Fairtrade is trading fairly to promote sustainable farming practices

On 14 December 2023, the CMA published its first informal Green Agreements guidance, which confirms that a new initiative to secure longer-term supply agreements between UK grocery retailers on Fairtrade producers of bananas, coffee, and cocoa is unlikely to raise competition concerns (the “Shared Impact Initiative”).

Fairtrade approached the CMA under the open-door policy set out in its recently published Green Agreements Guidance (our summary is here), arguing that longer-term contractual stability and greater security of purchasing commitments would provide producers with the opportunity to invest in more environmentally sustainable farming practices. 

Key take-aways

The CMA’s first informal guidance gives an indication of the breadth and depth of the CMA’s assessment of environmental sustainability agreement, and provides a roadmap for how it plans to approach future submissions.  This case suggests that:  

• First, the CMA will consider whether an agreement is an environmental sustainability agreement.  In this instance, an important factor in the CMA’s assessment was the scheme’s objective of increasing investment in more environmentally sustainable farming practices such as reducing deforestation and on-farm and on-plantation emissions, as well as tackling biodiversity loss. 
• Once the CMA establishes the existence of an environmental sustainability agreement, it will examine the overall competitive effects of the agreement, probing the parties’ self-assessment and the supporting data.  Here, the CMA considered the competitive effect on multiple levels of the supply chain.  It also relied on the parties’ data which showed that due to the limited number of stock-keeping units (SKUs) per business, the agreement would not impact a material part of the market.
• Finally, the CMA will give the parties comfort that they will not take an enforcement action against the initiative or agreement (based on the specific information provided).  Parties may also use the CMA’s informal guidance when discussing similar initiatives in other jurisdictions. 

In more detail, the CMA’s informal guidance provides an overview of Fairtrade’s proposed initiative and sets out a competitive assessment, balancing the procompetitive environmental sustainability benefits against potential restrictions of competition within the Fairtrade supply chain: 

What is Fairtrade’s Shared Impact Initiative?

Fairtrade currently certifies producers that meet certain standards. In exchange, retailers purchase their products at a Fairtrade minimum price and a Fairtrade premium.  The premium, set for each product by country of origin and other product specific characteristics, is added to a communal fund for workers and farmers to improve their social, economic, and environmental conditions (Fairtrade’s existing initiative). 

The Shared Impact Initiative builds on Fairtrade’s existing initiative and aims to work with participating UK grocery retailers (the “Retailers”) to provide banana, coffee, and cocoa producers with greater security through longer-term purchasing commitments.  The goal is to incentivize and financially support participating producers to invest in more environmentally sustainable farming and production methods than they would absent the scheme. 

Under the Shared Impact Initiative, Retailers will commit publicly to purchasing a minimum annual quantity of Fairtrade bananas, coffee, and/or cocoa over a 3-to-5-year period.  Beyond the minimum threshold, Retailers can choose to source from another supplier.

The other main features of the Shared Impact Initiative are: 

• Retailers must make their commitment to participate public.
• Products will be sourced from a selected group of existing Fairtrade producers who currently sell low levels of Fairtrade products. 
• Fairtrade will ensure that producers do not become overly dependent on one Retailer. 
• Retailers will continue to pay the Fairtrade minimum price and the premium under the existing Fairtrade initiative for the products purchased under the Shared Impact Initiative (i.e., the minimum price and premium will not change, but it will apply to an additional volume of and specific products). 
• Fairtrade (via FLOCERT) will monitor the Shared Impact Initiative. 

What did the CMA assess and what was the conclusion?

The CMA assessed the Shared Impact Initiative (and not Fairtrade’s existing initiative), believing that it was an environmental sustainability agreement that will not restrict competition “by object or effect” for three reasons:

• It will not appreciably affect the parameters of competition (price, output, product quality, product variety, or innovation) because it will only relate to a small number of products (SKUs) per business, which make up a very limited proportion of the overall market for these products.  
• Its objective is to facilitate access to UK groceries markets by Fairtrade producers, on fixed volume and duration contracts, to enable investment in sustainability projects. 
• The duration and volume of the commitments will be limited to what is necessary to achieve the overall objective of the Shared Impact Initiative. 

The CMA considered the impact on competition between (a) Retailers and (b) (Fairtrade) producers: 

• The CMA believes that there is no reduction in competition between Retailers
  • The Shared Impact Initiative does not involve price coordination.  Each Retailer will set its own retail prices. 
  • The CMA found in July 2023 in its CMA Competition, choice and rising prices in groceries, that the grocery retail sector is competitive.  Other than the core volume and duration specified in the Shared Impact Initiative, each Retailer will continue to act unilaterally when it purchases from suppliers/producers. 
  • Under the existing Fairtrade initiative some retailers pass-on some, or all, of the additional cost of producing Fairtrade SKUs to consumers, and some absorb it.  Therefore, Fairtrade products are not always more expensive than non-Fairtrade products.  The CMA was comfortable that the pricing structure under the Shared Impact Initiative was the same as under Fairtrade’s existing initiative.
  • The Shared Impact Initiative does not determine the quantity, quality, or choice of the Fairtrade products offered, preserving competition based on quality and range of products.  Retailers will continue to trade outside the Shared Impact Initiative and plenty of alternative Fairtrade and non-Fairtrade products will not be covered by the agreement.  And the way in which Retailers absorb additional volumes of Fairtrade products will vary between Retailer and product. 
  • The CMA considered that information exchanged by Retailers publicly committing to purchase additional volume of Fairtrade products in the future, was not likely to reduce competitive uncertainty or be capable of influencing the competitive strategy of the Retailers.  Any information shared will not go beyond what is necessary to implement the Shared Impact Initiative, which, in any event, only covers three Fairtrade products and volumes of those products are small, e.g., less than 10% of the total annual UK cocoa imports, less than 5% of total annual UK coffees imports, and less than 15% of total annual UK banana imports.  
  • Any restrictions to the commercial autonomy of the participants are likely to be ancillary, objectively necessary, and proportionate to implementing and achieving the overall objective of the Shared Impact Initiative. 
• The CMA also believes that there is no reduction in competition between producers 
  • Fairtrade producers who are not eligible for, or not participating in, the Shared Impact Initiative will continue to compete to supply the majority of the UK grocery market that is not covered by the agreement. 
  • Fairtrade submitted that: 
    • Retailers will continue to source from outside the pool of Fairtrade producers. 
    • The Shared Impact Initiative will only cover a small number of producers i.e., estimated to be 2-3% of all the Fairtrade producers across bananas, coffee, and cocoa, or approximately 1.5% of all Fairtrade producers.  
    • The Fairtrade Producer Network will select the pool of producers on fair, objective and non-discriminatory terms. 

The CMA concluded that the Shared Impact Initiative was likely to have a neutral or positive effect on competition, since it could result in additional availability and choice of Fairtrade products for UK consumers.  If there were restrictive provisions within the Shared Impact Initiative, the CMA considered that these were likely to be objectively necessary to implement and proportionate to achieve the overall objective of the environmental sustainability agreement. 

However, does the CMA’s informal guidance provide Fairtrade with enough comfort to launch the initiative?

• The CMA clearly states that if it the Shared Impact Initiative is investigated in the future and found to infringe competition law, it would not issue fines against Fairtrade or the parties that had implemented the agreement.  
• But Fairtrade must make their own assessment of whether any material change to the initiative could have an impact on the competitive assessment.  For example, a material increase in market coverage is likely to trigger a reassessment. 
• The parties may also approach the CMA under the “open-door” policy again to discuss any changes to the Shared Impact Initiative. 

What can we learn from the first informal guidance?  

While the first informal guidance under the Green Agreements Guidance gives the parties an understanding of the CMA’s assessment and comfort from its conclusion, it also:

• Confirms that companies must undertake their own thorough competitive assessment and make reasoned submissions accompanied by robust, market-specific data. 
• Does not yet give an indication of the timing of the process. However, sources suggest that the parties approached the CMA at the end of July 2023, the CMA finalised their guidance on 21 November, and the decision was published on 14 December 2023. 
• Protects companies which have approached the CMA through its “open-door” policy, but it does not protect the agreement from scrutiny where it has an effect outside the UK.  
• May encourage other jurisdictions which have not yet adopted sustainability agreement guidelines, to introduce guidance that will enable global sustainability initiatives and limit fragmentation or divergence (as we discuss here).