EU ESG requirements: what HR managers in Germany need to know

Introduction
EU and German ESG requirements
ESG and HR management frameworks and standards

Introduction

Environmental, social and governance (ESG) issues have gained a great deal of popularity. For human resources (HR) management, the question arises as to what role HR can or must play in this context and what contribution practical HR work, and the managers responsible for it, can make to achieve strategic ESG goals within a corporate organisation.

ESG-oriented HR management requires clearly defined criteria and targets based on these criteria. The good news is that a wide range of regulatory and standardisation initiatives on social and governance aspects already exist at EU level, which provide fairly concrete guidance for ESG-oriented HR work. This article, part of a series on ESG requirements for HR managers, outlines the existing requirements and indicates how they are to be interpreted in Germany.

EU and German ESG requirements

NFRD/CSR Directive
In 2014, the European Union adopted the Non-Financial Reporting Directive (NFRD), also known as the Corporate Social Responsibility (CSR) Directive. The German legislature has implemented this directive into national law in sections 289b et seq and sections 315b et seq of the German Commercial Code (HGB).

The directive, and the German implementation thereof, expands the reporting requirements of large capital market-oriented companies, credit and financial services institutions and insurance companies with more than 500 employees. Regarding the areas relevant to HR management, a wide range of topics and performance indicators for sustainability reporting are described in this context – in particular:

• the implementation of the fundamental conventions of the International Labor Organization (ILO);
• diversity concerns, such as gender diversity;
• employment and working conditions;
• relations with trade unions and respect for trade union rights;
• employee co-determination;
• health and occupational safety;
• human capital management, including management of restructurings;
• respect for human rights; and
• supply chains.

Both the NFRD itself and the EU Commission's guidelines also refer reporting companies to existing "high-quality, broadly recognised national, EU-based or international frameworks". Under the applicable German law, this is reflected in section 289d of the HGB. Both the EU and the German legislature, as well as the Commission, limit themselves to a reference to the aforementioned frameworks. However, due to their high level of detail, these in particular provide valuable indications for practical ESG-relevant HR work.

CSRD
With the new Corporate Sustainability Reporting Directive (CSRD) adopted by the European Parliament on 10 November 2022 based on a proposal by the European Commission, the European Union now aims to extend the CSR reporting obligation to large non-capital market-oriented corporations and limited liability partnerships under commercial law. De facto, in the future large parts of the German mid-tier will be obliged to publish a sustainability report.

As a result of the CSRD, the current level of detail of the information to be disclosed will increase significantly. The directive again provides important indications for HR management focusing on ESG goals.

EU Sustainable Corporate Governance Initiative
In the area of corporate governance, the European Union aims to improve the EU legal framework for corporate law and corporate governance as part of a so-called "Sustainable Corporate Governance Initiative" and to urge companies to focus on long-term and sustainable added value. As part of the initiative, a draft EU Directive on Corporate Sustainability Due Diligence (CSDD) was published in February 2022. It should be noted that the planned EU regulations of the CSDD on the supply chain due diligence obligations of companies will significantly exceed the existing German Supply Chain Due Diligence Act. This is of particular relevance for practice with regard to the "G" in ESG.

ESG and HR management frameworks and standards

The indications resulting from the relevant EU regulations, recommendations and regulatory initiatives on social and governance aspects are barely suitable as a basis for ESG-oriented HR management in practice due to their limited level of detail. Reference is made to so-called "frameworks" and, in some cases private, standardisation initiatives with regard to the concretisation for the criteria and performance indicators relevant to HR work. This is where a rather confusing variety of indicators exists. Under applicable law, such as section 289d of the HGB, companies subject to reporting requirements decide at their own discretion which frameworks they will utilise for their non-financial reporting.

In order to achieve effective ESG-oriented HR management, it is sensible to deal with frameworks which are as informative as possible regarding so-called employee issues. Frameworks that may be useful for German companies include:

• ILO frameworks;
• the United Nations Global Compact;
• the Organization for Economic Cooperation and Development Guidelines;
• Global Reporting Initiative Standards;
• the International Organization for Standardization (ISO) standard ISO 26000;
• the German Sustainability Code;
• the Sustainability Accounting Standards Board standards; and
• European Financial Reporting Advisory Group (EFRAG) standards – the mandate of EFRAG, or rather its corresponding task force, is to compile proposals for European Sustainability Reporting Standards (ESRS) for the European Commission. The first set of 12 ESRS was submitted to the EU Commission on 23 November 2022.

For further information on this topic please contact Hagen Köckeritz, Guido Zeppenfeld or Marcel Hörauf at Mayer Brown by telephone (+49 69 7941 0) or email ([email protected], [email protected] or [email protected]). The Mayer Brown website can be accessed at www.mayerbrown.com.