processes or products where this will not result in increased prices or lower quality or choice.
- The setting of non-binding targets or ambitions for the whole industry with regard to environmental sustainability objectives.
Higher-risk green collaborations
The following are highlighted in the guidance as agreements that may infringe competition law:
- Agreeing the price at which to sell products meeting an agreed environmental sustainability standard.
- Green agreements that involve allocating customers or geographic market between competitors (for example, for jointly developed green products).
- Agreements that limit incentives to innovate to meet better environmental standards, such as an agreement not to adopt a new less polluting production process.
- Agreeing to limit freedom to exceed minimum environmental legal requirements.
- Collectively agreeing only to purchase from suppliers that sell sustainable products or not to sell to customers that produce environmentally damaging products or services.
- Agreeing a sustainability standard labelling system without allowing businesses to take advantage of the system on non-discriminatory terms.
- Exchanging competitively sensitive information that goes beyond what is strictly necessary for the performance of the agreement, and/or that is not appropriately ring-fenced through non-disclosure agreements and information exchange barriers (such as digital firewalls and password protection). Competitively sensitive information is likely to include any of the following (to the extent that they are not in the public domain):
- Prices, fees, discounts, margins, promotion periods
- Commercial terms, rebate strategies, volumes
- Cost information including supplier pricing/costs, labour costs and other key cost inputs
- New technologies and product launches
- Alignment of terms which lead to the exclusion of a competitor or reduction of competition on a market
- Supply capacity, expansion plans, or customer specific information
- Remuneration, incentives and employment terms offered to employees
The guidance provides clarity on when standard-setting in the context of environmental sustainability (such as publishers agreeing to use a logo to certify that a book or magazine is printed using a minimum 50% content of recycled paper) will be permitted by competition law:
- The process for developing the standard must be transparent and open to all businesses affected by the standard.
- Adoption of the standard cannot be mandatory (albeit the standard may require businesses that have committed to implement the standard to comply with its requirements).
- Any business must be permitted to implement the standard on reasonable and non-discriminatory terms, including effective access to the requirements and conditions for using the agreed label (or logo or brand name) for the standard.
- Businesses implementing the standard must be free to go above and beyond the limits of the standard.
- The standard must not be likely to result in an appreciable reduction in the availability of suitable products for consumers to purchase (for example, because participants remain free to sell competing products that do not meet the standard).
The communication of brands' sustainability collaborations
The CMA issued its Green Claims Code in September 2021 as an aide memoire to assist businesses in ensuring that any environmental claims they made about their products, services or brands more generally adhered to the Consumer Protection from Unfair Trading Regulations. At that time, the CMA gave clear warning to businesses that they would be given a few months to ensure their environmental claims were compliant, and then a pattern of enforcement action would commence.
True to its word, the CMA considered sectors it felt could cause widespread consumer harm with their environmental claims and decided the fast-fashion retail sector was the first to fall under its lens of scrutiny and the fast-moving consumer goods sector would be next. Due to its current programme of enforcement against misleading environmental and sustainability related claims, it is no surprise the CMA also referenced this work in the Green Agreements Guidance.
It pointed out that, as well as conducting a competition law assessment of any sustainability collaborations with third parties, businesses need to also ensure that the way they discuss any such collaborations and their achievements complies with consumer protection law. Any claims and the use of environmental labels must not be misleading – including either due to exaggeration, unclear or technical language consumers do not understand or not having adequate evidence to back the claims made. It is a timely reminder for all businesses seeking to be more sustainable that their public statements about their work needs to comply with the Consumer Protection from Unfair Trading Regulations, the UK CAP (UK Code of Non-broadcast Advertising and Direct & Promotional Marketing) and BCAP (UK Code of Broadcast Advertising) codes (regulating express and implied claims made in a wide range of advertising content) and the CMA’s Green Claims Code.
Preferential treatment for 'climate change agreements'
The CMA provides preferential treatment for collaborations that contribute to combating climate change, that is "climate change agreements". The guidelines give examples that include:
- "an agreement between manufacturers to phase out a particular production process which involves the emission of carbon dioxide
- an agreement between delivery companies to switch to using electric vehicles
- an agreement to pool funds, technology or expertise to support the development of more effective technology to capture and store carbon dioxide".
Because of the exceptional nature of the harms posed by climate change, in the case of climate change agreements, the CMA will take into account the benefits to all UK consumers, making it easier to justify these agreements under the competition rules.
To qualify for this beneficial treatment, businesses need to demonstrate that the climate change benefits are in line with, or exceed, existing legally binding requirements or well-established national or international targets. Businesses should consider undertaking an assessment and making a contemporaneous record of that assessment and or seeking informal advice under the open-door policy.
Open-door policy and protection from fines
The CMA's open-door policy is perhaps one of the most impactful features of its approach in the Green Agreements Guidance. Businesses (or interested trade associations and NGOs) who, after consulting the guidance, remain uncertain as to whether their collaboration has been structured lawfully, are invited to approach the CMA for informal advice.
The CMA assures that it "does not expect to take enforcement action in relation to an agreement which was discussed with the CMA in advance under the open-door policy and where the CMA did not raise concerns (or where any concerns that were raised by the CMA have been addressed by the parties)" and it will not issue fines in relation to any such agreement.
This process will be a useful tool to unlock uncertainty around novel and borderline collaborations and a valuable route to ensure protection from infringement action.
Osborne Clarke Comment
While the Green Agreements Guidance cannot be expected to cover an infinite range of possible scenarios, it will provide a considerable degree of certainty in an area that, to date, has been the subject of much caution, and the open-door policy goes a long way to addressing residual uneasiness in borderline and novel scenarios.
The guidance covers sustainability collaborations in the UK. Other jurisdictions, notably the EU and the Netherlands, are developing their own similar, albeit not identical, guidance. For this reason, businesses engaging in cross-border collaborations should ensure all relevant guidance is complied with.
More generally, we can expect that the regulators may expand the guidance to cover wider policy objectives over time, particularly within the ESG space.
If your business requires help ensuring its sustainability collaborations comply with competition laws, contact one of our experts (below) who will be delighted to support you.