ESG: What role does the legislator play?
The Status Quo
The goal of the legislator is to create a framework for a more sustainable economy. To this end, an increasing number of laws are being passed to ensure that companies integrate the issue of sustainability into their strategic orientation and business model. In addition, the mandatory laws are intended to create more transparency and ESG comparability among companies. In doing so, the legislator wants to provide impetus for innovation and investment in sustainable companies and promote companies that take ESG seriously.
The direct consequence: reporting obligations are becoming increasingly extensive. The CSR Directive Implementation Act (CSR-RUG), adopted in 2018, was the first step. Since then, listed companies with total assets of over €20 million, sales of at least €40 million and more than 500 employees across the group have been required to prepare a non-financial statement. In this declaration, companies must take a stand on environmental, social and employee issues, as well as respect for human rights and the fight against corruption and bribery. However, the legislator not only aims at making information available to third parties, but also encourages companies to actively address ESG issues. At the same time, it is supposed to support companies in the early recognition of their own risks to be able to counteract their implementation.
Current projects in Germany
The German government is not resting on already adopted measures, but is continuously working on providing even clearer ESG guidelines. For this purpose, a national action plan for business and human rights has been in place since 2017. With this action plan, the German government is pursuing the goal of improving respect for human rights along global supply and value chains and, for the first time, explicitly calls on companies to voluntarily commit themselves to the protection of human rights and environmental standards. However, after detailed examination the Federal Government decided this was not sufficient enough. As a result, concrete plans for a Supply Chain Act are now being discussed.
Due to the COVID-19 pandemic, the draft for the Supply Chain Act was temporarily halted in March 2020. However, it can be assumed that a binding law will be passed in the next few years. Companies must therefore face up to reality: Merely reporting the consequences of their own economic activity within Germany is no longer enough. Instead, companies must learn to take responsibility for their supply chains and their effects.
Increasing pressure from the EU
The importance of a more sustainable economy is also a priority at EU level. In March 2018, the European Commission published the “Action Plan: Financing Sustainable Growth”. The action plan set out a comprehensive strategy for further linking finance and sustainability. A central element of the implementation of the action plan is the taxonomy regulation. This affects all capital market participants and bindingly defines, among other things, when an economic activity is to be classified as sustainable, which disclosure requirements must be met and how detailed the information should be. For instance, according to EU Regulation 2019/2088, investors must also incorporate and disclose sustainability risks in their investment decisions from 2022 at the latest. Furthermore, from 2022 onwards, all companies will be subject to concrete disclosure obligations for dealing with climate change.
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