Sustainability goals set by governments in Europe and beyond have led to intense pressure on public and private players to invest in the green economy and make the necessary changes to their business models. Environmental and, to a lesser extent, other sustainability factors are now frequently a driver of M&A strategy and rationale.
Whether merger control assessments could, and should, consider sustainability factors is a question with which competition authorities are now beginning to grapple. To what extent should competition regulators be allowed to consider evidence that a merged entity will be able to, for example, enhance sustainable trade, cut emissions, produce more renewable energy, preserve natural resources or protect our wildlife? And how would these outcomes be weighted relative to risks that the merger might lead to, for example, higher prices for consumers?
Both the European Commission and national competition authorities (NCAs) recognise the important supporting role that competition rules can play to promote and achieve these objectives. The question of how competition authorities could take a clearer stance in relation to ‘sustainable’ cooperation agreements is already being addressed (see our recent blog post). Next on the agenda was the issue of consumer protection and ‘greenwashing’, discussed here. Some authorities are now turning their gaze to merger control, which has so far only popped up on the sustainability agenda occasionally.
As recently as 13 October, the Commission published a call for contributions on how competition rules and sustainability policies should work together (see our recent post here). The authority seeks stakeholders’ feedback on how merger enforcement specifically could better contribute to protecting the environment and the sustainability objectives of the EU’s Green Deal. The Commission also invites views on situations in which a merger could be harmful to consumers by reducing their choice of environmentally friendly products or technologies. While EU Commissioner for Competition Margarethe Vestager cautioned that competition policy cannot replace environmental laws, the consultation demonstrates that the Commission is now taking concrete public steps to seek to implement necessary changes to competition laws, policies and procedures, including merger control.
In addition, the Commission’s Chief Competition Economist, Pierre Régibeau, recently told an online conference that he had asked his team to start developing tools to analyse ‘out of market green efficiencies’ in merger control. These could assess whether mergers that threaten to push up prices might lead to environmental benefits such as reduced emissions.
Moreover, competition authorities have shown that they are capable of finding new, innovative theories of harm where other issues (eg data collection) have been less easily dealt with under current competition rules. A similarly innovative approach could well be followed in relation to sustainability factors in the near future.
Could European merger control regimes account for sustainability objectives already?
In recent years, the development of the digital economy has already led to a wider debate at EU level and globally on the role alternative policy objectives could play in merger control decisions. Given renewed carbon-neutral commitments across a number of jurisdictions, sustainability policy merits closer consideration within that discussion.
For the most part, the Commission, and by extension NCAs, are limited in their ability to evaluate parameters beyond conventional competition factors (such as prices, output, choice or quality of goods and services, and innovation). However, despite the Commission’s focus under the EU Merger Regulation (EUMR) on whether a merger would ‘significantly impede effective competition’, there is arguably some room for sustainability assessment:
- Article 2(1) of the EUMR sets out the criteria which the Commission should take into account when deciding whether to approve, or not to approve, a merger. These criteria include the ‘development of technical and economic progress, provided that it is to the consumers’ advantage and does not form an obstacle to competition’. In the context of a substantive assessment, the Commission is likely to consider sustainability in particular: (i) when defining the relevant market and analysing how consumers differentiate green(er) from other products; and (ii) in the assessment of closeness of competition between the merging parties.
- The Commission may analyse positive environmental factors as efficiencies to see if they might counteract the alleged negative effects on competition. Such efficiencies would have to benefit consumers, be merger-specific and be verifiable. The last condition seems the most challenging as many environmental benefits can be difficult to quantify and may take some time to materialise. However, merging parties could plead that they need the scale which only the intended merger can bring about to face up to their green transformation challenges. It may therefore be reasonable to claim that industry players will only be able to rise up to this challenge by way of a large-scale merger.
- Sustainability could play a role in the context of remedies, although at this stage it would more likely be relevant in addressing an environmental concern rather than boosting competition arguments, given that a sustainability commitment is unlikely to remove ‘pure’ competition concerns.
We are seeing early signs of environmental factors playing a role in merger assessment, particularly at EU level:
- In Aleris/Novelis (a merger of two US producers of aluminium products), environmental issues formed a crucial part of market definition. The Commission noted that certain types of aluminium are predominantly used for the production of fuel-efficient vehicles with reduced emissions. Such lightweight aluminium could therefore be considered to form a separate product market. This approach to market definition, in turn, framed the Commission’s substantive assessment and also played into the parties’ remedies package. Indeed, in its call for contributions on competition policy and the Green Deal, the Commission expressly recognises that environmentally friendly characteristics or sustainability product features can be associated with higher product quality and constitute a differentiating factor in the eyes of consumers.
- Sustainability considerations were an important factor in the Commission’s decision to open a Phase 2 investigation in Aurubis/Metallo. The authority voiced concerns that the deal might reduce incentives for re-cyclers to collect and sort copper scrap (an important component in electric vehicles). Ultimately, however, while the press release announcing the merger clearance uses the recycling topic to create the impression the deal was approved also because it is a good ‘green’ case, the Commission’s reasoning stops short of such language. In any event, the Commission took a different position in Bayer/Monsanto where it refused to assess environmental factors despite political pressure from NGOs and a wider public.
Should merger control regimes account for sustainability objectives?
Critics argue that the task of monitoring and promoting sustainability should more appropriately be tackled by environmental laws and an independent sustainability regulator.
For example, the German Federal Cartel Office (FCO) has recently argued that non-competition parameters are (and should remain) squarely within the political realm and a clearly defined framework for limited public intervention. According to the FCO, sustainability issues are best dealt with by way of environmental law and policies. Integrating sustainability into merger control would reduce ‘green’ considerations to instances of coincidental transactional activity – competitors that do not happen to merge would not be subject to the same standards as merging parties.
Similarly, the president of Lithuania’s Competition Council has warned of the perils of attempting to integrate sustainability analysis or other non-economic goals into antitrust regulators’ work. Enforcers may become less effective if they start considering additional factors in a competition law assessment and risk removing transparency and legal certainty. Undermining a predictable business environment could discourage businesses to make the very substantial investments required to implement the EU’s Green Deal.
Green means go – an opportunity to shape the debate
Competition authorities are increasingly aware of their role in supporting sustainability efforts. However, they seem divided over whether competition policy, and particularly merger control, is the best forum to consider these objectives. While many merger control regimes already allow some scope to consider sustainability criteria, we are currently far from a consistent approach across regulators, even within the EU. For international businesses considering cross-border M&A, this may cause uncertainty, particularly where merger clearance is required across jurisdictions with different approaches to sustainability arguments.
Subject to clarifying policy statements from authorities or a fundamental change in legislation, the consideration of sustainability objectives in merger control will likely depend on whether the parties can produce evidence which persuades the authorities that the benefits for consumers (or wider society) outweigh any lessening of competition. Bringing sustainability into play requires an economic assessment and the tools to objectively measure its merger-specific costs and benefits. ‘Green’ goals which lend themselves to this more easily can be put forward as part of consumer benefits, efficiencies or even remedies arguments. However, it may still be a while before competition authorities develop an appropriate economic framework to capture the benefits of cleaner air or improved biodiversity.
Similarly to the Commission’s initiative in other areas (eg horizontal cooperation agreements), non-binding guidelines could be a useful first step to define a common approach. The most recent call for contributions could be a milestone in this process. Stakeholders from across all industries should therefore use this opportunity for an early engagement with the Commission, and contribute to the debate on how environmental policies should interplay with merger assessments. We would be delighted to discuss these issues with you in more detail, and assist with your response if you are considering engaging in the consultation.