Guidance

Environmental sustainability agreements and competition law

Published 27 January 2021

The CMA has produced this information sheet to help businesses and trade associations better understand how competition law applies to sustainability agreements and where issues may arise.

When we refer to sustainability agreements in this document, we are referring to cooperation agreements between businesses (including industry-wide initiatives and decisions of trade associations) for the attainment of sustainability goals, such as tackling climate change. For example, businesses may decide to combine expertise to make their products more energy efficient or agree to use packaging material that meets certain standards in order to facilitate package recycling and reduce waste.

Sustainable development goals can include a wide range of objectives in addition to dealing with climate change. The CMA’s current focus is on the environmental aspect of sustainability agreements, particularly given our strategic priority related to climate change.

The CMA’s approach to sustainability agreements

Supporting the transition to a low carbon economy is a strategic objective for the CMA. As part of our work in this area, the CMA wants to ensure that competition policy does not create an unnecessary obstacle to sustainable development and that businesses are not deterred from taking part in lawful sustainability initiatives in the mistaken belief that they may breach competition law.

To assist with this, the CMA has set out some of the key points that businesses and trade associations should consider when entering into sustainability agreements, so as to minimise harm and competition law risk.

This document contains:

• an overview of key legal considerations businesses should be aware of when entering into sustainability agreements
• a summary of more detailed, technical information which businesses should discuss with a legal adviser who is familiar with competition law (particularly regarding market share thresholds and exemptions)

Overview for businesses

Competition encourages businesses to improve and innovate, for the benefit of their customers. Competition law is therefore designed to protect consumers and other businesses from behaviour that might restrict or weaken competition, the impact of which can be: increased prices, reduced innovation or a reduction in the quantity, quality and variety of products.

Many forms of collaboration between businesses for the achievement of sustainability goals are unlikely to raise any competition law issues. Beneficial forms of cooperation – such as grouping together to purchase common inputs or for research and development – are unlikely to harm competition, providing the businesses do not have market power.^{[footnote 1]}

Competition law issues are most likely to arise where cooperation significantly restricts competition. However, even then an agreement must be assessed in its economic context and, in some cases, sustainability agreements may deliver benefits that outweigh the potential consequence of restricting competition.

In these cases, some exemptions from competition rules may be possible – either by meeting the requirements of an individual exemption or if an agreement falls into an existing exemption category.

Cooperation agreements between businesses which may restrict competition, will need to be considered on a case by case basis. We always recommend you seek independent legal advice to help you determine if your agreement could fall under an exemption or not.

The CMA recognises that collaboration can help achieve sustainability goals. However, sustainability agreements must not be used as a cover for a business cartel or other illegal anti-competitive behaviour.

The consequences of breaching competition law are serious and, therefore, it is important you are aware of the types of anti-competitive behaviour to avoid, including the exchange of any competitively sensitive information, especially on prices and output plans.

Seek independent legal advice, if you are unsure about any aspect of the law

If you don’t have access to legal advisers, there may be other sources of advice you can turn to, such as the Competition Pro Bono Scheme. This scheme offers an initial free legal consultation. Other legal advisers may also offer advice on a similar basis.

Use a fair standard-setting process

Many sustainability agreements are standard-setting agreements by which businesses, often through trade associations or standardisation organisations, set standards on the environmental performance of products, production processes, or the resources used in production.

When setting up a new standard, businesses, trade associations and/or standardisation organisations should follow these steps to comply with competition law:

• allow stakeholders to inform themselves effectively of upcoming, on-going and finalised standardisation work in good time at each stage of the development standard – for example, through the publication of regular updates in dedicated journals
• guarantee that all competitors in the markets affected by the standard can participate in the standard-setting process and join the agreement
• ensure access to the standard is on fair, reasonable and non-discriminatory terms for all businesses which comply with it
• if the standard-setting involves intellectual property rights (IPR), participants must disclose in good faith their IPR that might be essential to the implementation of the standard. They must also offer to licence their essential IPR to all third parties on fair, reasonable and non-discriminatory terms. This should be provided for in an IPR policy from the standard-setting organisation
• ensure that the members of a standard setting organisation remain free to develop alternative standards (including higher standards) or products that do not comply with the agreed standard

When setting standards, businesses, trade associations and standardisation organisations should not:

• exchange or disclose commercially sensitive information that goes beyond what is necessary for setting the standard
• impose obligations (either directly or indirectly) to comply with the standard, label or code of conduct on businesses that do not wish to participate
• make it difficult for businesses to develop alternative standards (including higher standards) or products that do not comply with the agreed standard
• use quality norms to prevent a technology or a competitor from entering the market. Examples include (a) setting a standard and putting pressure on third parties to prevent them from marketing products which do not comply with that standard, or (b) colluding to exclude a new technology from an already existing standard

More detailed, technical information to help ensure your standardisation agreement does not violate competition rules can be found in Horizontal Cooperation Guidelines (page 55-72) ^{[footnote 2]}.

Trade associations can also find further useful information on our following pages:

• What do trade associations need to know about competition law?
• Blog: Trade Associations: are you complying with competition law?

Avoid serious restrictions of competition and anti-competitive behaviour

‘By object’ restrictions

There are certain forms of collusion between companies which by their nature are most likely to prevent, restrict or distort competition.

These practices are usually referred to as ‘by object’ restrictions and include price fixing, output limitation, the sharing of markets and customers, and bid rigging.

You must avoid these ‘by object’ restrictions in your sustainability agreements as they are almost always incompatible with competition rules.

In particular, you should be aware that:

• agreements containing one or more ‘by object’ restriction cannot benefit from the safe harbours provided for agreements of minor importance or block exemptions (see information on market share size)
• agreements containing ‘by object’ restrictions also typically would not qualify for individual exemptions.

Business cartels

Sustainability agreements must never be used as cover for a business cartel.

Cartels are the most serious form of anti-competitive behaviour between competitors. A business cartel exists when rivals agree to act together, instead of competing with each other, in order to benefit cartel members.

In such arrangements, participants normally agree to use one or several ‘by object’ restrictions listed above (i.e. agree to fix prices, share markets, rig bids or limit output), usually in order to preserve or drive up prices while maintaining the illusion of competition.

Such arrangements are illegal and the consequences of engaging in them are serious. Those caught breaking the law can face significant fines, director disqualification and in the most serious criminal cartel cases, prison.

Therefore, it is important that businesses expressly distance themselves from any situation where they suspect that sustainability issues are being used as a cover for anti-competitive practices.

Sharing sensitive information

You must always avoid exchanging competitively sensitive information directly with current or potential competitors, especially on prices and output plans. Doing so, even at a single meeting, can be a breach of competition law with serious consequences for the businesses involved.

Competitively sensitive information covers any non-public strategic information about a business’s commercial policy. It includes, but is not limited to, future pricing and output plans.

Historical commercial information (generally older than 3 years) is less likely to be sensitive, particularly if individual businesses’ commercial activities cannot be identified in it, in other words when the information is aggregated.

It is sometimes acceptable for businesses to share competitively sensitive information (for example recent information on capacities, sales or cost of inputs and components) with a third-party such as a trade association or market intelligence firm to create aggregated market-wide statistics that may be beneficial to suppliers, customers and other market participants by allowing them to get a clearer picture of the economic situation of a sector. However, third party providers collating the data must be careful not to disclose received individualised information back to businesses competing on the market and not to use it to facilitate coordination between competitors.

Visit our page on managing competitively sensitive information for further advice on what you can and cannot share.

Find out more about what anti-competitive practices look like and the consequences of breaking competition law on our ‘Cheating or Competing?’ campaign page.

You can find additional information on compliance with competition law in our Competition law risk: a short guide.

Consider available allowances and exemptions

Assess the size of your market share

If the combined market share of the businesses involved in a sustainability agreement is below a certain threshold, the agreement may benefit from special competition law allowances.

Various competition law guidelines identify market share thresholds (or ‘safe harbours’) for different types of agreements. It is generally considered that an agreement would not breach competition law if the market shares of the businesses involved do not exceed the relevant threshold and the agreement does not create any serious competition restrictions (for example, price fixing, market sharing, bid rigging etc – also known as ‘by object’ restrictions).

Before you assess your market share, you need first to define what the relevant market is (both in terms of product and geography) and then assess your share of this in accordance with applicable guidance.

If you think your market share in the relevant market is low, you should consider seeking independent legal advice as to whether your sustainability agreement may benefit from the safe harbour provided for agreements of minor importance (de minimis) or the low market share thresholds set out for certain types of cooperation agreements:

Agreement type	Market share threshold
Agreements of minor importance if parties are competitors (or it is difficult to classify whether parties are competitors or non-competitors)	The parties’ joint share on any of the relevant markets affected by the agreement is 10 %* or lower[footnote 3]
Agreements of minor importance if parties are not competitors	The market share held by each of the parties on any of the relevant markets affected by the agreement is 15%* or lower[footnote 4]
Joint commercialisation agreements (for example, joint selling, joint distribution, joint advertising and similar agreements)	The parties’ joint share of the relevant market is 15% or lower[footnote 5]
Joint purchasing agreements	The parties’ joint share on the purchasing market is 15% or lower and the joint share on the selling market is 15% or lower[footnote 6]
Production agreements[footnote 7]	The parties’ joint share of the relevant market is 20% or lower[footnote 8]

(*) Note, that in some circumstances, the threshold mentioned above is reduced to 5%.^{[footnote 9]}

There is no presumption that agreements where parties’ market shares exceed the indicated thresholds are in breach of competition law. The potential effect of such agreements and the benefits they may create will need to be assessed on a case by case basis. (See information below on meeting exemptions criteria.)

Consider whether your agreement meets the criteria for an exemption

Use existing exemptions where applicable

Some sustainability initiatives may fall into one of the general categories of agreements (such as research and development or specialisation agreements) which may be exempt from the anti-competitive agreements prohibition under what we refer to as a ‘block exemption’.

This means that if your sustainability agreement satisfies the conditions set out in the relevant Block Exemption Regulations it could be considered compatible with competition law despite its potential restrictive effects. These conditions include, among others, maximum market share requirements, and specific restrictions that the agreements should not contain or to which the exemption would not apply.

Businesses should seek independent legal advice if they think their agreement may benefit from an existing block exemption.

Agreements covered by the EU Block Exemption Regulations are automatically exempt from the Chapter I prohibition in the Competition Act 1998. Following the end of the Transition Period (31 December 2020), UK businesses continue to benefit from EU Block Exemption Regulations as incorporated into domestic law (‘retained exemptions’).

Block exemptions most relevant for sustainability agreements:

• Research and development agreements block exemption (expires on 31.12.2022) – relevant guidelines can be found in Guidelines on horizontal co-operation agreements
• Specialisation agreements block exemption (expires on 31.12.2022) – relevant guidelines can be found in Guidelines on horizontal co-operation agreements
• Technology transfer agreements block exemption (expires on 30.04.2026) – relevant guidelines can be found in Guidelines on the technology transfer agreements
• Vertical agreements and concerted practices block exemption (expires on 31.05.2022) – relevant guidelines can be found in Guidelines on vertical restraints

Demonstrate that the conditions for an individual exemption are met

Some agreements that appear to restrict competition, and do not fall under an existing block exemption (see above), may still be permitted on an individual basis provided they generate benefits which are deemed to outweigh the disadvantages of restricted competition.

If the agreement is likely to affect competition (for example, by leading to increased prices or a reduction in the choice of products on the market), you will need to be able to demonstrate that your agreement meets each of the following criteria for an individual exemption:

• the agreement generates efficiencies - for example, increases the quality of products
• these efficiencies cannot be achieved with other economically practicable and less restrictive means
• these efficiencies benefit consumers
• the agreement will not lead to the elimination of competition in the market

Businesses should seek independent legal advice on whether their agreement may qualify for an individual exemption.

‘Framework for assessment’ flowchart

In order to assist with consideration of the risks involved in setting up a sustainability agreement, the CMA has provided a flowchart which should be considered alongside other information and our published guidance on competition law and how we will enforce it.

This flowchart is structured as a set of questions that will give you an indication as to whether your sustainability agreement could break competition law. It should be looked at alongside the more detailed information in the relevant sections of this document.

This framework applies to any sustainability agreement between natural or legal persons engaged in an economic activity (including sole traders, non-profit organisations, co-operatives, public organisations offering goods or services on a market other than free of charge).

This flowchart does not provide an exhaustive framework for assessing compliance with competition law. If you are unsure of the legality of a sustainability agreement, you should seek independent legal advice.

Accessible chart description

Question 1: Is there an agreement or a trade association’s decision? (either formal or informal, written or oral) If yes, go to question 2. If no, agreement is not prohibited.

Question 2: Is the agreement covered by a block exemption and meets all of the requirements under that exemption? If yes, agreement is not prohibited. If no, go to question 3.

Question 3: Is this a standard-setting agreement which meets all of the criteria for standardisation agreements? If yes, agreement is not prohibited. If no, go to question 4.

Question 4: Does the agreement contain a restriction of competition ‘by object’? (e.g. price fixing, market sharing, output limitation etc.) If yes, go to question 6. If no, go to question 5.

Question 5: Could the agreement have a restrictive effect on competition? (e.g. may lead to increased prices, reduced variety of quality of products, reduced innovation etc. In the analysis, consider whether there a numerous and strong competitors, market characteristics such as low barriers to entry, buyers/suppliers with countervailing bargaining power etc.) If yes, go to question 6. If no, agreement is not prohibited.

Question 6: Does the agreement meet all four conditions for individual exemption? If yes, agreement is not prohibited. If no, agreement is prohibited.

1. A business will usually have market power if it is able to raise and maintain prices or reduce the quality, quantity or variety of its goods or services in circumstances when losing sufficient customers to competitors makes it unprofitable to do so. ↩

2. Under sections 60 (and 60A) of the CA98, the CMA must have regard to any relevant statement from the European Commission (made before 31 December 2020 and not withdrawn) when applying competition law. Such statements include the notices and guidelines referred to in this publication. ↩

3. Notice on agreements of minor importance, paragraphs 8 and 9 ↩

4. Notice on agreements of minor importance, paragraph 8 ↩

5. Horizontal Cooperation Guidelines, paragraph 240. ↩

6. Horizontal Cooperation Guidelines, paragraph 208. ↩

7. Horizontal Cooperation Guidelines, paragraph 153. ↩

8. Horizontal Cooperation Guidelines, paragraph 169. ↩

9. See Notice on agreements of minor importance, paragraph 10. ↩