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Businesses around the globe are examining their supply chains to check whether their suppliers meet certain standards and comply with internal corporate social responsibility (CSR) policies and environmental, social and governance (ESG) goals. This is fueled by stricter regulation and increasing pressure from shareholders, investors, consumers, employees and other stakeholders. In the EU, for instance, the recently adopted Corporate Sustainability Due Diligence Directive now requires large EU companies (>1,000 employees and a global turnover of >€450 million) and non-EU companies doing significant business in the EU (EU-wide turnover of >€450 million) to identify and address actual or potential adverse human rights and environmental impacts in their supply chains.
Regulatory and compliance challenges
Companies seeking to ensure their supply chains meet these goals increasingly collaborate to attain these objectives more efficiently. This is particularly relevant as most legislation (such as the EU Corporate Sustainability Due Diligence Directive) promotes this cooperation (including among competitors) to reach the goals. Such joint initiatives and collaboration may raise antitrust risks, especially when involving competitors, and many antitrust authorities are closely monitoring and increasingly scrutinizing these types of collaborations.
When engaging in joint initiatives and projects to advance a more sustainable, ethical and ESG-sensitive supply chain, companies must be aware that certain conduct can raise antitrust risks and constitute anticompetitive behavior:
- Disguised cartel conduct: Competitors must not engage in collaborations and sustainability agreements that restrict competition. High antitrust risks are agreements to fix prices, allocate markets or customers, rig bids, boycott competitors or limit output under the pretext of a pro-competitive justification to achieve a more sustainable or ethical supply chain.
- Information sharing: Any joint initiative with competitors to help assess (or address) supply chain issues raises antitrust risks where this involves sharing sensitive business information. Competitors must not exchange commercially sensitive information, including price, costs, production or capacity levels, business plans and strategy, employee wages, etc. Extra attention is warranted when competitors are active in concentrated markets where information exchanges have a higher potential to facilitate collusion and negatively affect competition in the market.
- Supply chain audits: Sharing results of a supplier audit with competitors can potentially raise antitrust concerns because some business audits may include commercially sensitive information. Discussions among competitors regarding any commercially sensitive information contained in audit results are prohibited, and any coordinated conduct based on those discussions could also raise antitrust concerns. Measures to mitigate antitrust risk include outsourcing or clean team arrangements with the appropriate non-disclosure and confidentiality safeguards.
- Boycotting suppliers: Antitrust rules generally prohibit boycotts agreed between competitors that directly or indirectly aim at excluding actual or potential competitors. Special attention must also be taken when companies participate in a group boycott, for instance, by refusing to engage with or purchase from certain suppliers because they fail to comply with certain sustainability standards. While some antitrust jurisdictions take a strict approach to such boycotts, others are more flexible in certain circumstances. For example, agreements between competing purchasers to no longer buy products from certain suppliers due to particular product characteristics, production processes or working conditions since the products offered are unsustainable and the purchasers want to buy only sustainable products, are not per se prohibited under EU antitrust rules, and their actual and likely effects on competition must be assessed in their legal and economic context. Prior antitrust advice is therefore warranted where companies consider making a joint decision to terminate supplier relationships, refuse to deal with or discriminate against suppliers who will not comply with voluntary sustainability standards.
- Developing and implementing sustainability standards: Antitrust risk can arise when competitors collaborate in the development and implementation of sustainability-related standards or mandatory practices or metrics for suppliers. Companies must not collaborate as a pretext for cartel activity (price fixing, market or customer allocation, output limitations of quality or innovation). Antitrust risks can also arise when the cooperation negatively affects competition, including through price coordination, foreclosing alternative standards and excluding or discriminating against competitors. To mitigate antitrust risk, participation in agreements regarding sustainability standards must be voluntary, competitors shall remain free to adopt higher sustainability standards and standards should not have the effect of blocking out competitors (regardless of when they are being developed or implemented). Companies should make independent decisions on whether and how to promote standards to address industry issues.
In case of doubt, companies should seek legal advice before engaging in joint initiatives and projects with competitors to verify whether their suppliers meet certain standards and comply with internal CSR and ESG policies and goals.