UK's CMA gives green light to climate change proposal directly impacting suppliers in retailers' supply chains

Green light for sustainable supply chain initiative

On 19 March 2024, the Competition and Markets Authority (“CMA”) issued its second informal opinion under its Green Agreements Guidance (the “Guidance”) applying its seal of approval to an industry initiative in the groceries sector to reduce greenhouse gas emissions in the supply chain.

The Guidance, issued in October 2023, is intended to provide greater legal certainty for businesses on how competition law applies to arrangements entered into to achieve environmental sustainability goals and offers and “open door” policy encouraging business to come forward to discuss their proposals at an early stage with the CMA either because they raise potential issues not covered by the Guidance or where it is unclear how the Guidance would apply. Under the Guidance, the CMA has adopted a more permissive approach for agreements that are specifically intended to mitigate or combat climate change, known as ‘climate change agreements’ and this is the first time the CMA has published informal guidance on an agreement of this kind (“Informal Opinion”).

WWF-UK Proposal

The proposal reviewed by the CMA is part of the World Wildlife Fund UK’s (“WWF-UK”) wider package of outcomes and measures launched by WWF in November 2021 to support the goal of halving the environmental impact of UK shopping baskets by 2030.

According to WWF-UK, the food system accounts for 30% of global greenhouse gas (“GHG”) emissions, with 97% of that arising from indirect emissions in the supply chain. WWF-UK has been working with certain UK grocery retailers to reduce the GHG emissions produced by the groceries sector. As part of this work, in November 2022, five UK supermarkets (Sainsbury’s, Marks & Spencer, Co-op, Waitrose and Tesco, who represent around 60% of the market) publicly made a joint commitment together with WWF-UK and another non-governmental organisation to (among other things) support their suppliers to reduce GHG emissions in line with the commitments made by those retailers.

The Informal Opinion

The Informal Opinion considered the WWF-UK proposals for participating UK grocery retailers to commit jointly to reduce GHG in their supply chain by encouraging their suppliers to adopt net-zero science based targets (“SBTs”). In particular, the Proposal will require retailers to:

• unilaterally identify and require suppliers who account for at least 80% of each retailer's supply chain emissions to set net-zero SBTs; and
• incentivise those suppliers who achieve certain net-zero SBT milestones (e.g., through preferred payment terms) and disincentivise those who do not (e.g., through delisting).

Based on a high-level assessment, the CMA concluded that it does not expect to take enforcement action against the Proposal and considers the risk of significant harm to competition or consumers to be low.

In particular, the CMA found, based on indicative estimates and proxies, that:

• there are reasonable grounds to expect that the relevant environmental benefits attributable to the Proposal would make a material contribution to reducing greenhouse gas emissions in the UK's food supply chain;
• there are reasonable grounds to expect that the potential relevant benefits would equal, or exceed, any adverse effects on consumers resulting from the Proposal on aggregate over this period;
• there are credible reasons to believe that the Proposal is likely to be indispensable to achieve the potential benefits; and
• the Proposal would not result in the elimination of competition.

The CMA, however, expects participating retailers to take into account feedback from suppliers and re-engage with the CMA if they receive credible evidence that gives rise to significant concerns about the potential impact of the Proposal.

Comment

The Guidance is an important ‘pillar’ in the CMA’s strategy to promote environmental sustainability and help accelerate the transition to a net zero economy, and the Informal Opinion is further welcome evidence that the CMA is committed to providing businesses a greater degree of legal certainty when assessing their green collaborations under UK competition law.

The outcome of the Informal Opinion is consistent with this strategy and signals that the CMA wants to help businesses ensure that competition law does not act as a barrier to legitimate climate change agreements.

The Informal Opinion is also instructive on the level of detail the CMA could be expected to go into when assessing whether an agreement falls within scope of the Guidance. In particular, in keeping with the aim of conducting a light-touch review, the CMA appears to be taking a pragmatic approach by accepting indicative estimates of the benefits (reductions in emissions) which could arise from the Proposals. In addition, while it is clear from the Informal Opinion that the CMA engaged in multiple rounds of discussions and information requests with WWF-UK, it chose not to engage with suppliers, which would have increased the duration and complexity of the review.

Further reading on sustainability

• UK competition authority gives green light to environmental sustainability agreements
• Global Supply Chain Horizons