Sustainable corporate governance is more than just a reporting obligation

In the EU, the Corporate Sustainability Reporting Directive (CSRD) requires capital market-oriented companies to disclose detailed information on the sustainability of their activities.

As part of the CSRD, the European Sustainability Reporting Standards (ESRS) were developed. They define the scope and structure of the reports.

In addition, numerous companies are also subject to the EU Deforestation Directive, the European Corporate Sustainability Due Diligence Directive (CSDDD) and in Germany also the  Supply Chain Due Diligence Act (LkSG). All of these laws require them to report in detail on certain sustainability aspects of their activities.

ESG does not just exist on paper, but proves itself in practice

Capital market-oriented companies must implement the CSRD from 2025. The CSRD is supplemented by the ESRS, which define the scope and structure of the reports and provide a guideline for the disclosure of business activities in relation to ESG.

In a competitive environment, it can be advantageous to score points in the area of ESG and thus stand out from other businesses. However, it is not only ESG reporting that is important, but also the implementation of the formulated ESG goals - which, incidentally, do not always result from reporting alone. On the contrary, they usually lag behind reporting. Companies should bear in mind that reporting needs to be scrutinised and evaluated from many different perspectives.

The level of sustainability performance achieved by a company is primarily determined by its corporate governance. In its original sense, the term corporate governance refers not only to the organisation and its policies, but also includes the strategy according to which the organisation is aligned. The principle of "structure follows strategy" applies, even if it is often reversed in practice: a business can only become "green" or “sustainable” if it has made a strategic decision to do so and aligns itself accordingly.

ESG does not just exist on paper, but is proven in practice. Appropriate compliance must be anchored in the corporate culture. Anyone who believes they can dismiss ESG with a report will not fulfil the requirements. A purely opportunistic presentation will quickly be exposed.

A management that chooses to strategically align their organisation with sustainability criteria must consider all the consequences when making this decision:

• The integration of ESG goals into the core business requires a transformation, both in terms of content and organisation.
• A constantly changing environment leads to a continuous adaptation process.
• Internationally operating companies face major challenges, particularly in terms of meeting the expected standards of partners - the further away from Europe, the more complex.
• The management culture must be harmonised.
• Management must be prepared to set an example and be accountable.
• The employees must be behind the concept and support it.
• Internal regulations must be adapted.

Sustainable corporate management put to the test

The extent to which corporate governance is "sustainable" can be verified using various tests:

• The ESG report is scrutinised at the Annual General Meeting. The answers on ESG topics must be answered immediately and correctly by the Executive Board. Is the Executive Board - and the back office - prepared for this?
• Is the management ready to adapt its own behaviour, for example by using e-cars or avoiding air travel? Are there any ESG targets over and above the standards?
• From an organisational corporate governance perspective, the question also arises as to whether at least one member of the Supervisory Board should be well-versed in ESG issues. This could be defined as a qualification criterion for Supervisory Board members in the Supervisory Board's rules of procedure.
• Are the members of the Supervisory Board sufficiently independent of management and neutral in their decisions? Their independence is a basic prerequisite for compliance with ESG standards and self-imposed ESG targets.
• Is compliance with the standards organised and consistently monitored by the Management Board and Supervisory Board - regardless of the economic impact?
• In future, funds that attach importance to ESG standards will demand proof of compliance with ESG standards, for example: How many suppliers have had supply contracts cancelled due to non-compliance with ESG standards? Statistically speaking, in many industries that source goods internationally, the answer cannot be "zero".
• Do the employees identify with the ESG-orientated focus and do they also see this as the meaningful purpose of their work? Is this sufficient for them as a motivational "purpose"?
• Is advertising already free of greenwashing? The marketing areas for advertising and packaging must already prepare for the new directive that came into force on 26 March 2024. Directive on empowering consumers for the green transition through better protection against unfair practices and better information which must be transposed into national law by 27 March 2026. Environmental claims such as "green" or "eco" will then be prohibited. The potential fines, which are calculated according to a company's turnover, may hit companies with high turnover but low margins, such as retailers, very hard.

True sustainability goes beyond fulfilling the minimum requirements

If a company's corporate governance has internalised ESG issues and is committed to them, it should publicise their implementation and successes in addition to mandatory reporting in order to set itself apart from those competitors that only do what is necessary and legally required:

• In addition to ESG reporting, are there updates on reportable successes in the quarterly reports?
• Does the Supervisory Board ensure that the management takes into account the effects of business activities and does it demand transparency in this regard? Is information on this provided in the report of the Supervisory Board?
• Can the Management Board report on its own ESG commitment, does it monitor compliance with the targets? Is this part of the Executive Board report?
• Are ESG topics an agenda item in analyst meetings? Is additional information required beyond the reports? Is Investor Relations prepared for this?
• Is ESG reported on extensively in press conferences? Are ESG aspects addressed by the company in interviews?
• Is reference made to the company's ESG performance in adverts or published job offers?
• Is there any involvement in initiatives to promote ESG?
• Are improvements reported in modern communication channels - and discussed in social media?

ESG is no longer just a reporting issue, but rather an increasingly important strategic and complex task for management, executive boards and supervisory boards. In addition to legal risks and the associated potential fines, the company's reputation is also at stake.

Successful sustainable corporate governance is achieved through the example set by management and appropriate monitoring, and performance is verified by stakeholders.