Climate vs competition: A balancing act

The Competition and Markets Authority (CMA) has recently published draft guidance on applying Chapter 1 prohibition to environmental sustainability agreements.

Upon successful implementation of the guidance, UK fund managers should find it easier to assess the risk of environmentally focused agreements and the possibility of them infringing upon competition law.

While the CMA outlines greater flexibility in support of environmental initiatives, it remains firm in other areas of competition law principles, highlighting legal limitations on the flexibility it offers.

The defining detail
The guidelines clarify that individual exemptions to competition law may apply if the environmental collaboration restricting competition has a wider benefit to society, which outweighs the potential anticompetitive effect of the legal breach.

In this case, the benefits may need to be quantifiable, whether in terms of direct benefits to consumers of the product (or investors in the fund from a PE perspective), or broader UK society. This might be hard to justify.

Richard J Brown, senior associate at Travers Smith, shares more: “The CMA has been clear that it is ‘determined’ to ensure competition law is not an obstacle to environmental sustainability collaborations. But, to take advantage of that comfort, parties may need to quantify in advance the green benefits. That may include measuring the predicted emission reductions. If the scheme has a broad range of sustainability objectives and its future impact is not 100% clear, that evidence may be hard to produce quickly.”

To help materially explain the exemption, the guidance defines the relevant consumer much more broadly than usual, demonstrating extra flexibility when it comes to climate change agreements that support the UK's emission reduction targets.

Stephen Whitfield, partner at Travers Smith, further highlights how the guidelines can assist PE fund managers weighing up environmentally sustainable agreements against compliance with competition law: “The CMA acknowledges that consumer benefits of green initiatives can be non-monetary, indirect and materialise over a long period of time – so an exemption may be still available even if the initiative does not immediately result in lower prices or better investment returns.”

In particular, something to be aware of is the implication of industry-wide pro-ESG messaging and investment commitments, and the possibility of it being anticompetitive or not. Such an industry-wide collaboration might infringe upon the idea of a full sector boycott of a certain industry – non-renewable energy, for example. On the other hand, the overall effects of the wording could also be justified to have a wider benefit to the investor or the UK as a whole.

Two sides of the coin
While the UK guidance appears to align with that of the EU, the CMA’s stance allows for more flexibility regarding climate change agreements.

The CMA’s focus is also narrower as it applies only to environmental sustainability agreements, which include those relating to climate change. It therefore does not apply to a broader definition of sustainability or ESG agreements, unlike the European Commission’s.

The UK competition authority is yet to fully develop its approach in other areas.

Watch this space
The implications of competition law on wider environmental-led trends to reduce emissions are not yet clear. What is apparent is the UK’s willingness to allow for some environmentally-led agreements within firms, as long as the consequences can be thoroughly justified as being of benefit to the investor.

Brown suggests ways in which fund managers can contact the CMA for further information through informal guidance: “In a break from its current practice, the CMA is adopting an ‘open-door policy’ by which firms can get informal comfort that their environmental collaboration will not be subject to investigation or fines. That comfort does come with conditions though – for example, you will have to amend your scheme if the CMA raises concerns.”

The consultation period ends on 11 April 2023, with UK and EU guidance expected to come into effect on 1 July 2023.

A link to the draft guidance and the consultation document can be found here.

Responses to the consultation can be sent to sustainabilityhbersreview@cma.gov.uk.