ESG Part 2 - ESG as a "must-have"

After outlining the basics in our last Insight in the ESG – Environmental Social Governance series (Part 1 - The ESG basics), we will now show that sustainability has become a decisive factor for the economic success of your company, because sustainability has changed from a "nice-to-have" for major international corporations to a "must-have" and at the same time a value driver for domestic SMEs. Increasing regulatory pressure at both international and national level is contributing to this in particular.

ESC – Increasing regulatory pressure

We have already shown that there are hardly any companies left whose agenda does not prioritise sustainability and climate protection. This is due not only to the political will to be climate-neutral by 2045, but also to employee requirements, customer wishes and pressure from society and investors. The challenges and objectives behind ESG are certainly not new. What is new, however, is the acute pressure with which climate neutrality is also being demanded of companies. National and international ESG regulations are developing at breakneck speed, placing ever new obligations on your company and forcing you to scrutinise your entire corporate strategy. The following are just a few examples:

• United Nations Guiding Principles on Business and Human Rights,
• the OECD Guidelines for Multinational Enterprises,
• the European Green Deal,
• the EU CSRD Directive,
• the EU Disclosure Regulation SFDR,
• the (planned) EU Sustainability Reporting Directive (CS3D),
• the German Supply Chain Duty of Care Act,
• the German sustainability strategy and
• the German sustainability strategy and the Bavarian sustainability strategy.

CSRD reporting obligation and disclosure regulation

Although the reporting obligation under the EU Corporate Sustainability Reporting Directive (CSRD) of 2022 does not apply to small and medium-sized enterprises (SMEs) until 2027, such companies must already report today on how they ensure that their business model is (1.) is compatible with the transition to a sustainable economy, (2.) with the 1.5°C target of the Paris Climate Agreement and (3.) the realisation of climate neutrality, and disclose sustainability data on their company in accordance with the European Sustainability Reporting Standards (ESRS) if they require fresh capital. Financial institutions must disclose to their clients whether and, if so, which sustainability features the advised investment in a company has due to their own transparency obligations under the EU Sustainable Finance Disclosure Regulation (SFDR) of 2019 in investment advice and asset management. However, the sustainability of a company is also becoming increasingly important outside the capital market in the case of traditional bank loans. Increasingly, it is being agreed that the loan interest rate will be reduced if the borrower achieves certain sustainability targets at certain times.

Supply Chain Due Diligence Act and CS3D

Since 2024, SMEs with 1,000 employees or more have been subject to the 2021 Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz - LkSG), which carries considerable fines and reputational damage. As a result, these companies must comply with human rights and environmental due diligence obligations in their own business activities and, above all, in the supply chain. If your company meets this obligation, you have to establish responsibilities, introduce processes and create documentation, particularly in the areas of purchasing, HR, occupational health and safety, EHS (environment, health and safety), compliance, legal and management. But even if your company is below the 1,000-employee threshold, you are affected by the obligations of the LkSG if you have customers who are themselves covered by the LkSG. In all likelihood, this obligation will also be extended to companies with just 250 employees in the near future with the implementation of the EU Corporate Sustainability Due Diligence Directive (CS3D) of 2022.

Greenwashing

Finally, the planned Green Claims Directive with its strict fairness and transparency requirements to prevent and combat greenwashing, i.e. misleading sustainability advertising (Greenwashing) and increasing legal disputes in this context (Green Claims), should be mentioned.

Of course, climate neutrality in Germany can only be achieved if the domestic economy is reminded of its corporate climate responsibility and committed to climate transformation. However, many companies (still) feel overwhelmed by the task of complying with and implementing the many regulatory requirements.

Dr Thomas Hausbeck. LL.M. and the ESG team at SKW Schwarz will be happy to support you in complying with the numerous and often confusing obligations of a company on the way to legally sanctioned and socially required climate neutrality.