ESG sustainability factors in corporate and tax law!

Companies bear more responsibility – what do you need to know?

ESG – this stands for Environmental Social Governance, i.e. the areas of environment, social affairs and corporate governance. Nowadays, companies are expected not only to pursue their own business interests, but also to do business in a way that conserves resources and is socially responsible. This creates extra work – but it also offers SMEs in particular the opportunity to position themselves as pioneers in their region.

Sustainability is no longer a niche topic:

In the long term, an ecologically and socially sustainable corporate strategy will be an integral part of any successful corporate management. This is because ESG issues are attracting more and more attention in society’s perception: be it climate and environmental protection, the guarantee of equality and inclusion or the legal compliance of companies. For reasons of public image alone, it is therefore no longer an option for companies to ignore developments in the field of ESG.

Numerous legal requirements at national and EU level:

Moreover, the new public sensitivity is now also calling legislators to the scene. Compliance with ESG standards is no longer merely voluntary (“soft law”). There are already numerous legal regulations at national and EU level (“hard law”), and the trend is increasing. In particular, the European Union, which has set itself the goal of reducing its net greenhouse gas emissions to zero by 2050 as part of the so-called European Green Deal, can be expected to continue its commitment to ESG in the future – for example in the area of supply chain compliance.

The scope of ESG regulation goes far beyond the area of environmental protection. German and European awareness of grievances is also growing with regard to working conditions and compliance with the law by companies. This results not least in new regulations, such as the recent Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – LkSG), according to which companies must ensure compliance with human rights in their own business areas and along the supply chain.

ESG affects companies of all sizes – so what should be considered?

As a “cross-cutting issue”, ESG criteria have an influence on a large number of corporate and business areas. In company law, they give rise in particular to organisational and supervisory duties for corporate bodies within the framework of corporate governance and compliance. These should therefore take care of the establishment of ESG-compliant processes in good time. This also applies to small and medium-sized enterprises and SMEs: Although they are not yet directly affected by many legal requirements because they are linked to certain numbers of employees, such as the LkSG, they are indirectly affected. At least indirectly, however, they will not be able to avoid compliance with ESG standards in the long term. For example, because larger companies pass on the requirements to them as contractual obligations in order to be able to account for their value chains and customers themselves. Or because pressure from the public or contractual partners (“stakeholders”) requires implementation even without a legal obligation. Regional companies are often particularly vulnerable in this respect because they receive increased attention in their catchment area.

In addition, access to capital will also depend on the fulfilment of ESG standards in the foreseeable future: According to the so-called Disclosure Regulation in conjunction with the so-called Taxonomy Regulation, financial service providers are obliged to report on the sustainability of their business partners. To create incentives, loan interest rates are already linked to the achievement of certain ESG targets.

In any case, a trend towards lowering the requirements for size and turnover can be observed in German and European legislation. In the future, it must be expected that smaller companies will also have to fulfil far-reaching legal requirements or will at least be able to benefit from advantages – for example in tax law (so-called green tax).

Establishing ESG-compliant operations is an investment in the present and the future!

Sooner or later, almost every company will have to take the various ESG factors into account in order to be able to operate successfully in the long term. In view of this, it is worthwhile to carefully examine one’s own impact now and, based on this, to develop a suitable ESG strategy. If implemented correctly, this will not only protect future value creation, but also sharpen the company’s profile in the present. Advanced ESG concepts and ESG compliance management systems are regarded as a seal of quality by business partners, the public sector, investors and consumers. They enhance reputation and thus ultimately represent a competitive advantage.

This is all the greater the earlier ESG-compliant processes are implemented. In the long term, there is no way around the necessary investments – but there is an opportunity to position oneself as an innovative pioneer in a future-oriented topic.

Latecomers face reputational damage, fines and liability!

If, on the other hand, the company fails to align itself with ESG in good time, there is a risk of reputational damage and fines, as well as liability risks. In the event of a breach of organisational or supervisory duties, these can also affect the executive bodies personally. German jurisdiction is now also beginning to consider damages for climate and environmental damage. The possible resulting distortions are not yet foreseeable, but could potentially be huge. Moreover, in view of the political and social mood, it cannot be ruled out that the legislature itself could create corresponding liability bases in the near future.

Corporate bodies should therefore act promptly:

For those responsible, this means that they should carefully examine their duties as a corporate body and the ESG requirements that affect them. Duties may arise in the areas of corporate governance or compliance, for example. In addition, ESG criteria should be taken into account in corporate acquisitions and the associated due diligence, as well as in insolvency and restructuring.

Since the necessary measures depend entirely on the respective company, a risk analysis will first have to be carried out to identify, evaluate and prioritise existing and expected future risks in the company’s business areas, products and locations.

Based on the results of this analysis, a code of conduct can then be drafted and preventive measures and control mechanisms implemented. Depending on the size and business area of the company, obligations to report on its own sustainability performance (internally and/or externally) or to protect whistleblowers may apply. If necessary, (new) business partners should be screened for ESG criteria or adjustments made to existing contracts. In any case, the results found should be checked regularly and the measures taken should be reviewed for timeliness and effectiveness. Clean documentation of the measures taken is important for possible presentation to business partners, supervisory authorities and/or the public.