Environmental factors should be considered as part of risk management activities
Corporate strategies should balance economic and environmental goals
Corporate planning should include sustainability-related targets
Sustainability efforts should be monitored by supervisory board
Supervisory board members should have expertise in sustainability issues
Comment
In the draft version of the new German Corporate Governance code (DCGK), the ecological and sustainability provisions are far stronger than in previous versions. This article outlines five sustainability-related changes it introduces.
Environmental factors should be considered as part of risk management activities
The DCGK proposes that companies' boards should systematically assess and evaluate the risks and opportunities associated with environmental factors.
There are several reasons for this proposal:
- The effects of some sustainability factors are now so serious that they may lead to a development that endangers a company's existence – for example, where a company's main activity depends on combustion engines or coal power.
- Sustainability factors are increasingly leading to serious economic risks, such as extreme weather events – which can lead to significant damage – or climate change.
- Financing is becoming increasingly difficult for business models that are considered to be unsustainable.
- Increasing environmental regulation (eg, the Supply Chain Act – for further details, see "Environmental provisions in Supply Chain Act") can result in additional costs, fines and liability risks.
- Legal risks also arise from so-called "climate lawsuits" or climate change litigation, which is on the rise.(1)
Corporate strategies should balance economic and environmental goals
The DCGK proposes that a company's corporate strategy should provide information on how its economic and environmental goals are balanced.
Shareholders are increasingly urging companies to consider sustainability factors in their corporate strategies, based on the belief that ecological and social sustainability is positive and will, in the long term, enhance the company's success, even if it affects profitability in the short term.
Corporate planning should include sustainability-related targets
The proposed recommendation requires corporate planning to contain sustainability-related goals and targets. Companies will therefore comply with this recommendation only if they have set concrete sustainability goals. This is already the case for many companies.
For example, many companies in the public eye have committed to the reduction of climate-damaging emissions, either in the form of a percentage reduction within a concrete time, a target date for "net zero" emissions or a combination of both. Numerous other social and ecological goals are conceivable and widespread in practice.
Sustainability efforts should be monitored by supervisory board
The DCGK attaches great importance to recommending that supervisory boards monitor companies' sustainability efforts. For most supervisory boards of listed companies, however, this recommendation has no significant practical impact, because sustainability already plays a central role in their work.
The DCGK allocates the task of monitoring internal control and risk management systems relating to sustainability to audit committees. Other sustainability-related monitoring tasks could be suitable for a sustainability committee. Indeed, an increasing number of companies already have a sustainability committee, or plan to set up one. This trend is sure to continue, strengthened by the planned changes to the DCGK.
Supervisory board members should have expertise in sustainability issues
The DCGK recommends that the competence profile of a company's supervisory board should include expertise on sustainability issues that are important to the company's business. The DCGK provides no information as to whether the competence profile is to be updated, but it goes without saying that it should be adapted to current developments.
The DCGK also provides that the chairperson of the audit committee should have special knowledge and experience in sustainability reporting or auditing, and that at least another member should have complementary competence.
The draft of the new DCGK clearly priorities ecological and social sustainability. Although the draft is not yet final, it is expected that the basic direction will remain the same.
A closer look reveals that many of the proposed recommendations come from other applicable laws or existing business practices. Other recommendations anticipate developments that are expected with the entry into force of the EU Corporate Sustainability Reporting Directive and its implementation into German law. Regardless of the proposed changes to the DCGK, therefore, sustainability aspects are already central to the activities of boards of directors and supervisory boards, and this trend will likely continue over the next few years.
For further information on this topic please contact Vera Rothenburg at Gleiss Lutz by telephone (+49 711 8997 0) or email ([email protected]). The Gleiss Lutz website can be accessed at www.gleisslutz.com.
Endnotes
(1) For German lawsuits in this area, click here.