Anti-competitive agreements between competitors have traditionally been a principal focus of enforcement in competition law. However, competition authorities have recently taken a keen interest in ensuring that enforcement risk does not hinder the achievement of sustainability objectives through industry collaboration. Integral to the consumer goods supply chain, retailers are therefore well-placed to capitalise on these opportunities, cooperate on environmental goals and differentiate themselves in a world where the demand for sustainability has increased.
To this end, the UK Competition and Markets Authority (“CMA”) has now published its highly anticipated draft sustainability guidance 2023 which provides greater certainty as to when joint sustainability initiatives are permissible and when such competitor cooperation goes too far. This is part of a wider trend in competition law, with similar guidance issued by the European Commission and the Netherlands Authority for Consumers and Markets.
Environmental Sustainability Agreements
The CMA’s draft guidance focuses on Environmental Sustainability Agreements ("ESAs") impacting the UK market. These are agreements between competitors aimed at preventing, reducing or mitigating the adverse impact of economic activities on environmental sustainability e.g. reducing greenhouse gas emissions and promoting the sustainable use of raw materials.
ESAs unlikely to infringe competition law
The CMA considers that ESAs which do not concern the parameters of competition are unlikely to infringe competition law. Examples include:
- Internal corporate initiatives e.g. limiting single use plastic and printing in offices.
- Joint consumer campaigns / lobbying on sustainability issues.
- Jointly funded training programmes on the reduction of greenhouse gas emissions.
- Pooling general information about the environmental credentials of suppliers and customers e.g. on (un)sustainable production processes or waste disposal efforts.
- Development of a common methodology to calculate and report emissions impact.
It is important to note that lines are not always clear cut. Agreements that go beyond or combine permissible examples with other aspects may require further justification and/or be prohibited. For example, when pooling sustainability credentials leads to prohibited discussions on prices and purchase volumes or where competitively sensitive information is exchanged in the organisation of a joint lobbying campaign.
Prohibited ESAs – greenwashing and cartels
Agreements with the "object" of restricting competition are by their very nature harmful to the competitive process e.g. price-fixing cartels, market or customer allocation, output restrictions, and limiting quality or innovation. ESAs that are used to disguise such infringements of competition law are therefore prohibited and the CMA is not afraid to probe deeper to ensure objectives are legitimate.
Examples of ESAs that are prohibited include:
- Fixing the price of sustainable products.
- Forbidding or obliging parties to purchase from certain suppliers.
- Limiting technological development to minimum legal standards instead of cooperating on more ambitious environmental goals.
In practice, it is difficult for such agreements to benefit from the sustainability exemption provided in the CMA’s draft guidance.
Whether the CMA uses competition legislation or the consumer protection legislation relevant to its Green Claims Code, the CMA has made it clear it will hold companies that either collude or mislead consumers regarding their green initiatives to account. This was made clear when the CMA launched its investigation into three fashion brands (ASOS, BooHoo and George at Asda) to scrutinise their “green” claims in July 2022, with an expanded review beyond fashion into a wider range of fast-moving consumer goods launched in January 2023.
Consumers, benefits and the sustainability exemption
Initiatives that restrict competition may still be permissible if they benefit from the sustainability exemption. The CMA’s draft sustainability guidance allows ESAs that otherwise restrict competition if they are indispensable to the achievement of certain benefits, if consumers receive a fair share of those benefits and there is no elimination of competition in the market. This is a complex legal and economic analysis, with the concept of a “fair share” of “consumer benefits” being of particular note. Many sustainability agreements will therefore require in-depth consideration of market impact, supported by robust evidence of efficiencies, to ensure compliance with competition law.
Industry standards or codes of conduct are key examples of agreements in this category. These must be transparent, reasonable, non-discriminatory and accessible to all competitors on the market. Sustainability standards come in all shapes and sizes. This includes agreements to phase out or replace non-sustainable products and processes with sustainable alternatives e.g. furniture manufacturers not using unsustainably grown wood. A logo scheme to denote recycled paper content used by publishers of magazines or books is another example.
Whilst monitoring compliance of those who have signed up to the sustainability standard is permitted, businesses should not be obliged to participate. Businesses should also be free to develop alternative standards (including higher standards) or even products that do not comply with the agreed standard.
Examples of other cooperation between competitors that require justification under the sustainability exemption are:
- Climate change agreements that contribute to binding climate change targets under domestic or international law e.g. switching to electric delivery vehicles. The CMA has adopted a more permissive approach to such agreements in terms of the wider range of consumer benefits relevant to the analysis.
- Joint purchasing agreements where competitors negotiate lower prices for low-carbon inputs with large suppliers as a collective.
- Joint production/R&D initiatives relating to the development of new sustainable products/inputs e.g. alternatives to plastic packaging.
What does the CMA draft sustainability guidance mean for retailers?
Whilst not yet formally adopted, the CMA’s draft guidance presents real opportunities for retailers wanting to collaborate and broaden environmental objectives that are difficult to achieve individually. To further demonstrate its commitment to sustainability, the CMA has indicated a willingness to issue opinions on individual initiatives, protecting parties from potential enforcement action and fines if they take advantage of this open-door approach.
As policy on the intersection between competition law and sustainability develops, DLA Piper can help retailers and other parties in the consumer goods supply chain design compliant sustainability initiatives in the UK and beyond.