The Five Key Sustainability-Related Changes Introduced by the New German Corporate Governance Code – Commentary

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Environmental factors should be considered as part of risk management activities
Corporate strategies must balance economic and environmental objectives
Business planning should include goals related to sustainability
Sustainability efforts must be overseen by the supervisory board
Members of the supervisory board must have expertise in sustainable development issues
Comment

In the draft version of the new German Corporate Governance Code (DCGK), the ecological and sustainability provisions are much stricter than in previous versions. This article describes five durability-related changes it introduces.

Environmental factors should be considered as part of risk management activities

The DCGK proposes that corporate boards systematically assess the risks and opportunities associated with environmental factors.

There are several reasons for this proposal:

  • The effects of some sustainability factors are now so severe that they can lead to development that endangers the existence of a company – for example, when a company’s main activity depends on combustion engines or coal energy.
  • Sustainability factors are increasingly leading to serious economic risks, such as extreme weather events – which can lead to significant damage – or climate change.
  • Funding is becoming more and more difficult for economic models deemed unsustainable.
  • Increase environmental regulation (e.g. supply chain law – for more details see “The environmental provisions of the supply chain law”) may lead to additional costs, fines and liability risks.
  • Legal risks also arise from so-called “climate lawsuits” or litigation related to climate change, which are on the rise.(1)

Corporate strategies must balance economic and environmental objectives

The DCGK proposes that a company’s corporate strategy provides information on the balance between its economic and environmental objectives.

Shareholders are increasingly pushing companies to consider sustainability factors in their corporate strategies, based on the belief that ecological and social sustainability is positive and will improve long-term success. of the business, even if it affects short-term profitability.

Business planning should include goals related to sustainability

The proposed recommendation requires corporate planning to contain goals and targets related to sustainability. Companies will therefore only comply with this recommendation if they have set themselves concrete sustainability objectives. This is already the case for many companies.

For example, many companies in the public eye have pledged to reduce climate-damaging emissions, either as a percentage reduction within a specific timeframe, a target date for “net zero” emissions, or a combination of both. Many other social and ecological goals are conceivable and widespread in practice.

Sustainability efforts must be overseen by the supervisory board

The DCGK attaches great importance to recommending that supervisory boards monitor companies’ efforts in terms of sustainable development. For most supervisory boards of listed companies, however, this recommendation has no significant practical impact, as sustainability already plays a central role in their work.

The DCGK entrusts the task of monitoring internal control and risk management systems relating to sustainable development to audit committees. Other sustainability-related oversight tasks might be appropriate for a sustainability committee. Indeed, a growing number of companies already have a sustainable development committee or plan to create one. This trend will not fail to continue, reinforced by the planned changes to the DCGK.

Members of the supervisory board must have expertise in sustainable development issues

The DCGK recommends that the competency profile of a company’s supervisory board includes expertise on sustainability issues that are material to the business of the company. The DCGK does not specify whether the skills profile should be updated, but it goes without saying that it should be adapted to current developments.

The DCGK also provides that the chairman of the audit committee must have specific knowledge and experience in sustainability reporting or auditing, and that at least one other member must have additional expertise.

Comment

The design of the new DCGK clearly prioritizes ecological and social sustainability. Although the project 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 the developments expected with the entry into force of the European directive on corporate sustainable development reports and its transposition into German law. Irrespective of the proposed changes to the DCGK, sustainability aspects are therefore already at the heart of the activities of administrative boards and supervisory boards, and this trend is expected to continue in the coming years.

For more information on this subject, please contact Vera Rothenburg at Gleiss Lutz by phone (+49 711 8997 0) or e-mail ([email protected]). The Gleiss Lutz website can be accessed at www.gleisslutz.com.

Endnotes

(1) For German prosecutions in this area, click on here.

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