ESG and German competition law – a box of chocolates?

Forrest Gump knew it all along: Life is like a box of chocolates, and you never know what you’re gonna get. And this still seems to apply to competition authorities’ definition of the terms “sustainability” and “ESG” standing for Environment, Social and Governance.

While the brand new EU Horizontal Guidelines list social aspects like “upholding human rights and ensuring a living income” as sustainability objectives, German Federal Cartel Office ("FCO") president Andreas Mundt stated at the International Competition Law Forum of the German Studienvereinigung Kartellrecht in May 2023 that the ongoing discussions on sustainability should be limited to the “E” within ESG. Looking around, we see that the Netherlands appear to include environmental as well as social and governance objectives. However, new rules in Austria and upcoming guidance in the UK explicitly limit the sustainability analysis to environmental topics. The German FCO apparently wants to join the latter. Nevertheless, following the bananas case in March 2022, it now dealt with its second case on living wages under the umbrella of a “sustainability initiative”.

German FCO opens the social box again: Living wages for cocoa farmers

Bringing us back to the chocolate box (and its most important ingredient), this week, the FCO gave its green light for a collaboration of cocoa and chocolate producers, food retailers, public authorities and NGOs within the German Initiative on Sustainable Cocoa (the “Cocoa Initiative”; Forum Nachhaltiger Kakao e.V.). This initiative intends to promote living wages for cocoa farmers in Ghana and the Ivory Coast by voluntary commitments on minimum prices, quotas and premium systems – ideally resulting in better prices for the farmers.

The FCO states that it for now “refrain[s] from a detailed examination and keep[s] a steady eye on the further development of the project” because

• there is no agreement on uniform surcharges,
• each member will publish their individual commitments only after aggregation and the installation of safeguards to ensure that no reverse engineering on individual purchasing prices from farmers is possible,
• the commitments are made on a voluntary basis, without any sanctions if certain thresholds are not met and
• the prices paid to farmers directly only form a small part of the overall price at the end of the value chain.

The FCO did not see a “clear risk of a restraint of competition” and therefore dealt with the initiative in accordance to its publicly known approach by applying existing competition law provisions without the need for specific sustainability provisions – like in the bananas case.

But the FCO’s ESG recipe remains a secret

Closing with Forrest Gump: Never knowing which chocolate you will get is for sure easier for competition authorities than for companies. Both the bananas and the cocoa case – clearly dealing with the S in ESG – were tagged as sustainability initiatives by the FCO. Nevertheless, following the FCO president’s recent statements, the FCO ESG recipe remains – at least to a large extent – a secret. Companies welcome that the authority is open for discussions on sustainability aspects (probably even including the S and the G where appropriate) and its flexibility and mindfulness of practical issues. This approach can result in good results and workable solutions as shown by the Animal Welfare Initiative’s case, one of the authority’s first sustainability cases dating back to 2014 (a time when sustainability was not on the radar of most of the competition law practitioners). Interestingly, the initiative now decided to end the use of a compulsory standard surcharge payable to participating farmers that was achieved in a close dialogue with the FCO as from 2024 and to introduce a voluntary element allowing it to refine its financing model and include more competition again.

Without doubt: More guidance – based on previous FCO cases and the increasing number of blueprints of regulators around the world – would reduce uncertainty and increase incentives to boldly address sustainability issues without fearing unreasonable competition law limitation. However, as for now, the German legislator might jump in as the next reform which may consider sustainability aspects is already around the corner.