Jane Murray
General Counsel
The Competition and Markets Authority (CMA) has published informal guidance on the application of the UK Competition Act 1998 to environmental sustainability agreements in the context of climate change, aimed at supporting other businesses considering similar agreements.
By making public its assessment of a WWF-UK proposal, which raises the ambition of several competing, leading UK supermarkets committed to reducing greenhouse gas emissions (GHG) in their supply chains, the CMA seeks “to provide more clarity or comfort to other businesses considering entering into similar environmental sustainability agreements.”
The informal guidance, which could serve as a case study for similar agreements, was published as part of the regulator's ‘open-door’ policy on climate change agreements. Set out in the CMA’s recently published Green Agreements Guidance, this policy aims to help UK businesses or industries understand how they can collaborate on legitimate environmental initiatives while remaining on the right side of competition law.
Businesses can approach the CMA for informal guidance on proposed agreements under the open-door policy, either because they raise issues not covered by the Guidance or where it is not clear how it will apply. By way of reassurance, the CMA does not expect to take enforcement action under the policy if the agreement was discussed with it in advance and where the CMA has not raised concerns in its informal guidance. This also applies if any concerns with the agreement that the regulator did identify have been addressed by the businesses.
If the CMA later concludes that further consideration of the agreement is necessary, for example, if the anticompetitive effects of the agreement turned out to be greater than expected, it has stated that it would not issue fines against the parties.
Direction of travel
Notable points for investors in the informal guidance include the CMA’s view that when assessing the potential for the agreement to harm competition, it was appropriate to assume that companies who set science-based net zero targets will then take steps to implement them. It outlines that it is reasonable to assume that even without the WWF-UK proposal in question, the general direction of travel is for more suppliers to adopt net zero targets or to take other actions to reduce emissions. Therefore, the CMA will only take into account the costs and benefits attributable to the agreement.
“The Green Agreements Guidance enables companies to be confident they can fulfil their green potential without breaking the law."
It assessed the proposal on the assumption that it would require target-setting by suppliers responsible for up to an incremental c.30% of emissions generated by each retailer’s supply chain. This considers an increase in coverage from 50% to 80% of suppliers representing the GHG emissions of each retailer, together with the use of the new incentives to encourage compliance which are expected to accelerate the adoption of net zero science-based targets by suppliers.
Ann Pope, CMA Senior Director of Antitrust explained its approach: “The Green Agreements Guidance enables companies to be confident they can fulfil their green potential without breaking the law. This is the second proposal on which we have given guidance and is the latest update related to our wider work on environmental sustainability, and will help grocery retailers further improve their green credentials.
"We encourage businesses in any sector to get in touch if they are considering entering into an environmental sustainability agreement but are uncertain on how the guidance would apply. We can provide insights to help them reach their environmental goals, while making sure their customers are getting a fair deal.”
Although globally accepted principles of competition law already allow for the kinds of collaborations we see in climate change, the actions of the CMA in taking steps to clarify, elucidate and then act in support of legitimate collaborations are extremely welcome.
Benefiting UK consumers
A joint commitment on supply chain emissions was first agreed in November 2022, co-convened by WWF-UK. Five UK supermarkets pledged to ask suppliers representing 50% of emissions from their individual purchased goods and services to publish robust, science-based net zero targets across all scopes, with clear milestones this decade to enable a 50% reduction in emissions by 2030.
The case study includes high-level estimates of the participating supermarkets’ scope 3 emissions, together with CMA calculations for the carbon value of estimated reductions.
Scope 3 emissions are a particularly large contributor to retailer emissions, accounting for 97% of the participating supermarkets’ total emissions footprint, while food system emissions as a whole account for 30% of the global total.
WWF-UK proposed to raise the coverage of suppliers from 50% to 80%, together with new deliverables, incentives and disincentives to support the scale and pace of change required to reach the target. Reducing these indirect emissions is essential to meeting the UK government’s legally binding climate targets, which the CMA notes are supported by recent declarations on food systems at COP28.
Categorising the proposal as a ‘Climate Change Agreement,’ the CMA sets out that there are credible reasons to believe the proposal would benefit all UK consumers. It argues it will do so “by reducing GHG emissions and thereby helping to mitigate the impact of climate change, which will in turn help to reduce costs that consumers would otherwise incur.” Recognising potential anti-competitive effects as a result of the proposal, on balance the CMA takes the view that the risk of significant harm to competition and consumers appears likely to be low.
The case study includes high-level estimates of the participating supermarkets’ scope 3 emissions, together with CMA calculations for the carbon value of estimated reductions. This quantifies the benefit to UK consumers if the proposal is successful. The guidance does make clear that it is not necessary to quantify sustainability for all cases, but in this example, quantification helped the CMA to identify the scale of the possible benefits to UK consumers. This reiterates the longstanding investor call for more robust data, particularly on scope 3 emissions.
Phasing out agreement
The CMA informal guidance concludes that the WWF-UK proposal, if implemented, would be unlikely to have the object of restricting competition. It also does not appear likely to eliminate or harm competing but non-participating retailers, nor would it lead to market sharing. It considers the proposal to be akin to a ‘phasing out agreement’, that involves the phasing out over time of non-sustainable products or processes.
"We recognise that most businesses want to do the right thing and we want to support that."
The Guidance explains that a ‘phasing out’ agreement is unlikely to raise competition concerns where it does not involve either “an appreciable increase in price or reduction in product quality or choice for consumers, and provided that the agreement does not have the object of eliminating or harming the parties’ competitors or market sharing.”
“We recognise that most businesses want to do the right thing and we want to support that,” said David Middlemiss, Director of the CMA’s Sustainability Taskforce: “If businesses have questions about the open-door policy or a potential environmental sustainability initiative, we encourage them to contact us early to discuss this. The process is intended to be light touch and proportionate.”
David explained that other sector regulators, such as the Financial Conduct Authority (FCA), will be involved where relevant to consider requests for informal guidance, with both organisations working closely together on the enforcement of competition law. As this proposal did not involve financial services, the CMA was not required to consult the FCA on this specific agreement.
Overall, this open-door policy is a bold and welcome move from an internationally respected regulator which should give investors and the businesses they invest in confidence to consider similar climate agreements. And for investors engaging with assets collaboratively as part of their individual net zero commitments, this should be a welcome and encouraging sign of clarity and consistency.
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