A German boost to ESG and Competition Law

Germany takes the next step: The debate on ESG and Competition law - seemingly having slowed down since the Federal Cartel Office’s (FCO) helpful guidance for three ESG initiatives last year -  is picking up speed again. Keeping its promise set out in the competition policy agenda up to 2025 on sustainable competition as a pillar of the socio-ecological market economy, the Federal Ministry for Economic Affairs and Climate Action published a comprehensive study on “Competition and Sustainability in Germany and the EU” which is open for public consultation until 6 April 2023.

What’s in there?

The study prepared by academic experts – providing an antitrust perspective as well as an economic angle –  looks closely into all areas of competition law, i.e., agreements, abuse of dominance, merger control, proceedings and sanctions. It is based on a broad understanding of sustainability relying on the 17 Sustainable Development Goals of the United Nations ranging from climate action and gender equality towards good-health, quality education and economic growth.

The study provides a toolbox with 34 instruments on how to possibly combine sustainability with competition law. Although the experts do not make any specific recommendations, here is what we read between the lines:

• A general exemption of ESG agreements from competition law (including for certain sectors) is met with reservations. The same applies to justifying competition restraints for the pursuit of sustainability goals under the ancillary restraints-doctrine. However, the study favors the consideration of out-of-market efficiencies. Criticizing that the current draft EU Horizontal Guidelines do not initiate a turnaround as they do not include ESG benefits to consumers that are not affected by the restriction of competition in the first place, the German study is in line with the progressive approach from UK’s CMA. The British authority just recently indicated in its Draft Guidance on Environmental Sustainability Agreements that it will also interpret the concept of consumer widely.
• Sustainability effects should also play a more important role in abuse proceedings. On the one hand, they could be factored in at the level of justification for specific forms of behavior. On the other hand, harmful practices from dominant firms (such as violating environmental standards or paying dumping wages) could be prosecuted more severely.
• The study investigates both filing requirements and the substantive assessment under merger control law. It discusses additional German filing thresholds for “dirty deals” (e.g., based on CO2-emissions) as well as a broader scope of the SIEC criterion including sustainable innovation and environmental technologies.
• Further, the report advocates sustainability considerations when it comes to legal consequences for companies, e.g., as part of remedial measures and as a mitigating or aggravating factor for the calculation of fines.
• Finally, procedural solutions are a way to integrate ESG. This could be done by strengthening third parties’ rights (e.g., for environmental organizations), issuing more informal guidance or installing a so-called “sustainability sandbox” for monitoring ESG initiatives.

Corporate vs. regulatory responsibility 

When presenting the study to the public, the Ministry pointed out that companies must do their part in driving sustainability forward. While this would not be the sole responsibility of the state, there was consent that the regulator must take a driving seat in setting the guardrails. The companies’ need for more guidance and certainty was acknowledged.

The FCO president Andreas Mundt, who assisted the presentation of the study to the public, emphasized that the authority had already done a lot and that there was case practice. Seemingly refraining from "radical" changes, he feels that a general exemption of ESG agreements from competition law is likely to degenerate. While stressing that “we don't need a sledgehammer, but a foil" to deal with ESG initiatives, he promised that the FCO will issue (at least) some form of guidance soon.

What’s next?

The Ministry will assess the different options from the study’s “all-you-can-eat menu” in detail. It intends to compile the companies’ and other stakeholders’ submissions and feedback before handing it over to the European Commission. So far, the Ministry has not specified whether the outcome will be considered in the next German Competition Law Reform. The current draft – having been on hold for the past weeks – does not deal with sustainability yet. However, a governmental compromise could already be reached in the next days. It remains to be seen whether there is time and willingness to open the study’s ESG toolbox and to integrate some of the options now or in the next round. Nevertheless, going forward the discussion on ESG and Competition law in Germany can be expected to be revived and intensified again.