Climate protection and sustainability also play an important role for future success in many companies. But new rules such as strict control of supply chains can result in high costs. Many companies would therefore like to join forces, because “together we can often achieve greater economies of scale or greater effectiveness,” says Maria Dreher in ntv’s “Climate Laboratory”.
Similar to the EU Commission, the competition and antitrust lawyer at the international law firm Freshfields advocates facilitating cooperation between companies if it serves sustainability – even if there are disadvantages for consumers at first glance, such as higher costs. As examples, the lawyer cites disposable plastic in canteens, more expensive but sustainable textiles or higher wages for banana farmers. Can’t the market regulate itself? The state does not prescribe sustainable standards by law? Yes, says Dreher. But companies often have more knowledge and potential than nation states – and can also implement corresponding agreements much more quickly.
They mainly represent large companies in merger control cases. How does that fit with the topic of climate protection?
Maria Dreher: Companies also have to play their part in climate protection. Shareholders find the topic important, as do consumers. A very strong understanding of this is also developing in antitrust law, because this can also make a contribution to the realization of sustainability goals.
What does antitrust law have to do with sustainability goals?
Antitrust law regulates the relationship between competitors. Competition basically means that companies strive to offer attractive prices, high quality and innovation – in its pure form a great system. However, external factors can create a situation where the net ratio of traditional competition does not necessarily produce the best outcome. For example, if a European consumer buys a particularly cheap T-shirt, a certain production process is triggered in Bangladesh, for example, and a toxic substance may be released into the groundwater because the production processes are not geared towards sustainability. So the low price has had a negative effect elsewhere.
So when it comes to competition, it’s all about the cheapest price, not always about the best product?
One can also say that competition does not only have to be price-oriented in the short term, but can also be based on longer-term sustainability goals. Now you can ask: Can’t the company do it alone? Can’t a particularly innovative entrepreneur bring a particularly sustainable product onto the market? That can happen. But it can also be a disadvantage if consumers are not sufficiently informed. For example, in the consumer goods industry, a relatively large company wanted to introduce compressed packaging to reduce waste. But this product was incredibly poorly received because consumers were skeptical that they could really get the same product for the same price – just in a smaller package.
But there is also the opposite example. In the textile industry, for example, many companies are now deliberately charging higher prices to advertise environmental protection and sustainability – and are very successful with it. Why should competition or antitrust law be relaxed for this?
It’s not necessarily about easing, but about creating framework conditions for companies to cooperate. Because together, larger economies of scale or greater effectiveness can often be achieved. If many companies commit to a sustainability standard, it will have a greater and perhaps faster impact. The alternative would be to wait for the appropriate market to emerge. It took organic products about 30 years to become as successful as they are now.
So it would take too long for companies to wait for the normal innovation process?
It would take longer and could be done less efficiently. Cooperation between companies often also enables resources or know-how to be pooled, joint research or the merging of sales channels. Supply chain due diligence is currently a very big topic. In Germany, for example, a corresponding law has come into force. It will be important for companies to find out how they can implement and control this as efficiently as possible. That costs everything.
Can’t companies just work together like that? Is this forbidden?
That is the crucial question. Cooperation is not prohibited, but only permitted within relatively narrow limits, because there is always a certain basic skepticism when companies work together. This requires justification under antitrust law. As a result, there is a certain degree of uncertainty on the market as to what a company is allowed to do. Certain initiatives may therefore never have come about.
That means the companies come to you and say: we would like to work together in these fields, but we don’t dare.
Exactly. Interestingly, many competition authorities have recognized the importance of this discussion. Europe is also in a certain pioneering role with some very proactive authorities, there are a number of guidance papers or handouts. The German Federal Cartel Office, for example, is very active in case practice. It is now possible to proactively discuss cooperation projects with the authority in order to create the right framework and to find out which parameters still need to be adjusted so that cooperation can be implemented in a way that is as competitive as possible but with a high sustainability effect.
Gentle on competition? Nice word. Do you have an example?
There are three different groups of cooperation in the evaluation. The first does not affect the competition at all. For example, when competitors agree to jointly eliminate single-use plastic in canteens. The authorities have made it clear that this does not affect the economic behavior of the companies and is therefore fine.
Why do companies have to work together to ban single-use plastic?
It’s again about the argument that the effect is greater when as many as possible in the industry get together. This does not have to be an agreement between competitors, but generally between market participants.
Of all the companies that have a canteen?
That would be an option. In the second group of cases there are cooperations that affect the competition, but do not restrict it negatively. An interesting case of the Bundeskartellamt is the Living Wages case, which deals with procurement methods in the banana sector that secure a living. Representatives of the German retail trade have agreed on joint procurement practices in order to create wage structures, working conditions and employee representation that are as fair as possible and to generally improve the procurement conditions in certain countries. The Cartel Office looked at this and said: Because no specific wages were agreed, the cooperation has a strong impact on sustainability, but does not have a negative impact on competition.
Because companies still have to set their own prices based on how economical they think they are?
Exactly. And then there is the third group, where agreements reduce competition but have strong positive effects. There, a distinction is made between two groups, which is what the debate in antitrust law is currently focusing on.
One example is mineral oil manufacturers who agree to sell only cleaner fuel at German gas stations. In case of doubt, it is a bit more expensive, but releases fewer emissions. Since drivers are also citizens and now breathe cleaner air, this would be a clear advantage that may outweigh the disadvantage of the price increase.
The second example is more controversial. Cotton is an important input material and the textile industry has agreed to only use sustainably produced cotton. This makes the product that customers in Germany buy more expensive. The advantage of this decision does not benefit the people in Germany either, but perhaps less water is polluted somewhere else in the world. Is that enough of an advantage to offset the possible disadvantage for whoever purchases the product?
But couldn’t the use of sustainable cotton simply be made mandatory? Or ban the non-sustainable alternative? Then competition would not have to be restricted.
The question is: does government regulation go far enough? Can the solutions be created quickly enough? Climate policy in particular is a relatively controversial topic. What if you only agree on the lowest common denominator? Do we really want to trust in a government solution if the companies had the necessary knowledge and potential to implement much more than is stipulated by the government, and much faster at that? Creating comprehensive solutions across countries is probably quite difficult in practice.
And then it would be easier to just let the companies work together?
It is definitely a good accompanying measure in certain areas. The solutions do not have to be permanently located at the company. But pioneering projects like this banana project are a good immediate measure. Maybe it will be picked up at some point in regulation.
You said there is a lot of movement on the field. The EU Commission has issued new recommendations, and the Netherlands is also much further along. How do you observe this development?
Different authorities have taken different positions in the discussion. There are also participants from the economic side who are skeptical and ask whether companies should take on this ordering and educating function. New legislation in Austria is very interesting, dealing with the exception to the ban on cartels: cooperation that restricts competition is prohibited – unless there are justifying arguments. This may be the case when certain limitations are outweighed by clear benefits, or when the benefits outweigh those limitations. An important principle has traditionally been that consumers must benefit from good products or good prices. It’s called consumer welfare.
Is it primarily about the price?
Exactly, but that often falls a bit short because “cheapest price” doesn’t necessarily mean “best allocation of resources”.
Or “best quality”.
That’s correct. There was one case in which companies had agreed to remove washing machines with particularly poor energy efficiency from their product portfolio. The restriction of competition was in the case of less choice because certain washing machines that might have been cheaper were no longer available. This is primarily a restriction of competition. However, it has been found that the more efficient washing machines are more expensive to buy, but save customers money in the long term because they use less energy. The cartel office said: There is a restriction due to less choice and a higher price. Ultimately, however, this is compensated for by the higher energy efficiency.
But there is also a study by the Kronberger Kreis. This is a coalition of very liberal economists who are certainly not in favor of more government regulation. But they are still against a relaxation of antitrust law: once companies are allowed to do so, cartels could emerge – as with the Green Dot. It was introduced in the early 2000s and created a cartel between different disposal companies. This was later punished by the Cartel Office. However, it took a relatively long time for the negative consequences to be reversed.
In principle, sustainability agreements between competitors are nothing special because cooperation is permitted under certain circumstances. There are purchasing cooperations, there are research and development cooperations and production joint ventures. It is recognized that cooperation between competitors can promote efficiency and produce good results. That’s why I always find it funny when you just pick out the examples where a risk has materialized. Because without risks, there would be no need for antitrust law.
But you still have to acknowledge that there is a risk. How can you prevent companies from exploiting loopholes and fixing prices?
Such loopholes should already be closed when designing such cooperations, for example by excluding pricing from these programs – as with the living wages of bananas. Of course, the authorities must also require that the sustainability benefits be specifically identified. You can’t just say: We’re cooperating now because it’s incredibly important and that’s what’s in the room.
However, the authorities must then also check whether the cooperation is being implemented as agreed.
This is the case in many areas of antitrust law. For example, you can use an independent third party to look at it.
But that didn’t work for Wirecard either.
But then we assume that the starting point is a breach of the law. This is a premise that should not actually be assumed.
Do you know of cases in your practice where you say: That’s really a shame. That would have been a cooperation that could have taken us forward. But it didn’t come about because of antitrust law.
I can only speak to a limited extent about practical examples that do not come about. But lately, because of supply chain due diligence, we’re talking to a lot of companies who are concerned about how that would actually be manageable in practice. You have to look at the precautions taken by business partners. You have to check that regularly too. In the guidelines of the EU Commission there is a statement: You can definitely get together and work with databases in order to keep this control effort to a minimum. The important next step is to clarify how to deal with the information if things are not looking so good with a supplier. What consequences can I then draw? Can the industry say we don’t work with certain companies? And if I can’t do that, then where’s the effectiveness of all that sustainability care?
Clara Pfeffer and Christian Herrmann spoke to Maria Dreher. The conversation has been shortened and smoothed for better understanding.
