The Competition and Markets Authority (CMA) has now published its guidance on sustainability agreements (the Guidance). The Guidance differs in several respects from the draft guidance published in February 2023 and supplements the CMA's revised Horizontal Guidance, published in August 2023. Here are the key takeaways from the Guidance. 

What type of agreements are covered by the Guidance?

The Guidance applies to:

• environmental sustainability agreements – agreements between competitors aimed at preventing, reducing or mitigating the adverse environmental impact of economic activities or assisting with the transition towards environmental sustainability. Examples include agreements aimed at improving air or water quality, conserving biodiversity or natural habitats, or promoting the sustainable use of raw materials. They do not include agreements that pursue broader societal objectives, such as improving working conditions;
• climate change agreements – these are a subset of environmental sustainability agreements, which contribute towards combatting climate change. Such agreements are treated more favourably under the Guidance (see below). Examples include an agreement between manufacturers to phase out a particular production process which emits carbon dioxide; an agreement between delivery companies to switch to using electric vehicles; and an agreement to pool funds, technology or expertise to support the development of carbon capture and storage; and
• mixed agreements – a new addition since the draft guidance, these may generate both climate change benefits and environmental benefits. For example, an agreement between book publishers to only use recycled paper, to reduce deforestation. In such cases, the climate change benefits that arise from the agreement can be assessed separately from any other environmental benefits. 

Which agreements are unlikely to infringe competition law?

The Guidance specifies several types of agreement that either do not restrict competition at all, or are unlikely to have an appreciable effect on it. These are:

• non-appreciable agreements – where the parties have a very small combined market share of the affected market and the agreement does not restrict competition "by object";
• agreements which do not relate to the way that businesses compete with each other (on price, quantity, quality, choice or innovation) – such as agreements concerning the internal corporate conduct of businesses, or organising a joint industry awareness campaign;
• agreements to do something jointly which none of the parties could do individually – for example, because each party individually lacks the resources or capabilities, such as the technical expertise, to undertake the particular type of project;
• cooperation required by law – provided the cooperation is required by law, not simply encouraged;
• pooling information about suppliers or customers – provided parties are not required to purchase (or refrain from purchasing) from particular suppliers and parties do not share competitively sensitive information (such as current or future prices);
• creation of industry standards – provided certain conditions around the creation and implementation of the standards are met;
• phasing out/withdrawal of non-sustainable products or processes – where it does not involve an appreciable increase in price or a reduction in product quality or choice;
• industry-wide environmental targets – for example, industry-wide targets to reduce carbon dioxide emissions, provided those targets are not binding on the participating businesses; and
• agreements between shareholders – to vote for pro-environmental corporate policies (which is a new addition since the draft). 

Which agreements could infringe competition law?

Certain environmental sustainability agreements may have the "object" of restricting competition i.e. they are, by their very nature, regarded as being harmful to competition. Such agreements are likely to involve price fixing, market or customer allocation and/or limitations of output, quality or innovation. In limited circumstances, it may be possible for "by object" environmental sustainability agreements to benefit from an exemption (and therefore be permitted – see below), such as where the restriction is regarded as an "ancillary restraint" that is directly related, necessary and proportionate to the implementation of a wider permissible environmental sustainability agreement. If an environmental sustainability agreement does not have the "object" of restricting competition, it may only breach competition law if it has an appreciable negative effect on competition (and is not exempted). The assessment of the effects of an agreement depends on the relevant facts, including factors such as the extent of market coverage of the agreement, the parties' market power and whether there is any exchange of competitively sensitive information.

Which agreements are capable of exemption?

Some sustainability agreements may appreciably restrict competition, but qualify for exemption. The parties must demonstrate that the agreement contributes certain benefits, consumers receive a fair share of those benefits, the restrictions in it are "indispensable" and that it does not substantially eliminate competition. The Guidance explains how these exemption criteria apply to sustainability agreements:

• in an update to the draft, the Guidance specifies that the specific benefits arising from the agreement may be felt outside the UK (but the benefits to UK consumers must outweigh the harm caused to them);
• these benefits can include future benefits (quantified and discounted as appropriate);
• the benefits can be passed on both to direct customers and those who purchase from them (i.e. indirect customers);
• consumers of the products or services may benefit both directly and indirectly – for example, where they value the broader environmental sustainability benefits of the agreement and the impact of those benefits on others (outside the relevant market); and
• in general, the consumers who receive a fair share of the agreement's benefits are to be the consumers of the products or services to which the agreement relates. However, where two markets are related, benefits achieved on separate markets can be taken into account, provided the consumers affected by the restriction and receiving the benefit are substantially the same or substantially overlap. 

What about climate change agreements?

While the exemption criteria for climate change agreements is the same as for other types of environmental sustainability agreements, the CMA takes a more permissive approach to the requirement for consumers to have a fair share of the agreement's benefits. For this purpose, the CMA will take into account the totality of climate change benefits to all UK consumers arising from the agreement. This approach reflects the exceptional nature of the harm posed by climate change and appears to be a more permissive approach than the European Commission's.

What is the CMA's proposed general approach?

The Guidance says parties:

• can contact the CMA to seek informal guidance about an environmental sustainability agreement, including where they are unsure about the applicability of the Guidance (the CMA says it has an "open door");
• would be protected from fines and director disqualifications for all environmental sustainability agreements where parties approach the CMA to discuss their agreement and the CMA does not raise any competition concerns (or any such concerns have been addressed);
• would be protected from CMA enforcement action against environmental sustainability agreements that are consistent with the Guidance; and
• should expect the CMA typically to publish a summary of the sustainability initiatives that it has discussed with parties, together with an assessment of risks and solutions. 

The full text of the Guidance is available here.