20 January 2025 undoubtedly was a significant day. Donald Trump, the old and new US President, was inaugurated in the USA. For some time already, a dispute had developed in the USA about the compliance with ESG aspects by companies and institutional investors. This discussion has also spilled over to Germany and Europe and mixes with the decades-old issue of red tape reduction. A first example of this was the quite bumpy path towards the Corporate Sustainability Due Diligence Directive (CSDDD). The discussion on the repeal of the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG) was a second example (see our blog post of 9 December 2024 on this issue: Why we (in particular the management) need to continue to take the German LkSG seriously and how it (also) relates to the pending implementation of the CSRD | ADVANT Beiten). In November 2024, the European Council demanded a 'revolutionary simplification process' in the Budapest Declaration on the 'New European Competitiveness Deal', which is supposed to essentially bring about a reduction of sustainability reporting obligations by at least 25 percent (Budapest Declaration on the New European Competitiveness Deal). On this basis, the EU Commission has announced an omnibus regulation regarding the Corporate Sustainability Reporting Directive (CSRD), the Taxonomy Regulation and the CSDDD, which entered into force only in summer 2024. Since then, there has been a great deal of speculation and demands as to what this omnibus regulation is supposed to contain in detail. A first full draft of the Commission is expected to be submitted by the end of February. Another element of the current picture is the fact that the CSRD, which came into force already in 2022, has not yet been transposed into German law as a result of the premature end of the German so-called traffic-light government coalition, which in turn leads to considerable legal uncertainty for those companies that would have been obliged to report on sustainability for the first time for the financial year 2024 and had prepared for it, expecting a halfway timely transposition of the CSRD into German law (see our above-mentioned blog post for more on this issue too).
All of this could be criticised as a hectic back and forth which seems to be rather far from the goals of clear and efficient guidance, predictability, and planning security. At the same time, the question is how this potential 'chopping and changing' on the part of the legislature may be perceived by the companies concerned. However, regardless of the ongoing political debate about the new ESG regulations, there are also some legal determinants for the ESG issue which can be expected to continue to be there in any scenario:
Laws already in force must of course be observed ('compliance') for as long as they will be in force. The mere possibility of a law being repealed is no justification for not abiding by it before this happens. This is true, for example, for the German Supply Chain Due Diligence Act which has been German law since 1 January 2023 (see our above-mentioned blog post). Applicable laws, however, also include the traditional general duty of care of board members and managing directors, where modifications − particularly with regard to the legal consequences of a breach of duty in the form of liability for damages - are discussed from time to time, but not their complete abolishment: 'In managing the affairs of the company, the members of the management board are to exercise the due care of a prudent manager faithfully complying with the relevant duties', section 93 (1) sentence 1 of the German Stock Corporation Act (Aktiengesetz, AktG). And sentence 2 of the provision makes it clear that entrepreneurial decisions are to be taken on the basis of adequate information and in the best interests of the company. What does this mean for entrepreneurial decisions − and especially key decisions on the corporate strategy and the business model, for which (also) ESG aspects are relevant and, therefore, part of the adequate information base? The management board should take adequate account of these ESG aspects when taking a decision (in addition to all the other relevant aspects) if it does not want to be exposed to allegations of breach of duty and liability claims later in the event of an unsatisfactory development of the company. And this regardless of CSRD, Taxonomy Regulation, CSDDD and the announced omnibus regulation (for details see Walden, NZG 2020, p 50 et seq: 'Corporate Social Responsibility: Rights, Duties and Liability of the Management Board and Supervisory Board').
Another closely related issue can be found in the field of banking supervision. Some years ago already, the supervisory bodies emphasised the relevance of ESG risks and the need to identify them in traditional risk management. Meanwhile, the minimum requirements for risk management of the German Financial Supervisory Authority (Mindestanforderungen an das Risikomanagement, MaRisk) contain numerous detailed provisions in this regard. And only on 9 January 2025, the European Banking Authority (EBA) published its 'Guidelines on the management of environmental, social and governance (ESG) risk' (Final Guidelines on the management of ESG risks.pdf). The executive summary states:
'ESG risks, in particular environmental risks through transition and physical risk drivers, pose challenges to the safety and soundness of institutions and may affect all traditional categories of financial risks to which they are exposed. To ensure the resilience of the business model and risk profile of institutions in the short, medium, and long term, the guidelines set requirements for the internal processes and ESG risk management arrangements that institutions should have in place. […] Institutions should integrate ESG risks into their regular risk management framework by considering their role as potential drivers of all traditional categories of financial risks, including credit, market, operational, reputational, liquidity, business model, and concentration risks.' (Emphasis added by the author)
This implies two things for companies in the real economy: Firstly, if ESG risks are relevant for financial institutions, then they are also relevant, and even more so, for their clients because ESG risks of the institutions often are the result of ESG risk of their clients, for instance where such a risk is passed on to the institution as a credit risk. Therefore, not only the institutions, but also the companies in the real economy do well to consider ESG risks in their traditional risk management systems (a legal requirement for listed companies under section 90 AktG since the Wirecard affair) in order to possibly avoid potential negative effects of any missing or inadequate consideration of ESG risks for the company. And secondly, regardless of the structure of the companies' own risk management, a 'trickle-down' effect can also be expected as the institutions must try to obtain relevant information from their clients for their own risk management processes and their clients are therefore confronted with corresponding requests for information. Thus, the inclusion of ESG aspects in the loan processes of institutions has already begun.
On the other hand, board members and managing directors should keep an eye on possible ESG opportunities in addition to ESG risks. For many companies, the transformation of the economy may also offer new business opportunities which need to be treated like any other business opportunities.
All this, of course, applies primarily to the classic outside-in perspective of companies, but in some circumstances also indirectly to the inside-out perspective addressed by the CSRD from the point of double materiality, i.e. the impacts of business activities on the environment and society. This is because such negative impacts can reflect on the company if they are seen in a critical light by relevant reference groups such as (potential) customers and employees. And finally, looking into the supply chain is also nothing new, at least since the coronavirus and increasing geopolitical uncertainties.
As a result, dealing with the ESG risks and ESG opportunities relevant for the specific company appears to be appropriate with a view to the general duty of care of management board members and managing directors, even regardless of the CSRD. Interestingly, the Chief Sustainability Officers (CSOs) of more than 400 French companies who are members of the French C3D organisation have recently addressed the EU Commission regarding the EU Commission's omnibus plans and emphasised that 'ESG reporting and value chain assessment' are essential 'for resilience' as well as 'for survival, growth, and long-term competitiveness' of European companies. In addition, it would strengthen Europe's sovereignty by European norms setting global standards instead of leaving this to other, competing jurisdictions (presumably referring to what is known as the Brussels Effect). The French CSOs therefore advise the EU Commission to take practical measures to improve the clarity and effectiveness of the regulations without jeopardising their strategic goals. As has already been made clear at the beginning, there certainly are enough voices advocating the opposite view and seeing an unchanged continuation as a serious competitive disadvantage.
So, it definitely will be interesting to see how this discussion will develop. Neglecting relevant ESG aspects 'only' for this reason could prove risky for company managers. Making well-considered decisions on an adequate information basis is the be-all and end-all (also) in this respect.
Dr Daniel Walden
Dr André Depping