Green shoots? Some thoughts on the European Commission’s treatment of sustainability in the draft merger guidelines

Summary of how Guidelines incorporate sustainability-related considerations

The EC’s draft revised merger guidelines (the Guidelines) recognise the existence of a range of non-price parameters of competition, including for the first time sustainability (alongside a host of other new additions, such as resilience and security of supply). 

This is partly a simple record of the EC’s practice in past merger reviews. For example, the Guidelines cite the EC’s review of Norsk Hydro’s acquisition of Alumetal, in which the carbon footprint of the merger parties’ respective aluminium alloy offerings was one aspect of the EC’s closeness of competition analysis, reflecting the value that customers increasingly place on ‘green’ alloys.  Equally, it is a reflection of the current political and policy impetus arising from the Draghi report and a desire to ensure that EU merger control policy is – and is perceived to be – supporting the EU’s broader policy objectives, including in respect of sustainability (the Guidelines specifically note that EU merger control “allows for the preservation of green innovation competition, which supports sustainability and the transition to low carbon technologies"). 

The Guidelines also logically incorporate these non-price parameters into their proposed framework for assessing efficiencies (i.e. transaction-related benefits such as synergies) which can be invoked to secure clearance where they outweigh the competitive harms likely to be caused by the transaction. Of particular relevance to sustainability-related efficiencies is the Guidelines’ proposed assessment of ‘out-of-market’ and collective benefits:

• ‘Out-of-market’ benefits are those that arise in a market (or markets) that are related to the market(s) in which transaction-specific harm may arise, provided that the consumers who will enjoy these benefits in the related markets and those in the market(s) subject to negative effects “substantially overlap”.
• Collective benefits are those accruing to a wider section of society than just consumers in the relevant (or related) market.  As with ‘out-of-market’ benefits, collective benefits can only be taken into account if harmed consumers “substantially overlap” with or form part of the group of beneficiaries.

The Guidelines adopt a narrow approach to how out-of-market or collective sustainability benefits can be taken into account when assessing efficiencies: admissible benefits are confined to those accruing to consumers in the market(s) in which the transaction in question causes harm – benefits arising for other groups of consumers, however large, are excluded from the balancing exercise (even where those other benefits are verifiable and merger-specific).  Moreover, such benefits must be “valued by and fully compensate” (whether on a standalone basis or alongside other transaction efficiencies) substantially all harmed consumers.  In adopting this approach of restricting relevant benefits only to those arising for harmed consumers, the Guidelines cross-refer ‘by analogy’ to the EC’s Horizontal Cooperation Guidelines.

Finally, the Guidelines’ recognition of all non-price parameters is tempered by a concession that “many non-price parameters are not readily subject to quantification”, along with a clear statement that the EC “enjoys a margin of discretion” in weighing such parameters in its assessment of a given transaction.  The Guidelines nonetheless make clear that all out-of-market and collective benefits should be assessed by the same standards as any other efficiency (i.e. must be verifiable and merger-specific). 

Some problems with the EC’s current approach

There are several potential drawbacks to the EC’s current approach to sustainability-related competition and sustainability-related benefits. 

First, there is an implicit policy tension between, on the one hand, specifically recognising EU merger control’s role in supporting broader EU policy objectives – including support for sustainability – and, on the other hand, fettering that support by formally restricting the scope of acceptable ‘out-of-market’ or collective benefits that can be taken into account.  This is particularly acute in respect of sustainability-related benefits, which by their nature will often accrue to recipients (whether individuals or market actors) on a broad basis – potentially much broader than the markets in which any transaction-related harm may arise. 

Second, but linked to the above, there is a clear practical risk that out-of-market or collective sustainability benefits arising for EU consumers from a given transaction could plausibly outweigh any harm - but the Guideline’s current approach would still be to prohibit that merger (or only clear it with remedies).  This is because, under the Guidelines, only benefits arising to consumers in the markets where harm also arises (or, in the case of out-of-market benefits, ‘related’ markets) can be taken into account.  Such an approach appears counter-intuitive, particularly when set against the broader sustainability objectives that the Guidelines claim to support (not least since there is an implicit choice in this approach that consumers that may enjoy sustainability benefits as a result of the transaction are less worthy of protection than harmed consumers, even where those benefits in aggregate outweigh any harm). 

Third, the Guidelines do not attempt to set out guiding principles or other commentary that provide a framework for quantifying sustainability-related harms or benefits, notwithstanding (i) their explicit recognition that such quantification is not straightforward; and (ii) that the EC will still apply the same evidential standards to collective benefits and out-of-market benefits as to other efficiencies.  This is problematic from a dealmaking perspective, given the EC’s substantial margin of discretion in assessing whether and how such parameters should be measured – noting also that sustainability benefits will likely often be inherently uncertain or difficult to quantify. 

Considerations for deal-makers

The increasing recognition that sustainability can be a relevant parameter of competition, including as a basis for transaction-specific benefits, means that deal-makers should closely assess whether sustainability is or will become a relevant parameter of competition and be prepared to make submissions as to why their transaction does not lead to sustainability-related harms. 

As regards efficiencies, there now seems to be clearer scope to make well-reasoned arguments that transactions lead to sustainability-related benefits. This may be particularly relevant for companies active in ‘greener’ sectors (e.g. electric vehicles, batteries, solar and other non-fossil fuel-based energy technologies) as well as industries that are transitioning to greener technologies (e.g. in shipping and other transport sectors, and mining, metals and other industrial production).  Any such arguments should be made early in the merger review process and grounded in clear evidence rather than unsubstantiated assertion. 

However, given the difficulties in assessing sustainability benefits quantitatively, the currently limited scope for out-of-market and collective benefits to be taken into account in the EC’s formal efficiencies analysis, and the margin of discretion that the EC is seeking to retain in assessing such efficiencies, deal-makers should not assume that they can rely on sustainability benefits to establish meaningful efficiencies (particularly where those benefits are key in over-riding any harm that may arise from the transaction in question).  For these reasons, and assuming no substantial change of approach in the finalised guidelines, we consider it likely that sustainability benefits will, even where they are recognised by the EC, continue to occupy a relatively niche role in EC merger control clearance decisions.