Global regulators ponder 'groundbreaking' Australian environmental merger decision

Two weeks ago, the Australian competition watchdog approved an $11.8 billion merger between Canadian asset manager Brookfield and local electricity provider Origin Energy, arguing that the environmental benefits of the deal outweighed any competition concerns arising from the transaction. It was the first time an Australian merger clearance had been premised on green arguments, and the decision led some international regulators to speculate on the possibility of similar verdicts in their own jurisdictions. But without the flexibility of Australia’s unique “public benefits” test, global competition authorities may have to think outside the box.

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24 October 2023
By Ryan Cropp and Andrew Boyce

The possibility of bringing environmental and sustainability concerns to bear on merger decisions has become a topic du jour of the global conference circuit. The need for antitrust authorities to help manage the green transition is a compelling one, even if it’s typically spoken of in the future tense.

Yet if the Australian competition watchdog’s most recent merger decision is any guide, that future may now be upon us.

On Oct. 9, the Australian Competition & Consumer Commission, or ACCC, approved asset manager Brookfield’s A$18.7 billion ($11.8 billion) acquisition of Origin Energy, on the grounds the deal was likely to substantially increase investment in renewable power in Australia and have a material influence on the country’s renewable energy transition.

It was the first time that environmental factors had got a deal over the line in Australia and the verdict surprised almost everyone, not least because the ACCC had concluded that the deal raised competition concerns.

Under the country’s unique merger authorization process, though, the regulator is able to clear a deal if it decides its anticompetitive detriments are outweighed by public benefits. And that’s exactly what the ACCC did.

The Brookfield authorization may even have been the first time globally that a significant and potentially anticompetitive merger has been cleared for explicitly environmental reasons — although as some observers have pointed out, Australia’s ability to claim a world-first may depend on what qualifies as “environmental.”

Yet whether a world-first or not, regulators around the globe are taking notice.

In an interview with MLex this week, Netherlands Authority for Consumers and Markets Chair Martijn Snoep described the case as “groundbreaking” and suggested that competition regulators in other jurisdictions should look for ways to expand existing rules to take sustainability concerns into account.

But as Snoep and others note, the Australian regulator’s explicit “public interest” test gives it more room to move on environmental and sustainability issues than most other watchdogs, which must instead must work within slightly narrower tests of economic efficiency.

However, the ability of regulators to forge a similar path to the ACCC might not necessarily require a complete rewriting of the rulebook. In some parts of the world, such as Europe and the United Kingdom, all that may be needed is for the right case to come along.

But in other jurisdictions, such as the United States and Brazil, top antitrust officials appear to have all but ruled it out — possibly because they don’t want to be seen to be injecting a contentious political topic into the antitrust world.

But with environmental concerns increasingly front of mind for policymakers around the globe, there may be no escaping the politics of this issue. On environmental merger rulings, it might simply be that where there is a will, there will be a way.

Environmental efficiencies

The ACCC’s Brookfield decision may have been premised on the green benefits of the transaction, but there’s no explicit clause in the Australian laws providing for environmental exemptions.

Instead, the country’s formal merger authorization regime allows the watchdog to apply a “public benefits” test, within which environmental concerns are but one of many potential claims merging parties can make to the regulator — though companies have generally found it hard to convince the ACCC of the materiality of their public benefits claims.

Australia is not the only jurisdiction with such rules. In South Africa, the competition regulator is required to assess a mergers’ impact on public interest factors, and while these laws do not “expressly provide” for the assessment of climate change and environmental factors, they are “broad enough to allow these effects to be taken into account,” the watchdog said.

New Zealand’s Commerce Commission, too — which often works in close concert with its trans-Tasman neighbor — also has a similar public benefits test. According to its authorization guidelines, the regulator is able to take environmental, health, media and social welfare benefits into account when making merger decisions.

In a statement to MLex, the Commerce Commission said it was "likely" it would be able to consider broad environmental benefits and detriments as part of this merger authorization process — and that those benefits need not be limited to the markets in which any substantial lessening of competition was found.

In other parts of the world, regulators must work within slightly narrower tests, with exemptions often framed around the idea of economic efficiency.

In the United Kingdom, for example, the Competition and Markets Authority, or CMA, can approve a deal that would result in a “substantial lessening of competition” if the companies can show it would create efficiencies that outweigh that harm. Efficiencies can take the form of either enhancing rivalry or bringing “customer benefits.”

In March 2021, the CMA issued fresh guidance that suggested it could clear some deals by taking their positive environmental impact into account. For example, a reduction in carbon emissions could be treated as an “efficiency” if it would bring benefits for “direct,” “indirect” or “future” UK customers.

“It might be … that benefits in the form of environmental sustainability and supporting the transition to a low-carbon economy are relevant customer benefits in some circumstances,” the guidance reads.

“A merger may lead to lower energy costs and some benefits that customers may value (such as a lower carbon footprint of the firm’s products),” it adds.

In Europe, too, the regulator can override competition concerns if the merging companies show their deal would result in efficiencies that outweigh the potential harm of the transaction — although the bar for making such claims is typically very high.

In order to consider an efficiency claim, the European Commission must be sure it “benefits consumers” and is a “specific” result of the merger. It must also be “verifiable” and benefit “substantially the same customers otherwise harmed by the merger.” As a result, very few are accepted.

Some, like Snoep, argue that the regulators should take a more flexible approach. “I think competition authorities should expand the notion of efficiencies to take on board sustainability considerations within the efficiency context,” Snoep told MLex last week.

He’s not alone in holding that view. In a recent paper, the European Commission noted that “sustainability-related aspects may play a role in the assessment of merger cases when it comes to efficiency considerations”.

Potential examples included mergers that resulted in better, more sustainable products or the generation of less waste, and deals that spurred green innovation and brought new green products to the market, the Commission said.

Such notions could take into account out-of-market efficiencies that would not necessarily directly benefit consumers, but would potentially bring overall benefits to society, or benefits that would not emerge immediately.

Some EU member states also allow ministers to override the national competition authority’s decision on a merger.

In 2019 the German economy minister approved a bearings merger between Miba and Zollern which had been blocked by the Bundeskartellamt, the country’s antitrust regulator, arguing that the companies’ innovation know-how was important for the country’s energy transition, and outweighed small restrictions to competition.

Similar powers exist in the UK, too, where the government can make a public-interest intervention in a merger in order to protect media plurality and broadcasting standards, the stability of the financial system, and to reduce the impact of public health emergencies.

Speaking different languages

On the other side of the Atlantic, there’s very little appetite for finding ways to include environmental factors in merger decisions — unless they affect competition.

At a senate committee hearing last year, US Federal Trade Commission Chair Lina Khan said that environmental, social and governance factors — referred to by the acronym ESG — didn’t constitute compelling reasons to “bless” an illegal merger and they would be relevant only to the extent that they can affect competition.

“I personally never find that compelling. I don’t think those types of ESG commitments, or anything in that vein, can ever rescue an illegal deal,” Khan said.

Jonathan Kanter, Assistant Attorney General at the US Department of Justice’ Antitrust Division, expressed similar sentiments during his confirmation hearing two years ago, suggesting that if a company’s ESG commitments had no impact on its ability to compete, those commitments were irrelevant to an antitrust inquiry.

However, even though the agencies may be reluctant to consider ESG policies as a defense for otherwise illegal behavior, some senior officials have suggested they are willing to consider sustainability and racial inequality issues when setting enforcement priorities.

FTC Deputy Assistant Director of Policy and Coordination Synda Mark told a conference last week that social values such as sustainability are embedded into both the history and the actual reading of the US antitrust statutes that the FTC enforces: the Sherman Act, the Clayton Act and the FTC Act.

“There is more than enough room for us to think about these other issues as we think about antitrust law,” Mark said.

The FTC official nevertheless qualified her statements, noting that companies are primarily focused on their bottom line. Any sustainability claims needed to be looked at with “very skeptical eyes,” she said.

In Brazil, the president of the Administrative Council for Economic Defense, Alexandre Cordeiro, last year advised antitrust agencies against reaching beyond the consumer welfare standard in their investigations, which he said would result in “legal uncertainty”.

"If each country chooses what is most important to them, we will no longer speak the same language," Cordeiro said.

"If I bring social issues into my analysis, the language will be different, and no one will know what is happening in Brazil. We run a serious risk of making completely different decisions in identical mergers, if we decide to consider political, social and environmental [matters]," he added.

Green shoots

The lack of explicit green exemptions in merger laws hasn’t stopped some companies from trying to argue environmental efficiencies.

In March this year, Khan noted that the FTC had already knocked back a number of companies that had approached the regulator hoping to use ESG commitments to get merger clearance for potentially anti-competitive deals.

“Those are instances where we have established very clearly that we look at these deals through a competition prism, and any types of ESG commitments or other types of sustainability commitments are really not key to our inquiry,” Khan said.

Europe, too, has seen a drip feed of new merger applications with environmental angles.

For example, when German copper producer Aurubis bought Metallo, an innovative scrap recycler in 2020, it argued the deal would result in the more efficient use of copper scrap and the recovery of more metals.

When US aluminum company Novelis acquired rival Aleris in 2019, it argued that the deal would support the EU’s green policy goals, promote the circular economy and reduce emissions.

In Aurubis’s case, the Commission said the efficiencies didn’t meet the legal standard to be accepted and had not been substantiated. Novelis also didn’t substantiate its arguments, the watchdog said.

But as Snoep told MLex, there is every possibility that another regulator might one day wave through a deal on environmental grounds — as long as the facts are right.

“[The Dutch regulator] has looked at it, but so far we haven’t had any concrete cases where an efficiency defense was put forward based on sustainability considerations,” Snoep said.

“We’re hoping to look into that more carefully,” he said — “as soon as we get the right case.”

With additional reporting from Ilana Kowarski, Flavia Fortes, Paula Mariane, Tono Gil, Toko Sekiguchi and Jon Menon.

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