Going green together

March 2024  |  FEATURE | COMPETITION & ANTITRUST

Financier Worldwide Magazine

March 2024 Issue

Sustainability has come to dominate corporate discourse in recent years. The responsibility of government, businesses and society to act in a more environmentally conscious way is reshaping ideas and strategies.

Climate change imperatives are of course a key factor in shifting mindsets. According to the UK’s Met Office there is a “reasonable chance” that 2024 may see the average global surface temperature rise to more than 1.5 degrees Celsius warmer than the pre-industrial era, for the first time. The 12 months between November 2022 and October 2023 saw global average temperatures rise 1.32 degrees above the pre-industrial average – that is 0.03 degrees above the previous record set between October 2015 and September 2016.

Against a backdrop of perilous predictions, regulators and governments worldwide are issuing guidelines to steer companies into addressing their climate change responsibilities.

Competition guidance in the UK

In the UK, the Competition and Markets Authority (CMA) has issued new guidance giving the green light to companies that team up to tackle climate change. The aim is to assuage concerns that they could fall foul of rules designed to protect customers from potential collusion.

The ‘Guidance on the application of the Competition Act 1998 to environmental sustainability agreements’, or the Green Agreements Guidance, establishes key principles and sets out practical examples that businesses can use to inform and shape their own decisions when working with other companies on environmental sustainability initiatives.

“We know that tackling climate change and promoting environmental sustainability matters, and supporting businesses to do this is a priority for the CMA,” said Sarah Cardell, chief executive of the CMA. “So, we have developed the Green Agreements Guidance for all companies who are considering collaborating so they can understand how to agree green goals without breaking the law.”

According to the CMA, industry collaboration is likely to make an important contribution to meeting the UK’s binding international commitments and domestic legislative obligations to achieve a net-zero economy.

The CMA is “keen to help businesses take action on climate change and environmental sustainability, without undue fear of breaching competition law” and emphasises its ‘open-door policy’ to provide informal guidance in the case of uncertainty. To that end, businesses, representative bodies such as trade associations, non-governmental organisations and charities can come to the CMA for informal guidance on any proposed environmental sustainability initiative.

The new guidance clarifies the circumstances in which collaboration with competitors to promote environmental sustainability may be permitted – and when it may be prohibited as anti-competitive under the UK competition law prohibition of anti-competitive agreements or practices. In the future, the CMA does not expect to take enforcement action against agreements that are in line with the guidance.

The guidance covers three main areas: (i) green agreements which are unlikely to infringe the prohibition; (ii) green agreements which could infringe the prohibition; and (iii) exemption to permit green agreements that would otherwise infringe the prohibition.

Examples of permissible collaborations include homebuilders agreeing to only install products that meet a minimum energy efficiency standard, financial institutions deciding not to finance or insure fossil fuel projects, or fashion groups no longer using fabrics that contribute to plastic pollution.

Shareholders can also agree on a common voting position in support of a business pursuing climate or environmental policies.

EU revisions

The European Union (EU) has also taken steps to relax antitrust guidelines for companies involved in collective climate action initiatives. On 1 June 2023, the European Commission (EC) issued a revised set of rules as a replacement for the horizontal guidelines and regulations that were published in 2010.

The release of the updated Horizontal Block Exemption Regulations on Research and Development and Specialization agreements (HBERs) and revised Horizontal Guidelines is an important step. HBERs exclude certain horizontal agreements from the scope of article 101(1) of the Treaty on the Functioning of the European Union (TFEU) – the cartel prohibition – based on the assumption that they promote competition and economic welfare and thus can be deemed compliant with the principles of the single market as outlined in article 101(3) of the TFEU.

The Horizontal Guidelines provide guidance on applying the HBERs as well as setting out principles for assessing other horizontal cooperation agreements and concerted practices under article 101 of the TFEU.

The guidelines establish a ‘safe harbour’ provision that exempts companies participating in “standardization agreements” from certain competition rules, even if these agreements result in price increases. Examples of such agreements include a boycott of plastics, fossil fuels or steel produced from coal-fired power plants.

Under the new guidelines, participating companies must not exceed one-fifth of a particular market and must not exchange commercially sensitive information unless necessary.

Careful review

To tackle the catastrophic effects of climate change, action must be taken quickly. Businesses have a key role to play in this process, and the scope of recent guidance will allow them to promote environmental sustainability and help accelerate the transition to net zero.

For EU or UK-specific organisations, the new EC rules and CMA guidance will help drive sustainability locally. However, for agreements and companies operating beyond those jurisdictions, divergent approaches to sustainability and cooperation may cause headaches.

Going forward, any companies participating in, or seeking to enter into, green agreements with competing businesses should review the guidance carefully and seek specialist competition legal advice to avoid falling foul of the law.

© Financier Worldwide

BY

Richard Summerfield