Dusseldorf Environmental awareness, social commitment and good corporate governance: for many years, these three topics provided the subject of Sunday speeches and colorful brochures. That is now finally over, as a broad-based study by Deutsches Aktieninstitut (DAI), a merger of German listed companies, and the law firm Hengeler Mueller shows.
It is available exclusively to the Handelsblatt and makes it clear that sustainability, with its environmental, social and governance (ESG) facets, has reached the everyday business of listed companies.
The change towards sustainable management has left the strategic level and is affecting concrete business. 76 percent of those surveyed stated that they had already changed the strategic direction of their company and had established a sustainability strategy.
In addition, the increase in sustainability in companies is also reflected in more reporting and risk management, the development and expansion of human capacities and specialist knowledge, and greater networking of the various areas of the company.
“Companies have recognized the need to align their strategy and actions with the mega-topic of sustainability. They actively take up the topic of sustainability and anchor a variety of control and process elements in order to advance the transformation towards more sustainable management,” says Christine Bortenlänger, Managing Director of Deutsches Aktieninstitut.
The topic of sustainability has thus developed from a soft “can” topic to a hard “must” topic – but not without pressure. Investors, legislators and society are increasingly expecting a more sustainable orientation from companies. The transformation process is now also being strongly driven by questions of reputation, a sense of responsibility and employee motivation.
“The commitment of the German corporate landscape to the sustainable transformation of our society is there. However, there is a regulatory reality that could lead to significant frictional losses during implementation,” says Daniela Favoccia, Partner at Hengeler Mueller. Above all, what is needed now are pragmatic and goal-oriented solutions in order to jointly achieve the ambitious and necessary international sustainability goals.
The Ukraine war shows how important a sustainable strategy is
Added to this is the war in Ukraine, even though this has not yet been taken into account in the study. “The war in Ukraine makes it clear how important geopolitical expertise is as part of a sustainable corporate strategy,” says lawyer Favoccia, who, in addition to her work at Hengeler Mueller, is also a member of the German Corporate Governance Code Government Commission (DCGK). The depiction of scenarios is becoming increasingly important in order to plan security of supply and supply chains in a sustainable manner.
For the study, 157 CFOs and 153 supervisory board chairmen from Dax, MDax and SDax companies were written to and asked what drives them to transform and how the consideration of ESG issues affects companies. In addition, it was examined how they assess the regulatory projects EU taxonomy, Corporate Sustainability Reporting Directive and Sustainable Corporate Governance.
The Corporate Sustainability Reporting Directive (CSRD)
Of the 310 people contacted, 44 took part directly in the survey, while 17 delegated the answering to employees. There were a total of 61 replies and therefore a response rate of almost 20 percent.
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The result of the survey: The companies set specific ESG goals and use a wide range of tools to ensure that the sustainability strategy is implemented and the goals are achieved – and to measure their success. Ratings and benchmarking are the most used tools.
According to the study, organizational elements of corporate governance are also used. For example, more than half of the companies have a corporate sustainability board, which can consist of board members and executives from various business units and functional areas.
Sustainability is being measured more and more frequently
Sustainability is becoming increasingly relevant for the key performance indicators, the so-called KPIs (Key Performance Indicators) for corporate management. While more than half of those surveyed already use ESG KPIs in corporate management, 98 percent of those surveyed state that they want to use them in the future. ESG issues thus systematically have a behavior-controlling effect in companies.
This is already common practice at the chemical company BASF. “BASF considers a number of sustainability indicators for its corporate management, starting with the sustainability assessment of our suppliers and resource-efficient production to increasing the proportion of women in management positions,” explains Stefan Schnell, Senior Vice President Group Reporting and Performance Management at BASF.
Of particular importance are the key figures and goals such as net zero emissions by 2050 and 22 billion euros in sales with particularly sustainability-promoting products such as insulating materials by 2025. At BASF, these are also called “Accelerator”. In addition to ROCE (return on capital employed), they are the central control parameters for BASF.
Schnell, who is a member of the Sustainability Reporting Board of the European Financial Reporting Advisory Group (Efrag), further explains: “We have set ourselves these goals because we believe that they will help us to be successful as BASF in the long term.” While the target for sales of accelerator products in 2021 has already been achieved, this key figure and its target will be further developed in 2022 in order to align the product portfolio even more closely with sustainability.
Supervisory boards want to link remuneration to sustainability
Supervisory boards are also taking a closer look at sustainability. Six out of ten of those surveyed state that they take ESG goals into account when determining executive compensation, and nine out of ten companies intend to do so in the future. The establishment of a special sustainability supervisory board committee is also a big step forward. Respondents say the number of ESG committees will more than triple.
The Chairwoman of the Supervisory Board of the Dax group Henkel, Simone Bagel-Trah, reports: “Sustainability is of course a regular topic on the agenda of both the Shareholders’ Committee and the Supervisory Board. We have a board member who is responsible for sustainability, so there is a strong anchor there. Incorporating sustainability goals into the remuneration of executives and executives is the right way.”
The Henkel supervisory board chairwoman would prefer to use resources for implementing the EU taxonomy in other areas.
(Photo: Henkel AG)
The interviewees are generally positive about the expansion of the reporting obligations provided for in the draft of the European Corporate Sustainability Reporting Directive. However, the companies want internationally uniform standards.
The respondents are more critical of the EU taxonomy, which poses major challenges for companies with its complex specifications and new reporting requirements. Above all, the indirect effects of the transparency obligations on strategy and corporate management are problematic from the point of view of the survey participants. It is unclear whether the Taxonomy Ordinance actually forces people to think about adjusting the key figures for corporate management or whether future investment decisions should be based on them.
The EU taxonomy
Companies that fall within the scope of the CSR Directive are obliged to provide information as part of their sustainability reporting on how and to what extent their activities are linked to economic activities that can be classified as ecologically sustainable.
According to the Taxonomy Regulation, large capital market-oriented public interest companies as currently defined in the CSR Directive (more than 500 employees) must report. If the CSRD (see below) comes into force, according to the current status, large capital market-oriented companies with 250 or more employees will be required to report.
For the 2021 reporting year, the companies concerned only have to disclose the share of taxonomy-eligible and non-taxonomy-eligible economic activities in their total turnover and their investment (CapEX) and operating expenses (OpEX) in 2022 with a view to the two climate-related environmental goals. From 2023, the other environmental targets must also be reported on.
“The goal – towards a sustainable economy – is absolutely right and absolutely necessary. I have question marks about whether this current path is the right one,” says Bagel-Trah. And further: “In order to master the bureaucracy associated with the EU taxonomy in the future, we would certainly have to hire numerous employees. These are resources that we could perhaps put to much better use in working on actual technology advances.”
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Some of the EU Commission’s proposals for sustainable corporate governance are also viewed with great skepticism. The proposal to establish sustainability expertise by means of an ESG expert on the supervisory board met with a mixed response, because knowledge has already been expanded in the bodies. Bagel-Trah pleads for “top-class all-rounders”: “If I put together my board exclusively from experts such as financial professionals for the audit committee, digitization professionals and ESG specialists, then the overall perspective is sometimes missing.”
Companies fear stakeholder lawsuits and want uniform standards
As expected, respondents are most critical of the idea that stakeholders can sue the board of directors and the supervisory board directly. This is not surprising, as experts say there is a high risk of litigation due to the great complexity and lack of clarity in the implementation of the specifications.
“The anchoring of sustainability issues in companies is on the right track. In terms of strategy, organisation, reporting and internal monitoring, management has ESG criteria in mind. In view of the wealth of new obligations that companies are facing, the EU Commission is urgently requested to exercise a sense of proportion,” demands DAI boss Bortenlänger. Lawyer Favoccia adds: “In order to standardize reporting requirements and reduce the effort for companies, internationally coordinated sustainability requirements are also useful.”
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