German Competition Law and ESG – sustainability-cooperation is fine, unjustified price-fixing is (still) not

The German Federal Cartel Office (FCO) is actively participating in the debate on how to integrate ESG topics into competition law. As regards actual ESG reforms it lets the European Commission go ahead. Nevertheless, the FCO has now assessed three ESG initiatives providing helpful guidance on the interplay between sustainability and competition law.

Living wages for bananas

The German retail sector voluntarily committed to responsible procurement practices for bananas. The participating companies agreed to develop processes to monitor transparent wages and plans to gradually increase the sales volume of bananas which are produced and procured in line with criteria providing for a living wage. According to the FCO the initiative is in line with competition law as it does not involve

• information exchange on competitive parameters, i.e. procurement prices, other costs, production volumes and margins or
• the introduction of minimum prices or surcharges.

Expansion of animal welfare initiative

The animal welfare initiative (Initiative Tierwohl) is an agreement between the agricultural, meat production and food retail sectors. The concept rewards livestock owners for improving the conditions in which animals are kept. The initiative is mainly financed by Germany’s four largest retailers which pay a standard premium to pork and poultry livestock owners via participating slaughterhouses. The FCO closely monitors the initiative which started in 2012 and has been subject to various changes until now. The cooperation was tolerated for a transitional period due to the project’s pioneering nature, free access to the initiative for other retailers and because there were no concerns about sensitive information exchange.

Now, the parties want to extend the initiative to fattening cattle. The FCO calls for certain adjustments. Most importantly, the authority again stresses that companies should introduce labels so that consumers can identify meat produced in line with animal welfare criteria. Further, the FCO wants the initiative to gradually introduce competition elements in the financing model, e.g., a recommendation to pay a compensation for animal welfare costs. This may be subject to further discussions with the authority.

Financing concept for milk producers

In the milk sector, the FCO expressed concerns regarding a financing concept that certain milk producers involved in the policy project “Agrardialog Milch” discussed with the authority. The initiative proposed to retroactively apply surcharges to raw milk prices to enable the producers to cover their production costs. The FCO held that this would contain price-fixing elements and result in an industrywide increase of the milk price. As the initiative did not provide for sufficient ESG criteria for the production of raw milk, the FCO does not see any justification for such an agreement on surcharges.

Lessons learned?

The FCO continues its practice dealing with ESG initiatives on a case-by-case basis. Although it had published some factors in its 2019 Annual Report following the assessment of previous cooperation (e.g. Fairtrade, Alliance for Sustainable Textiles/Green Button), detailed guidance is still missing. This is in particular true for ESG benefits which may outweigh any competition concerns. But the recent practice shows that the FCO is generally open for ESG-related initiatives and in fact considers sustainability aspects in its competition law assessment. The example from the milk sector also demonstrates that the FCO will, however, not tolerate any anti-competitive behavior if the ESG elements are unclear or not involved at all.

It seems that the FCO relies on EU wide developments to provide an ESG-friendly legal framework going forward: The upcoming horizontal EU reforms on competitor collaboration and – for sustainable farming – recent changes to the EU Regulation on the common organisation of the markets in agricultural products. There is a new section on vertical and horizontal initiatives for sustainability according to which competition rules shall not apply to agreements between producers of agricultural products if they are indispensable to the attainment of higher standards than mandated by the EU or national law. The EU Commission is asked to issue new guidance by the end of 2023. While the practical impact of these new rules may be limited, it could be an incentive for companies to look for high standard ESG opportunities – to the benefit of all!