Customers and investors have long been concerned not only with financial indicators, but increasingly also with non-financial performance indicators. The acronym ESG has become established for this purpose. ESG stands for Environmental (environmental concerns), Social (social aspects) and Governance (corporate management and compliance) and covers precisely those non-financial performance indicators. ESG is primarily to be understood as a framework that defines sub-areas and criteria that companies should take into account when it comes to sustainability. ESG thus provides a framework for companies to analyze their environmental and social impact, to promote sustainable business practices and also to make non-financial performance visible and comparable to external parties. Dealing with ESG criteria should form the basis of any sustainability strategy. The consistent tracking, monitoring and communication of ESG criteria is the main task of active sustainability management.
The EU regulations and laws that have already been implemented or are in preparation as part of the EU Green Deal also refer directly to the ESG framework. But sustainability management is by no means just a burdensome mandatory or compliance exercise. It is merely another driver. After all, the overall societal trend toward greater sustainability is already influencing companies at all levels of the value chain - regulation or not. Above all, increasing customer requirements and strategic anchoring are further important factors.
All three factors are crucial for companies to successfully integrate ESG within a company. If these three ESG factors are taken into account in sustainability management within the company, competitive advantages can be created and risks minimized. The three factors are briefly examined below.
The detailed second part of our blog series The most important ESG regulations in Germany at a glance can be found here. The third part of the blog series Sustainability between customer wishes and strategic anchoring can be found here.
Overview of important sustainability & ESG regulations
In the EU, several authoritative ESG regulations are on the way, which have emerged as a result of the Green Deal. The aim of the regulations is to strategically integrate sustainability into the business practices of companies.
CSR-Directive Implementation Act (CSR-RUG)
One of the most important regulations is the CSR Directive Implementation Act (CSR-RUG). This obliges companies to disclose information on non-financial aspects and thus to prepare a sustainability report. Five non-financial aspects on which reporting is required are: Environmental issues, employee issues, social issues, human rights and the fight against corruption and bribery. The directive is intended to drive capital market-oriented companies as well as banks and insurance companies to act more responsibly and sustainably. The aim is to create greater transparency regarding environmental and social impacts.
The CRS-RUG has affected capital market-oriented companies, institutions, and insurance companies with more than 500 employees since the 2017 financial year.
The Sustainable Finance Disclosure Regulation (SFRD)
The Sustainable Finance Disclosure Regulation (SFRD) requires financial product providers and financial advisors to disclose sustainability factors in the decision-making process for their financial products and to inform customers what adverse sustainability impacts the products have. This becomes particularly important for financial products that are designated as ESG confrom or "sustainable investment."
The aim of the SFRD is to ensure that financial market participants finance their growth in a sustainable manner over the long term and avoid greenwashing. In addition, there are specific requirements for companies as to which sustainability information must be disclosed.
Since March 2021, the SFRD primarily affects financial market participants and financial advisors who develop and offer financial products in the EU.
The EU taxonomy
The EU Taxonomy is a classification system for sustainable economic activities defined in the EU Sustainable Finance Action Plan. The EU taxonomy creates clear rules and regulations for the term sustainability, when a company operates sustainably or environmentally friendly. This results in reporting obligations for companies with regard to sustainability.
For large capital market-oriented companies with more than 500 employees, the EU taxonomy has already been applied since January 2022.
The Non-Financial Reporting Directive (NFRD)
Since 2017, banks, insurance companies and large capital market-oriented companies have been required to report on sustainability as a result of the entry into force of the Non-Financial Reporting Directive (NFRD).
Also known as the Non-Financial Reporting Directive, this specifies for companies with 500 or more employees the disclosure of non-financial information such as social and environmental impacts of their activities. Since the NFRD came into force, however, significant weaknesses in the directive have been identified, such as ambiguity regarding the definition of materiality. Therefore, the EU Commission published proposals for a revision of the NFRD in 2021 and launched the CSRD, which is intended to revise and replace the NFRD.
Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Directive (CSRD) will for the first time establish a uniform framework for the reporting of non-financial data by the European Commission. The CSRD will replace the existing Non-financial Reporting Directive (NFRD) and thus create new requirements for sustainability reporting. The directive affects all companies with more than 250 employees and is to be adopted by October 31, 2022 at the latest. It is currently available in draft form.
Whistleblower Protection Act (HinschG)
The Whistleblower Protection Act (HinschG) protects natural persons within a company who disclose violations within the company. The corresponding whistleblowers will be legally protected from negative consequences within the company. Companies with at least 50 employees will be affected by the Whistleblower Protection Act from the beginning of 2023.
Supply chain due diligence act (LksG)
The Supply Chain Protection Act (LksG) regulates the responsibility of companies with regard to their impact of their business activities on human rights in their supply chain. The law will apply from January 01, 2023 for companies based in Germany with at least 3,000 employees or companies with a branch in Germany also with at least 3,000 employees.
The ESG guidelines represent a completely new legal framework for sustainable business, which has long since affected not only financial players, but also the real economy. For companies, it is essential to get an overview of the current and upcoming ESG regulations and to align the company accordingly.
Customer requirements
In addition to ESG regulations, it can be observed that customer wishes are increasingly moving in the direction of sustainability. Particularly in the case of "consumer products", the trend towards greater sustainability has been observed for some time. Online retailers are actively labeling products that carry a sustainability label and meet sustainability requirements. Sustainability is already a purchasing argument in many areas, and the trend is rising sharply.
It is foreseeable that ESG criteria will become decisive for almost every product and service. It is important for companies to recognize this and take it into account in their customer communications. For example, new target groups can be developed through more sustainable products or costs can be saved through circular economy.
On the other hand, those who wait too long with a sustainability adaptation not only cut themselves off from new business opportunities, but also run the risk of losing customer trust. Therefore, as a company, it is important to communicate sustainability openly and transparently to the outside world and to customers.
In order to successfully establish sustainability in the company, it is necessary to seek regular exchange with customers and stakeholders and to know customer preferences and wishes and take them into account accordingly.
Strategic alignment
The integration of sustainability into the corporate strategy is unavoidable. The consideration of ESG criteria should be an integral part of any risk analysis and reflected by the corporate strategy.
Through comprehensive and active sustainability management, one's own corporate model can be future-proofed and expanded. Above all, risks can be identified and minimized or even avoided at an early stage through uniform data collection. A holistically thought-out sustainability strategy can be a decisive advantage for the company and represent a strong differentiating feature.
Conclusion
Even if a company is not yet regulated by sustainability laws today, the early introduction of an active sustainability management system and the processes connected to it brings many benefits:
- Improved capital market access
- Higher customer growth
- Optimized use of resources
- More efficient compliance
- ...
In order to successfully master the strategic challenges of sustainability management, it is advantageous to obtain an overview of the ESG regulations, to take customer requirements into account throughout the entire process and, based on this, to establish a successful sustainability strategy within the company.
Notice: The information provided is only a summary of selected ESG regulatory topics and data. The information is non-binding and there is no claim to completeness. Please note that information may be changed at short notice and without prior notice. Adjustments and extensions may be made at any time.
