Sustainable Corporate Governance
No longer a question about IF, but rather about HOW
In January, the Commission Regierungskommission Deutscher Corporate Governance Kodex adopted an updated draft of the German Corporate Governance Code (Deutscher Corporate Governance Kodex (DCGK-E 2022)) and initiated the consultation process. Interested members of the public were able to participate in the consultations until March 11, 2022.
The reason for the renewed reform of the Code is the growing importance of environmental and social sustainability matters and the expansion of the reporting obligations as a result of the announced EU Corporate Sustainability Reporting Directive (CSRD), as well as the most recent amendments to the German Stock Corporation Act (Aktiengesetz (AktG)) as a result of the Act to Strengthen Financial Market Integrity (Gesetz zur Stärkung der Finanzmarktintegrität (FISG)) and the Second Leadership Positions Act (Zweites Führungspositionen-Gesetz (FüPoG II)).
Firm anchoring of sustainability matters in corporate management
The planned amendments to the DCGK are intended to specifically extend corporate social responsibility to include sustainability matters. Recommendation A.1 DCGK-E 2022 requires the management board to systematically identify and assess the environmental and social impacts of the company’s activities and the associated risks and opportunities in the future. Corporate strategy should be the well-balanced implementation of all economic, environmental and social objectives of the company. In addition to financial objectives, corporate planning should specifically include sustainability-related objectives.
With regard to the new legal obligation of listed companies to establish an effective internal control system (ICS) and risk management system (RMS) (Section 91 (3) AktG) introduced by the FISG, these systems should, according to Recommendation A.3 DCGK-E 2022, be geared towards not only financial but also sustainability-related matters. Fortunately, in this context, Principle 4 DCGK-E 2022 should provide clarification that ICS and RMS include a compliance management system (CMS) that is aligned to the company’s risk situation. In our blog post of June 23, 2021, we already pointed out the lack of clarity from the legislator with regards to CMS matters. The opinion expressed in DCGK-E 2022 will hopefully also quickly shape the legal interpretation of Section 91 (3) AktG.
Required sustainability expertise in corporate oversight
The planned amendments also impose new requirements on members of the supervisory board. In the future, the supervisory board’s skills and expertise profile should also comprise expertise regarding sustainability issues relevant for the company (C.1 DCGK-E 2022). Against the background of the expansion of the monitoring task of the audit committee to include sustainability reporting as provided for by the CSRD draft of April 21, 2021, according to Recommendation D.4 DCGK-E 2022, a correspondingly expanded expertise of the chairman of the audit committee should be required.
DCGK-E 2022 as a consistent codification of existing requirements
The additions with regard to sustainability aspects planned with the DCGK-E 2022 are consistent with regards to the obligations from the Taxonomy Regulation and Disclosure Regulation that companies already have to comply with for the 2021 reporting year. With the adoption of the CSRD – which is expected to be adopted before the end of this year – and subsequent implementation in national law, the existing sustainability-related reporting obligations will be further expanded in the near future. In addition to binding European reporting standards (European Sustainability Reporting Standards), the CSRD draft also provides for a significant expansion of the group of companies that are obliged to report on sustainability. The European Sustainability Reporting Standards are intended to provide binding requirements for report content on the environmental objectives specified to date in the Taxonomy Regulation, on social aspects such as equality or respect for human rights, and on governance aspects, including the role of performance and supervisory bodies, corporate ethics and culture, ICS and RMS.
The DCGK per se, and thus the proposed new version, only applies to listed companies, which can also deviate from the recommendations with appropriate justification (“comply or explain”). However, at the latest when the CSRD is implemented in German law, a significant proportion of non-capital-market-oriented German companies will also have to deal with their sustainability strategy and its implementation in the medium term. The DCGK-E 2022 anticipates parts of a transformation process that may be necessary and can therefore certainly serve as a helpful corporate governance guide.
Is your company prepared?
Companies are being called upon to align their strategies and corporate processes in a wide variety of directions with the sustainability issues that are relevant to them. They increasingly have to justify themselves to investors and financiers. In the event of half-hearted and inadequate CO2 strategies, there is not only a risk of severe reputational damage, but also costly environmental and climate protection lawsuits may occur. In the U.S., the Securities and Exchange Commission (SEC) recently established a “Climate and ESG Enforcement Task Force” and made investigations and enforcement of corporate misconduct related to ESG matters, and in particular erroneous reporting on climate risks, one of its top priorities. Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) has included ESG risks in its supervisory priorities for quite some time now and, in its current ” Guidance Notice on Dealing with Sustainability Risks,” requires companies subject to its supervision, to take a concrete strategic approach to sustainability risks. In this respect, companies must immediately ask themselves how they are positioned with regard to their sustainability matters and what transformation process they need to initiate and communicate this externally.
In this context, management and supervisory boards are equally required to subject themselves and their company to critical examination and to analyze in detail the sustainability matters that are significant and comprehensively interwoven for the company. In doing so, supervisory boards should keep an eye on current developments with regard to the required sustainability-related expertise and the time frame for corresponding election proposals to the annual general meeting. Given the complexity of these matters and the legal, economic and practical dependencies alone, it is advisable to ensure that the supervisory board also has the appropriate expertise.
If corporate management and supervision want to do justice to the variety of individual regulations already in force and planned, isolated solutions are just as out of the question as purely reactive behavior. Instead, it requires a forward-looking, consolidated approach in interdisciplinary, cross-functional teams. The inclusion of sustainability-related matters and risks in the RMS, ICS and CMS, as recommended by the DCGK-E 2022, can provide the ideal basis for this if implemented correctly.
If you have any questions or require any assistance with regards to this, as an internationally experienced sparring partner, we are more than happy to support you on this from the very beginning. Feel free to contact us at any time!
- Draft German Corporate Governance Code 2022, available at https://dcgk.de/en/consultations/current-consultations.html
- Proposal of the European Commission (FISMA) of a CSRD dated April 21, 2021 (draft), available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021PC0189&from=EN
- Draft amendment of the European Council of February 18, 2022 (draft), available at https://data.consilium.europa.eu/doc/document/ST-6292-2022-INIT/en/pdf
- BaFin Guidance Notice on Dealing with Sustainability Risks dated October 21, 2021, available at https://www.bafin.de/SharedDocs/Downloads/EN/Merkblatt/dl_mb_Nachhaltigkeitsrisiken_en.html