Environmental sustainability agreements: final UK guidance to cooperating competitors

The UK Green Guidance gives businesses an important steer on when they can legitimately engage in environmental cooperation and puts the CMA ahead of the pack of international antitrust regulators seeking to promote sustainability objectives. It is a timely development as businesses prepare for future annual reporting requirements to disclose their engagement and collaborative activities with industry counterparts in the context of their climate transition plans.

In recent years, antitrust authorities across the globe have been considering the best way to ensure that antitrust laws do not prevent collaboration between businesses that is necessary for the promotion or protection of sustainability. The CMA has been one of the front-runners in the debate, establishing a “sustainability taskforce” in 2022 and advising the UK government on how antitrust laws can help meet the country’s environmental goals.

The UK Green Guidance marks a significant step in this process and adds the CMA to the list of antitrust authorities – only a handful so far – that have published guidance in this area. At EU-level, the European Commission (EC) published guidelines on sustainability agreements earlier this year (see our alert).

In many respects the UK Green Guidance is in line with the EC’s approach. However, there are some significant differences, with the CMA keen to position itself among the more ‘cooperation-friendly’ regulators given the importance of these topics to consumers and public policy. In particular, the CMA takes a more permissive approach than the EC to climate change agreements. These areas of divergence are crucial for businesses operating in both jurisdictions, and we highlight them throughout our commentary below.

Key takeaways

• The UK Green Guidance provides examples of environmental sustainability agreements that are unlikely to infringe UK antitrust laws and those that, while capable of restricting competition, may be permitted because of the benefits that they create
• In particular, the CMA includes detail on some crucial issues on which antitrust regulators have differed internationally (eg the ability of institutional investors to enter into agreements about the promotion of green policies in the companies in which they invest).
• For “climate change agreements”, the CMA proposes a more permissive approach given the “special category of threat” that climate change presents. Parties will be able to justify these types of agreement based on a wider range of benefits flowing from the cooperation.
• However, the CMA does not give details on how it will determine whether an agreement gives rise to “objective benefits” for environmental sustainability. The burden of proof is on businesses, which will need to exercise care and caution in describing and quantifying the benefits expected to arise from an agreement or be at risk of greenwashing.
• The CMA is operating an “open door policy” to give informal guidance to businesses who want to understand how the guidance would be applied to a particular project or initiative.
• Businesses that follow the principles in the UK Green Guidance will not face CMA enforcement action. Those that approach the CMA for informal guidance will receive protection from enforcement and/or fines, including protection for directors from disqualification orders.
• But businesses may still face private enforcement and reputational harm for greenwashing if the environmental benefits anticipated under the agreement fail to materialise as described. Businesses in regulated UK sectors also do not have the benefit of any assurances from the UK’s ‘concurrent competition regulators’ (including the FCA, PRA, Ofgem and Ofcom) that they will adopt the same approach to enforcement as the CMA.
• The UK Green Guidance is a timely development that should help businesses prepare for upcoming legal requirements to disclose their engagement and collaborative activities with industry counterparts in the context of their climate transition plans.

Environmental sustainability agreements are defined broadly, but no extension to other forms of ‘sustainability’ agreement

The UK Green Guidance applies to “environmental sustainability agreements”, encompassing a broad range of conduct aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assisting with the transition towards environmental sustainability. Examples include agreements designed to improve air or water quality, conserving biodiversity and natural habitats or promoting the sustainable use of raw materials.

UK/EU comparison: UK Green Guidance is narrower in scope

The UK Green Guidance is limited in scope to “environmental sustainability agreements”. The EC’s guidelines cover a broader definition of “sustainability agreements”, including cooperation designed to support economic and social development, including upholding human rights, ensuring a living income and protecting animal welfare.  

In the clear: environmental sustainability agreements that do not raise antitrust concerns

The UK Green Guidance lists eight types of environmental sustainability agreement that are unlikely to raise concerns (including when entered into by members of a trade association or an NGO or where such organizations provide support to businesses taking part in these agreements):

1. Agreements that do not affect the main parameters of competition ie that do not relate to price, quantity, quality, choice or innovation. Examples include agreements concerning internal corporate conduct/policies, joint funds to mitigate, adapt or compensate for greenhouse gas emissions, and agreements to run joint environmental awareness campaigns. Joint lobbying for policy or legislative changes is also given a green light, provided it does not involve sharing of competitively sensitive information and is not used to seek the exclusion of a competitor.
2. Cooperation required by law. For this exclusion to apply, the cooperation must be compulsory rather than just encouraged.
3. Pooling information about the environmental sustainability credentials of suppliers or customers. This is likely to be permissible provided there is no sharing of competitively sensitive information about prices or quantities and, in relation to suppliers, parties are not required to purchase (or refrain from purchasing) from those suppliers.

UK/EU comparison: aligned examples, but the UK Green Guidance includes more practical illustrations

Categories 1 to 3 are similar to those listed in the EC’s guidelines, although helpfully with more practical examples of non-problematic collaboration. This will aid the assessment of these types of environmental sustainability agreements across both jurisdictions. In respect of category 3, businesses may increasingly look to collaborate in this way as they prepare to comply with the growing body of EU and UK regulations to tackle the environmental impacts of supply chains (eg the EU Corporate Sustainability Due Diligence Directive and deforestation laws). 

4. Creation of industry standards. The CMA considers that collaboration to develop industry standards (including codes of practice) aimed at making products or processes more sustainable is unlikely to be problematic under UK antitrust rules provided that each of the following conditions are met:
   1. the process for developing the standard is transparent and any 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, including effective and non-discriminatory access to requirements and conditions for using the label/logo/brand
   4. participating businesses are free to go beyond the standard or develop additional higher standards and can develop alternative standards for competing products they sell outside the standard
   5. the standard is unlikely to result in a significant reduction in availability of products for consumers, ie either (i) participating businesses are free to sell alternative competing products outside the standard or (ii) their combined market share is sufficiently small (eg below 20%)

The CMA has added a note to remind businesses that, independent of the UK Green Guidance, they must comply with consumer protection rules on environmental labelling in order to avoid greenwashing. It refers to its separate guidance on environmental claims.

UK/EU comparison: similar to EC’s “soft safe harbour”, but may cover more agreements

In good news for participants to sustainability standards, there are clear parallels between this category and the soft safe harbour for sustainability standardisation agreements contained in the EC’s guidelines. The final UK Green Guidance brings the CMA’s approach almost entirely in step with the EC, in particular by including the same 20% combined market share threshold. 

Where parties’ market shares exceed that threshold (which may often be the case, in true cross-industry collaboration), the UK Green Guidance still provides a safe harbour for standards where criteria a to d (above) are met, and the participating businesses are free to determine which of their products the standard will apply to. The EU equivalent safe harbour will only apply if criteria a to d are met and the standard is not going to lead to a significant increase in price or reduction in quality, which may be difficult to establish in cross-industry collaboration and in practice is likely to set a higher bar for the EU’s safe harbour than in the UK Green Guidance.

5. Agreements to do something jointly which none of the parties could do individually. Examples include joint initiatives where businesses objectively lack the resources, expertise or capabilities – whether technical, scientific or other – to independently conduct the project. The CMA specifically notes that this may include early-stage scientific or technological research with an environmental sustainability objective.
6. Phasing out/withdrawal of non-sustainable products or processes. This is unlikely to be problematic if it does not involve an appreciable increase in price or reduction in product quality or choice and provided it does not have the object of eliminating/harming rivals or sharing markets.
7. Industry-wide environmental targets. The UK Green Guidance contains several specific examples, including (as a new addition since the draft guidance) the fashion sector agreeing targets to increase gradually the amount of sustainable materials used in clothing, in accordance with broad milestones. Another example is the establishment of a common framework to help businesses set environmental targets, allowing for the unilateral setting, disclosure and reporting of the participants’ targets, as well as how – in broad terms – the participants intend to meet their targets and their progress towards them.
8. Agreements between shareholders to vote for promoting corporate policies that pursue environmental sustainability. This category is a welcome addition to the final UK Green Guidance following responses to the consultation (including from A&O) on the draft guidance and recent moves by U.S. State Attorneys-General to pursue institutional investors for entering climate change commitments. The guidance covers: (i) an agreement between shareholders of a single business on such policies, (ii) one shareholder indicating how it will vote, and (iii) agreements covering shareholders’ conduct across several competing businesses provided they relate to any of the categories of agreement in 1-7 above.

UK/EU comparison: UK Green Guidance contains additional categories of non-problematic agreements, including welcome clarification for institutional investors who want to promote green corporate policies

Categories 5 to 8 are exclusive to the UK Green Guidance and are not referenced in the EC’s guidelines. However, the EC is clear that its guidance is non-exhaustive. Businesses may be able to take some comfort that environmental sustainability collaboration falling in the UK Green Guidance categories are also unlikely to raise concerns under EU antitrust rules (although if there is any doubt, approaching the EC for informal guidance would be prudent).

Possibly in the clear: environmental sustainability agreements that benefit from exemption

Like all agreements between competitors, environmental sustainability agreements that may give rise to antitrust concerns and fall within the scope of the UK prohibition on anti-competitive agreements could still benefit from an individual exemption if four cumulative conditions are met. The UK Green Guidance provides some high-level principles that the CMA will apply to assessing whether green agreements will meet these conditions and benefit from an exemption.

The CMA even notes that parties to agreements that involve elements that are usually treated as restrictions of competition “by object” (eg price fixing, market/customer allocation, limitations of output or limitations of quality or innovation) should not assume these are prohibited and should consider whether the exemption might apply. However, because of the nature of the terms, a careful analysis of the exemption criteria will be vital.

The CMA has provided examples of how the four cumulative criteria can be met by environmental sustainability agreements:

1. Benefits to production, distribution or technical or economic progress. This could include, for example, reducing greenhouse gas emissions, introducing new cleaner technologies or more energy-efficient processes, or shortening the time it takes to bring environmentally sustainable products to the market. The benefits must be substantiated, objective and verifiable but could materialise in future over a relatively long period. Businesses would need to demonstrate as concretely as possible that such benefits would arise.
2. No more restrictive of competition than is indispensable (or reasonably necessary) to achieving the benefits. In practice, the parties must demonstrate that they would not otherwise be able to achieve the level of benefits or achieve the benefits as efficiently (eg at a reduced cost or more quickly).
3. Consumers receive a fair share of the benefits. The benefits can include future as well as current benefits, and those that accrue to direct and indirect customers/users. Consumers may also benefit indirectly where they value the broader environmental sustainability benefits of the agreement and the impact of those benefits on others (eg sustainably grown wooden furniture which could help reduce deforestation). If quantification of the benefits is required, the CMA suggests the use of established techniques/methodologies and following industry best practice.
4. No substantial elimination of competition, ie there must be some remaining competition on the market(s) affected by the agreement. This condition can still be met if competition is only eliminated for a limited period.

Describing and quantifying environmental benefits is likely to be challenging, something that the UK Green Guidance briefly acknowledges. Companies will need to adopt a robust and cautious approach to avoid greenwashing. And, unhelpfully, the UK Green Guidance does not set out how the CMA intends to determine whether an agreement gives rise to “objective benefits” for environmental sustainability. Until the emergence of precedents on this issue, we expect businesses will make use of the CMA’s invitation to contact it to discuss their approach.

UK/EU comparison: both provide high-level guidance suggesting a very similar approach to application of exemption criteria

The UK Green Guidance is broadly in line with the EC’s guidelines in terms of the application of the exemption criteria to environmental sustainability agreements. The EC gives more examples of when consumers will receive a fair share of the benefits, which could be a helpful cross-reference for parties assessing a UK agreement (except for climate change agreements – see below). Like the CMA, the EC acknowledges the lack of precedents for measuring and quantifying certain types of benefits and commits to provide more guidance when it has sufficient experience.

A more relaxed approach to climate change agreements

The CMA gives extensive guidance on the third exemption criterion on a “fair share to consumers”. Significantly, it draws out “climate change agreements” as a sub-set of environmental sustainability agreements where a more permissible approach is appropriate.

The UK Green Guidance defines climate change agreements as those which “contribute to combating climate change”. Examples include agreements between manufacturers to phase out carbon dioxide-emitting production processes, agreements between retail businesses to require/incentivise suppliers to phase down greenhouse gas emissions and agreements not to provide financing or insurance support to fossil fuel producers. It remains to be seen how the CMA and businesses may use the UK Green Taxonomy to determine whether an agreement qualifies as a climate change agreement.

Under the UK Green Guidance, the “fair share to consumers” condition generally requires an assessment of whether the harm to consumers of the agreement’s products is offset by benefits to substantially the same set of consumers (ie to consumers ‘within the market’ related to the agreement). With limited exceptions, the potential wider benefits to consumers in other markets are not relevant to this assessment. In other words, where benefits arise across multiple markets, only the proportion of the benefit that accrues to the consumers harmed by the agreement is taken into account.

However, the CMA considers that a more liberal approach to climate change agreements is justified given the magnitude of the climate change risk, the degree of public concern about it and the binding commitments that UK governments have entered into.

The CMA will therefore depart from the general approach and exempt climate change 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. To put this into context: delivery companies agreeing to switch to electric vehicles could, for example, take into account the totality of the carbon dioxide emissions reduction (benefitting all UK consumers) to compensate for any harm to their direct customers resulting from the agreement.

But there is no free pass. Companies will have to demonstrate that:

• the benefits are in line with (or exceed) existing legally binding requirements or well-established national or international targets, including the Paris Agreement goals
• UK consumers benefit from the agreement
• the benefits offset the harm

It is unclear what criteria the CMA will adopt to assess whether benefits are in line with, or exceed, climate targets. The UK Green Guidance does not confirm, for example, whether agreements underpinning transitional activities and activities that enable third parties to make a substantial contribution to climate targets fall within the definition of “climate change agreements”. It will remain an area ripe for informal advice from the CMA.

Despite arguments made by stakeholders during the consultation process, the UK Green Guidance does not adopt this permissive approach to other sub-sets of environmental sustainability agreements, such as agreements to combat or mitigate biodiversity loss. In fact, where an environmental sustainability agreement is a “mixed agreement” that generates both climate change benefits and other environmental benefits (eg relating to biodiversity), the UK Green Guidance provides that these benefits should be assessed separately, with only the climate change benefits assessed under the more permissive approach. This will add complexity to the analysis in these cases.

However, the CMA notes that it is keeping the issue of biodiversity agreements under review and will provide further guidance on the treatment of their benefits “in due course if appropriate”. Parties to “mixed” climate change and biodiversity agreements will hope that this guidance comes sooner rather than later.

UK/EU comparison: no special treatment of climate change agreements by the EC

The EC’s guidelines apply the exemption criteria in the same way to all sustainability agreements. Parties to climate change agreements with effects in both the UK and EU will therefore need to comply with the less permissive EC approach to the “fair share to consumers” criterion.

Gaps and grey areas: CMA’s open door should provide further comfort

With the use of a number of practical examples, the UK Green Guidance provides a welcome level of reassurance and clarity for businesses who want to enter environmental sustainability agreements. Crucially, the CMA does not expect to take enforcement action against agreements that correspond clearly to the principles set out in the UK Green Guidance. But this is not a one-time assessment – parties should keep agreements under review to ensure that they continue to correspond with the principles.

The CMA acknowledges that the draft guidance cannot answer all the questions that businesses may have about whether their environmental sustainability agreements are compatible with UK antitrust rules. It therefore commits to an open-door policy, encouraging businesses to approach it for informal guidance if there is uncertainty around the application of the UK Green Guidance. Trade associations or NGOs can also request guidance, together with the parties.

The informal guidance mechanism will be of benefit to businesses in several respects:

• Protection from enforcement/fines. Discussing an agreement with the CMA in advance will provide important protections. Where the CMA does not raise any concerns (or any concerns are addressed by the parties), it does not expect to take enforcement action. If in future the CMA concludes that the agreement needs to be considered further, eg if any anti-competitive effects were greater than initially expected, it will not issue fines against the parties if it ultimately finds an infringement of UK antitrust rules. Instead, it will work with the parties to agree adjustments to ensure the agreement is compliant.
• No director disqualification. Protection from enforcement will also extend to directors – the CMA will not seek to disqualify any directors of the parties to the agreement.
• Potential CMA intervention in private litigation. Despite protection from enforcement/fines, parties to an environmental sustainability agreement may face private enforcement. The CMA may decide to intervene in those proceedings, presumably to put forward its views on the legitimacy of the agreement.
• Further examples of non-problematic agreements. The CMA will publish a summary of agreements brought to its attention with an assessment of risks and solutions. It will use these cases and its evolving understanding to publish updated guidance.

However, there may also be challenges. Where parties to agreements in regulated sectors approach the CMA, for example, it will also consult the relevant sector regulator. There is no indication that the parties will be protected from enforcement/fines by the sector regulator in the same way as under the UK Green Guidance.

In addition, looking beyond antitrust, businesses may face reputational harm for greenwashing if the environmental benefits anticipated under the agreement fail to materialise as described.

UK/EU comparison: EC informal guidance also available

The EC’s guidelines are clear that the EC is committed to provide informal guidance on novel or unresolved questions on individual sustainability agreements. The EC will not impose fines on parties for action taken which relies in good faith on a guidance letter issued under the Informal Guidance Notice. A strategic question for businesses will be whether to approach the EC, the CMA, or both, for a steer on their initiatives.

An emerging patchwork of international guidance and growing requirements to disclose industry engagement and collaboration

Overall, businesses will welcome emerging guidance on how sustainability agreements will be assessed under antitrust rules.

These are timely publications, not only to help manage antitrust risk, but also for businesses preparing for upcoming disclosure requirements. These obligations are round the corner, in view of the recent finalisation of the UK Transition Plan Taskforce’s Disclosure Framework (which requires disclosure of industry engagement strategies), the UK government’s upcoming consultation on requirements for the UK’s largest public and private companies to disclose transition plans, and the FCA’s intention to align with the Disclosure Framework alongside introducing new reporting rules based on the International Sustainability Standard Board’s global baseline (see our client publication on the ISSB standards here). Businesses seeking to adhere to transition plans-related disclosure requirements under the TCFD Recommendations, the ISSB standards and the EU Corporate Sustainability Reporting Directive should also be alive to the legal and reputational risks that may arise.

In addition to the CMA and EC, other antitrust authorities have also recently set out their positions on sustainability cooperation:

• Earlier this month, the Dutch Authority for Consumers and Markets (ACM) published an important “policy rule”. In previous draft guidance, the ACM (like the CMA) advocated a more permissive approach to consumer benefits for “environmental damage agreements”. However, following the publication of the EC’s guidelines – and its more cautious approach to the “fair share to consumers” criterion – the ACM has now aligned its position with that of the EC. Despite this adjustment, the ACM uses the policy rule to set out its approach to prioritising cases. It will not further investigate: (i) agreements concerning compliance with binding national or European rules, or (ii) environmental damage agreements if it is plausible that the agreement is necessary to obtain environmental benefits that sufficiently outweigh the potential competitive disadvantages. The ACM has already started to apply the policy rule and is giving informal guidance. It has published its positive informal opinion of a commercial waste recycling initiative.
• Outside Europe, the Japanese Fair Trade Commission is reportedly planning to revise its sustainability guidelines. These were only published in March 2023 but, according to an official, require an update to give further clarity.
• The Singapore CCCS published draft guidelines for consultation in July 2023.

By contrast, and as a notable outlier, U.S. regulators have been keen to emphasise that there is no ‘ESG exemption’ from the antitrust rules. Importantly, ESG has drawn some political attention in the U.S., where certain politicians are seeing ESG as harmful to certain classes of industries and thus warranting greater antitrust scrutiny.

The abundance of parallel initiatives across jurisdictions brings with it a risk of diverging approaches. While faced with growing disclosure requirements and increasing pressure to contribute to climate and environmental goals, businesses should tread carefully – in this area of fast-developing policy, arrangements with industry counterparts that might be permitted by one antitrust authority will not necessarily be treated in the same way by others.