Environmental factors are now frequently a driver of M&A strategy. Across most sectors, a poor green profile can seriously impact the investability, reputation and resilience of an entire business portfolio, and reduce the scope for financial returns. On the flipside, the growing expectations of governments and society present considerable opportunities for differentiation and growth into new markets and technologies.

Merger control policies are starting to evolve to take more account of these new strategic drivers, although there is undoubtedly further to go. Dealmakers should think about how to respond tactically in the context of their M&A deals.

“Going green” is a common objective

Increasing social and political pressure to tackle climate change has made “going green” an important common objective for companies and regulators alike.

Several competition authorities (including the European Commission, France, UK and the Netherlands) have acknowledged the importance of environmental factors in their competitive analyses, including for merger control.

We have mentioned in previous posts the EC’s Green Deal as a clear example of the massive political pressure on public and private players to invest in the green economy. These types of ambitious policy initiatives could also result in authorities giving more weight to environmental factors in future assessments.

The recent World Economic Forum’s Consultation Draft of proposed common standards for corporate disclosure of ESG factors may also have an impact. The report identifies several ESG factors to measure corporate performance. Attaching such value to these non-economic factors could test the underpinning premise for merger control reviews – that deal rationale is fundamentally driven by profit maximisation. Where companies want to argue that deal rationale is not only based on the target’s economic value but also bolstering their ESG profile, it’s vital that underlying documents back this up.

Merger control assessment of environmental factors so far

At EU level, we’re seeing early signs of environmental factors becoming important in the merger control assessment and the acceptability of remedies:

• In DEMB/Mondelez/Charger OPCO, environmental considerations formed part of the EC’s relevant product markets analysis (organic, fair trade and other certified coffees vs. conventional coffee).
• In Aleris/Novelis, environmental issues also formed a crucial part of the EC’s market definition, which framed the substantive assessment and also played into the remedies package.
• Perhaps most striking is the EC’s decision to open an in-depth probe into Aurubis/Metallo. Among the EC’s concerns was that the deal might reduce incentives for recyclers to collect and sort copper scrap.

Examples at the national level include the German government’s decision to step in and approve a deal (previously blocked by the FCO) because its environmental policy objectives outweighed the identified of competition concerns.

And the Portuguese authority has considered sustainability factors when defining relevant markets.

The US agencies have also done this, notably distinguishing between organic vs. conventional products:

• In Post/TreeHouse (ultimately abandoned by the parties), the FTC alleged a private label ready-to-eat (RTE) cereal product market which excluded “natural and organic” cereals. This was in part because these “tend to have healthier and more expensive inputs” – resulting in more expensive downstream products.
• In Danone/WhiteWave, while the DOJ was less explicit about non-price factors, we can infer differentiation from the description of the inputs for raw organic milk which: “is collected from organic cows on organic farms that must meet rigorous USDA regulations”, impacting the downstream price.

In China environmental considerations will play a role in assessing market power (and potentially in market definition) when, for example, stringent regulatory requirements to ensure environmental protection create barriers to entry (e.g. SAMR’s conditional clearance of Zhejiang Garden Biochemical/Royal DSM). In practice, merging parties can (and do) use environmental benefits as part of their efficiency arguments – especially where they are active in relevant industries like waste treatment. But it remains unclear whether these benefits could ever outweigh any anti-competitive effects in SAMR’s analysis.

Practical implications for M&A deals

While there is no settled guidance on how authorities will factor in environmental objectives, dealmakers can expect greater scrutiny of their deals where:

• There is a restriction of competition for a market segment or group of customers engaged in environmentally beneficial projects – even where this group would not be a “market” in the traditional sense.
• A large incumbent looks to acquire a smaller green innovator representing a potential future threat based on its “green” profile – we’ve seen authorities taking a much stricter stance against these so-called “killer acquisitions” especially in the tech space and expect this to apply for clean-tech and other emerging green challenger targets.
• Business plans indicate there will be merger-specific negative environmental effects.

Then clearance might be possible only subject to remedies that address any merger-specific environmental concerns. As you might expect, this will particularly be the case for energy markets, or innovative green targets.

Conversely, positive environmental objectives could help to shift the dial towards clearance for deals which could otherwise be challenging to get through.

Ultimately, we don’t expect environmental factors to decide the outcome of merger control reviews in the near future. They won’t replace the traditional criteria for analysis such as high market shares, closeness of competition, or barriers to entry. But it is inescapable that ESG considerations will play an increasing role.

Governments may also increasingly intervene to push through deals with proven environmental benefits (as in Germany), or block “dirty” deals. They also could use foreign investment control powers to factor in ESG considerations. State intervention in M&A is increasing. And in the wake of state support granted to address Covid-19 (where green investment is expected to drive recovery), we expect this to continue.

Tactical considerations for dealmakers

• Expect greater deal scrutiny, especially in the energy space and/or for deals which resemble potential “killer acquisitions”.
• Consider the risk of authorities revisiting relevant markets based on ESG factors when assessing feasibility. Check what level of market shares you get based on these alternative market definitions. Weigh the pros and cons of further segmenting markets based on ESG considerations and possible implications for future deals.
• When analysing the substantive effects of your deal, think carefully about the effects on any customer groups engaged in green projects.
• Think about the environmental benefits of your deal. In appropriate cases, these should be promoted front and centre as part of the fundamental deal rationale – not just as part of the efficiency arguments. Clear and compelling advocacy will be important.
• As is now par for the course in any review, pre-existing business documents will be key in determining the acquirer’s intentions and strategy for doing the deal. These documents need to reflect the rationale and related advocacy in any submissions (and at a minimum, not contradict these).
• Think about your approach to remedies. These may need to be designed or amended to address environmental concerns. Whilst behavioural remedies to deal with environmental concerns may not specifically resolve a competition issue, they may be useful as part of an overall package to get your deal through.