Initial situation

Companies are currently facing a multitude of changes and uncertainties: a tense geopolitical situation, a volatile global economy, difficult external economic conditions (including US tariffs, resource bottlenecks, etc.), domestic economic stagnation and digital transformation. Dealing with these issues alone is challenging enough. According to a recent economic survey, one in three companies in Germany plans to cut staff in 2026, and investment is also likely to decline in 2026. In terms of sustainability, there is also the ESG backlash in the US, new targets set by the current EU Commission in the Clean Industrial Deal, uncertainties about or resulting from changes to sustainability-related laws that have emerged from the implementation of the previous Green Deal, such as the Directive on Sustainability Reporting (Corporate Sustainability Reporting Directive, CSRD), the EU Supply Chain Act (Corporate Sustainability Due Diligence Directive, CSDDD) and the EU Deforestation Regulation (EUDR), to name but a few. In this environment, does it even make sense to continue focusing on sustainability?

Desire for stability

Stable legal and economic conditions are usually seen as a key locational advantage for the economy. Of course, the opposite is also true. From a macroeconomic perspective, uncertainty is not exactly a growth driver. Of course, not every uncertainty can be resolved single-handedly. However, IW Director General Hüther recently criticised in the heute journal, a German news program, that the German economy lacks planning security for a green transformation and that there are investment brakes that need to be removed (see here: Hüther: "Müssen uns Klimaschutz leisten"). Of course, there is no consensus on whether climate protection is a competitive advantage or exactly the opposite. All of this is open to political debate.

The decision-making criteria for companies and their management

This does not help companies at all at present. So what can be done? Managers are not politicians. Their actions are subject to clear legal guidelines.This can certainly help here. The general diligence requirements for board members and managing directors are regulated in Section 93 of the German Stock Corporation Act (AktG) and Section 43 of the German Limited Liability Companies Act (GmbHG) (largely identical in content). According to Section 93 AktG, board members must "exercise the care of a prudent and conscientious manager in their management of the company". And further on it says that they should make business decisions "on the basis of adequate information for the benefit of the company". Being guided solely by political trends can prove problematic in this context. It is also inadvisable to make decisions based on sweeping judgements.

Rather, it is advisable to create an appropriate basis for decision-making and, building on this, to make commercially justifiable decisions. This means that board members and managing directors should give appropriate consideration to all aspects that are objectively relevant to the specific situation. Otherwise, in the event of an unfavourable development of the company, there is a risk of allegations of breach of duty and, as the case may be, personal liability of the managers for damages incurred. Regardless of the sustainability laws currently under discussion, all sustainability aspects that are relevant to the company in question in the respective decision-making situation should thus also be taken into account in the decision-making process (see Walden, NZG 2020, 50 et seq. for details: "Corporate social responsibility: rights, obligations and liability of the board of directors and supervisory board"). Of course, board members and managing directors are not expected to have magical abilities. If uncertainties cannot be clarified further, they must make upcoming decisions – as usual – under conditions of uncertainty.

Appropriate consideration of sustainability aspects continues to be sensible

Dismissing sustainability aspects as insignificant from the outset in view of current political developments could therefore prove to be a dangerous bias. This is evidenced, for instance, by the fact that the banking supervisory authority continues to regard ESG risks as a challenge to the security and stability of banks. Thus, it considers it necessary for banks to (also) take these risks into account in their risk management. It stands to reason that this also makes sense for companies in the real economy, not least because the measures taken by banks have a foreseeable impact on their customers – the companies in the real economy. Companies should consider this when making decisions. The same applies to the identification and exploitation of opportunities that may arise for the company in connection with sustainability. This is also reflected in the sustainability-related recommendations of the German Corporate Governance Code (DCGK) which remain relevant today and which the vast majority of DAX, MDAX and SDAX companies comply with, as evidenced by their declarations of conformity (see our blog post Nachhaltigkeit ist out! Oder doch nicht? Ein Faktencheck. | ADVANT Beiten). It therefore makes perfect sense, for instance, to make internal efforts to "understand the financial effects on the undertaking over the short- medium- and long-term of risks and opportunities arising from the undertaking's impacts and dependencies on climate change " (to quote one of the objectives set out in ESRS E1) – regardless of whether or not the company is required to report on this externally in accordance with CSRD. Incidentally, the EU insurance supervisory authority EIOPA already warned years ago about a concentration of sustainability-related liability risks among insurance companies and – similar to the banking supervisory authority in its area – called for appropriate risk management measures.

Compliance obligation on top

Furthermore, management is and remains obliged to comply with applicable laws – regardless of whether these are considered "good" or "bad". Compliance with applicable laws is not at the discretion of management and is thus particularly liability-sensitive. Management should also keep an eye on the risks arising from legal uncertainties, especially in the area of sustainability. This applies not only to new sustainability laws (e.g. the above-mentioned European legal acts, as soon as and to the extent that they apply) but also to general legal norms that also apply to sustainability-related issues (see, for example, our blog post Climate Change Litigation Update: Are Companies Liable for CO₂ Emissions? | ADVANT Beiten), and finally also sustainability-related contractual agreements.

Conclusion: Balancing short-term and long-term considerations

In the end, decision-making in times of uncertainty remains particularly complex. However, a systematic approach to problem-solving based on proven methods, as ultimately suggested by the diligence requirements applicable to management, is helpful. In other words: Understand the problem accurately, break it down into its constituent parts, gather the relevant information and arrive at a synthesis based on an assessment and weighting. In our view, it is particularly important (and equally challenging) to find an appropriate balance between short-, medium- and long-term aspects, i.e. to reconcile "today" and "tomorrow" as well as possible.

Dr Daniel Walden
Jole Inserra
Dr Andé Depping

Statement of accounts 2024 of the BAFA

The BAFA has published its current Statement of Accounts 2024 on the LkSG (as of: October 2025) (BAFA - Overview - Statement of Accounts). In its report on the audits completed in 2024, it states "that most companies take their due diligence obligations under the LkSG extremely seriously and can demonstrate good to very good implementation." The "willingness to cooperate shown by the companies audited in each case" should be particularly emphasised. In 2024, the BAFA therefore initiated administrative fine proceedings only in "a few exceptional cases". However, the BAFA "did not evaluate or review in detail" the companies' reports on the fulfilment of their due diligence obligations pursuant to section 10 (2) LkSG in 2024, insofar as such reports were submitted at all. Background: In spring 2024, the BAFA had announced to review the availability of these annual reports for the first time as of 1 January 2026.

Immediate facilitations for addressees of the LkSG

In addition, a reference to "simplifications for companies in the Supply Chain Act" can be found on the website of the BAFA concerning the LkSG (BAFA - Overview) since 1 October 2025. The corresponding draft bill to amend the LkSG (more on this below) has not yet been passed through parliament. Nevertheless, the BAFA already announced that the audit of LkSG reports (already postponed until the beginning of 2026) will be discontinued with immediate effect. Furthermore, due to the lapse of the public interest in prosecution, all administrative offence proceedings relating to fines, which are to be deleted under the current draft bill, are to be discontinued. In view of the small number of administrative fine proceedings initiated to date (see above), this will not affect many companies but will certainly provide relief.

Reduction of the number of addressees of the Act only with future implementation of the CSDDD

Otherwise, the LkSG remains unchanged for the time being. This applies both to the group of addressees of the LkSG (cf. section 1 LkSG, in brief, companies based in Germany with more than 1,000 employees in Germany) and to the due diligence obligations of the relevant addressees provided for in the LkSG. Amendments in this regard are only expected in connection with the transposition of the European Corporate Sustainability Due Diligence Directive (CSDDD for short) into German law. This will presumably only take place once the revision of the CSDDD, among other things, which was initiated by the omnibus package on sustainability (see our blog post on this Omnibus Package on Sustainability: The Planned Amendments | ADVANT Beiten) has been completed. It is currently becoming apparent in the trialogue negotiations that the provisions of the CSDDD should in future only apply to companies with more than 5,000 employees and a worldwide turnover of more than EUR 1.5 billion. With the announced "seamless replacement" of the LkSG "by a law on international corporate responsibility that transposes the CSDDD into national law", the group of addressees of the Act in Germany is therefore likely to be considerably reduced in future. It is not yet clear exactly when this will happen. After setting a new deadline, the CSDDD is to be transposed into national law as of 26 July 2027 and has to be implemented as of 26 July 2028. Of course, even after such a transposition law came into force, many companies (especially European ones) would still be indirectly affected in their role as suppliers to companies subject to the CSDDD.

Continued compliance obligations for the time being and open question concerning benefits of the companies through implementing the LkSG

The LkSG thus remains applicable law for all previous addressees of the Act for the time being. It would therefore not be a good idea to disregard the LkSG now, even if the majority of the fines are deleted in the near future with the adoption of the LkSG Amendment Act as planned. On the one hand, inadequate fulfilment of the continuing LkSG due diligence obligations (such as refraining from a risk analysis) may trigger one of the remaining fines. On the other hand, and above all, the board of directors or management of the addressees of the LkSG are still (also) obliged to observe the provisions of the LkSG due to their general compliance obligation, irrespective of the deletion of the fines (see our blog post from December 2024 on the question: 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). 

Speaking of CSRD: According to the current status of the trialogue negotiations, companies with 1,000 employees and an annual turnover of EUR 450 million are likely to be obliged to submit sustainability reports in the future. In these reports, the respect for human rights in the supply chain, among other things, must also be reported. Although the planned simplification of the CSRD (Corporate Sustainability Reporting Directive) and of the ESRS (European Sustainability Reporting Standards) also promises simplifications in this respect, the basic reporting obligation remains unchanged in this respect. The topic of human rights in the supply chain will therefore not disappear completely from the "mandatory agenda" of most LkSG addressees in the future.

Apart from this, the question arises as to whether the implementation of the LkSG - and thus in particular the establishment of a human rights risk management system - has brought any benefits for the addressees in terms of content, apart from the high administrative costs, which are also due to the many uncertainties of the Act, and if so, what benefits? It would then be an obvious question for the companies that are likely to fall outside the scope of application in the future with the implementation of the CSDDD as to which of these benefits the company can and wants to maintain with reasonable effort - also with a view to the possibly continuing obligation to sustainability reporting in accordance with the CSRD.

More details on the Statement of Accounts 2024 of the BAFA

In 2024, the BAFA carried out a total of 851 ex officio audits, thereof 638 risk-based controls and 39 occasion-related audits. In addition, there were 314 processes from complaints and suggestions, of which 48 had an LkSG reference.

The focus was in particular on:

• determining the responsibility for risk management,
• establishing effective complaints procedures and
• first audits on the regular risk analysis and on the policy statement.

This revealed that many companies - particularly in the new size category of 1,000 employees or more - still faced challenges in the organisational separation of implementation and monitoring of human rights risk management and in the barrier-free design of complaints channels.

The occasion-related controls of the BAFA concerned, among other things:

• the transport sector (reasonable wage),
• the textile industry in Pakistan (child labour, occupational safety, freedom of association, unequal treatment, reasonable wage),
• the palm oil production in Central America (land grab, environmental offences) and
• the soybean cultivation in Brazil (land grab, environmental offences).

The BAFA names the following other countries affected: China, Germany, Morocco, Serbia, South Africa, Turkey and the USA.

Despite the increased audit activity of the BAFA, the number of sanctions in 2024 remained low:

• 18 administrative fine proceedings were initiated,
• 9 warnings were issued,
• no fines were imposed.

Backgrounds for the facilitations announced by the BAFA

It was already clear from the coalition agreement between the CDU, CSU and SPD that the "abolition" of the national LkSG announced there under the heading "Bureaucracy reduction" was to take place in two steps: (1) Immediate abolition of the reporting obligation under the LkSG and no sanctioning of the applicable due diligence obligations (with the exception of massive human rights violations), (2) Replacement of the LkSG in the course of implementing the European Corporate Sustainability Due Diligence Directive (CSDDD) with a "law on international corporate responsibility" (cf. Coalition Agreement-2025-1.pdf, there lines 1909 et seq.).

To implement the first step, on 3 September 2025, the German Federal Government presented the "Draft Act to Amend the German Supply Chain Due Diligence Obligations Act - Relieving the burden on companies through application and enforcement-friendly implementation" (see Act Amending the German Supply Chain Due Diligence Obligations Act - BMAS). According to this, the annual reporting obligation pursuant to section 10 (2) LkSG - which had previously been effectively postponed until the end of 2025 by the BAFA's announcement - will no longer apply with retroactive effect from 1 January 2023. In future, only those breaches of duty that the legislator has deemed to be particularly serious under the LkSG will be subject to a fine, i.e.:

• violations of the obligation to take preventive measures (section 6 (1) LkSG),
• violations of the obligation to take remedial measures (section 7 (1) sentence 1) and to develop concepts (section 7 (2) sentence 1 and section 9 (1) LkSG),
• violations of the obligation to establish a complaints procedure (section 8 (1) sentence 1 and section 9 (1) LkSG).

Even in these cases, the imposition of fines should be the last resort (cf. RefE, justification for Art. 1 number 6). The provision on increased fines for legal entities in section 24 (3) LkSG is apparently to remain in place - apart from consequential changes to the offences for which fines are imposed.

According to a press release of 26 September 2025, the Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie, BMWE) in coordination with the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales, BMAS) has instructed the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) to "exercise restraint with regard to the Supply Chain Act" (BMWE - Immediate relief for companies - BMWE instructs BAFA to exercise restraint with regard to the Supply Chain Act). This instruction might be the reason for the current information on the website of the BAFA. sein.

Dr. Daniel Walden
Jole Inserra
Dr. André Depping

Climate lawsuits against companies: Status quo

In Germany at least, there are still no legally binding court rulings on the liability of companies for damage caused by climate change that could be generalised. And, to date at least, this issue is also separate from the new sustainability laws (LkSG, CSRD, CS3D, Deforestation Regulation, Ecodesign Regulation, etc.). Rather, the question still needs to be clarified: Can CO₂ emitters be held liable for climate damage under general civil law principles? It is even more unclear what consequences such liability on the part of the company would have for the liability of board members and supervisory board members or managing directors, and to what extent there would be cover for this under the relevant liability insurance policies.

The RWE case before the Hamm Higher Regional Court

One prominent example is the case brought by Peruvian farmer Saúl Luciano Lliuya against RWE. After almost ten years, the Hamm Higher Regional Court dismissed the case at second instance in May 2025. Media reports emphasised that the court considered the fundamental responsibility of large CO₂ emitters for the consequences of climate change to be obvious. However, the lawsuit failed in the end due to the circumstances of the individual case.

The dismissal of the action can thus not be generalised. On the contrary, the Hamm Higher Regional Court's decision is also not a blueprint for new climate lawsuits. A closer look reveals that the Higher Regional Court of Hamm has left central questions unanswered and has taken legal positions that even create new uncertainties. Hence, there can be no question of clarifying the question of liability. Details on this can be found in my (German language) article: "Tidal wave ahead? What Lliuya vs. RWE means for CO₂ emissions, liability and D&O, corporate liability and human rights violations" (ZIP 2025, p. 2218 et seq.).

What remains is legal uncertainty - also internationally

Essential questions regarding liability and coverage thus remain unresolved. This applies not only to Germany but also to other legal systems. This is also relevant for German companies (and vice versa) because in cross-border situations such as climate change, the first question that arises is: Which national law is applicable at all? In the RWE case, the Higher Regional Court of Hamm applied German law because the parties were in agreement on this and there was thus a binding choice of law. However, this will not be the case in every instance.

Parallels: Holcim lawsuit in Switzerland

A case in Switzerland raises similar questions: Residents of the Indonesian island of Pari are suing the Swiss cement company Holcim. They hold Holcim responsible for rising sea levels and the resulting threat to their livelihoods. The plaintiffs are demanding from Holcim:

• Compensation for loss of income (e.g. tourism),
• a reduction in CO₂ emissions,
• financing of protective measures (the Peruvian farmer Lliuya had also demanded this from RWE).

As with the lawsuit against RWE, NGOs are also supporting the plaintiffs here and attracting media attention. According to German broadcasting news platform „Tagesschau“, Holcim referred to the competence of the legislator in a statement when asked by the German news agency dpa: "In our opinion, who is allowed to emit how much CO₂ is a competence of the legislator and not a question for a civil court." This assessment is probably based on the following key question.

The key question: Where does liability begin - where is the threshold?

The Indonesian islanders point out that, according to the "Carbon Majors" database, Holcim is one of the largest historical CO2 emitters in the world. The Peruvian farmer Lliuya also pointed out that RWE is one of the largest historical CO2 emitters worldwide. However, compared to RWE, Holcim is likely to have caused lower CO2 emissions due to its industry and is therefore further down the "ranking list" of "carbon majors". This leads to the interesting question: At what point is a company (jointly) liable for the consequences of climate change due to its CO2 emissions? Does it only include the top 10, the top 100, or even more major CO2 emitters? The only thing that seems to be clear is that liability ‘from everyone against everyone’ cannot be reasonable in any way. The Higher Hamm Regional Court has also clearly rejected such liability for every small or large CO2 emitter. However, the Hamm Higher Regional Court has not defined a precise threshold at which such liability should be considered.

Conclusion: It is now up to the legislator

The actual reason for this is that general civil law apparently does not provide any clear guidance on where such a liability threshold should ultimately be set. The historical legislator did not think about climate change (which was not even known at the time) and its consequences and the resulting question of liability. In our abstract legal system, this does not fundamentally prevent us from subjecting circumstances that were not apparent in the past to legal assessment. However, the phenomenon of climate change and its consequences is so special that there are obviously no other constellations that can in fact be compared with it. The usual legal toolbox thus reaches its limits here.

And this is precisely where we come full circle to Holcim's press statement. After all, if it is not possible to reliably determine from the applicable general civil law when CO2 emissions give rise to liability, then it would obviously be up to the legislator to set such thresholds in the first place.

In Switzerland, however, the first question is whether the Indonesian plaintiffs are even allowed to sue in Swiss courts. The development remains exciting.

First of all: BAFA's explanations are not a law, but the legal opinion of the supervisory authority, which may not always be correct. It is therefore worth seeking expert advice when you are confronted with requests for information from BAFA as the addressee of the Supply Chain Act in order to set the right priorities. This is all the more important in view of the new reporting channel created by BAFA for suppliers feeling that they are being treated inappropriately by those bound by the Act. It would almost be a miracle if this new reporting channel, which can be used anonymously, did not lead to a large number of incident-related enquiries from BAFA to the addressees of the LkSG. But more on that further below.

According to BAFA, the FAQ paper is primarily meant to 'complement' the guidances on risk analysis, on collaboration in the supply chain and on appropriateness (BAFA - Guidances) with the aim of 'explaining how companies can effectively implement their due diligence obligations'. Whether BAFA has actually achieved this goal with the FAQ paper is a matter of personal judgement. The new FAQ paper clearly builds on the existing guidances, in particular on collaboration in the supply chain, so that companies subject to the obligations will find much familiar information in it.

• Companies are expected to obtain an overview of their suppliers, identify risks using an abstract risk analysis based on general sources and only then, if necessary, examine the risks so identified in detail with the suppliers concerned.
• Companies are to prioritise those risks on the basis of the appropriateness criteria and do not need to address all risks.
• Companies cannot simply replace the risk analysis by referring to contractual assurances or corresponding certificates of risk-free supply chains from suppliers.
• Suppliers not included in the 'general risks' identified during the abstract risk analysis of the company's supply chain do not need to be examined in the detailed risk assessment.
• General and indiscriminate enquiries to a supplier not falling within the identified general risks are inappropriate.
• Confronting suppliers with prevention measures such as training, contractual obligations or codes of conduct on an indiscriminate basis, regardless of the identified risk exposure, may be deemed inappropriate and generally ineffective by BAFA.

BAFA's desire to protect SMEs, as those indirectly affected by the LkSG, from unreasonable efforts is evident. However, BAFA is also emphasising the advantages for the actual addressees of the Act: they have much leeway in deciding which risks to tackle first, which measures make sense and which (high-risk) suppliers to focus on. They can and should prioritise. The LkSG does not stipulate a specific minimum or maximum number or a specific percentage. It is also an advantage for the addressees of the Act to have to deal with a much smaller number of supplier responses.

That is certainly true in principle. In reality, it is not uncommon for large companies to have more than 10,000 direct suppliers. The abstract risk analysis alone requires much effort here and even if abstract risks were identified for only 10% of these direct suppliers, it would still be an almost insurmountable mammoth task to examine the abstract risks in concrete terms and, if specific risks were identified, to agree individually customised preventive measures with hundreds of direct suppliers, as BAFA apparently expects according to the guidance and the FAQ paper. BAFA emphasises that companies should deploy their resources in a targeted manner but leaves it open which resources the business must use in order to be able to fulfil the mammoth task of a specific, individualised approach. As though this were not enough work, BAFA also states that companies should, as a rule, favour direct contact with those indirect suppliers in the deeper supply chain who are most likely to pose risks given the results of the risk analysis. Any company that has ever tried to contact raw material producers outside Europe across several stages of the supply chain knows that this is more of an adventure than part of normal business. That is, if you get the contact details of the indirect supplier at all. In its guidance on risk analysis, BAFA stated that companies are 'encouraged' to 'successively endeavour to increase transparency in the supply chain'. Although this sounds sensible at first, it leaves essential questions unanswered, for example as to the legal basis for the requirement and the scope of the successive endeavours that may be required.

What does all this mean for the addressees of the LkSG? Suppliers for which no risks are apparent when analysing industry and origin should not be bothered with questionnaires or codes of conduct. This is certainly a relief. Beyond that, however, it becomes difficult to give a recommendation. We believe that the key must unavoidably be the depth of the specific risk analysis and a strict prioritisation of a handful of truly relevant risks that the company can realistically tackle with the ambition and expectation of improving the situation. Wait, wasn't that actually the aim of the LkSG? Extensive organisational work with questionable benefits in terms of the rights to be protected by the Act certainly was not.

The FAQ paper also fails to explain how to sensibly proceed as suggested. Instead, when considering specific risks, the paper simply states that it is 'at the discretion of the company to choose an appropriate and effective method for obtaining information when determining the risks'. General and indiscriminate enquiries to a supplier beyond the identified general risks would not count as such. What would? General and indiscriminate enquiries to all suppliers within an identified general risk area? Or even asking individualised, specific questions to all suppliers within the general risk areas? Encouraging the addressees of the Act to limit themselves to realistically manageable queries and data volumes with a view to the aforementioned objective should clearly look different. A modular system for questionnaires might be an option, from which only certain modules will be used, depending on the industry and region of origin, once the suppliers have been clustered according to abstract risks. But even then, the company is likely to be confronted with a substantial data volume as a result. But what for if only a few priority risks will be left for the subsequent prioritisation anyway?

More trouble is looming when it comes to preventive measures. It is our belief that companies should continue to agree supplier codes of conduct, which are used by most of the addressees of the Act and beyond, at least with their high-risk suppliers. Customisation does not appear to be practical or necessary in this respect, even though BAFA apparently takes a different view. Standardised supplier codes of conduct were used in the market long before the LkSG came into force and were widely recognised as being effective. What exactly should be unreasonable or inappropriate about obliging your direct suppliers to respect fundamental human rights? After all, BAFA has not (yet?) challenged companies' internal practice of having employees sign a code of conduct with comparable obligations as being inappropriate. It is clear, however, that the supplier code of conduct must not go beyond the intended purpose and impose duties of care on suppliers that have originally been imposed only on the addressees of the Act, such as the implementation of a risk management system, in particular for the purpose of communicating the results of the risk analysis to the client/addressee of the Act or a complaints procedure. How the agreement of a customised supplier code of conduct is to be successfully agreed on an ad hoc basis in an ongoing contractual relationship as a preventive measure for identified specific risks relating to a supplier, and what the advantage is compared to an abstract general commitment to essential human rights, remains BAFA's secret.

Yet, BAFA also uses the FAQ paper to announce the key topic for the next inspections of companies: from now on, it will pay particular attention to the implementation of the risk-based approach by companies in its inspections and sanction any infringements. 'Anyone who fails to take a risk-based approach or who attempts to pass on their due diligence obligations to other companies is neither acting adequately nor acting effectively on a systematic basis and is therefore not fulfilling their own obligations.'

And it gets even better: Suppliers who are contacted by a contractual partner bound by the LkSG on a blanket and non-risk-related basis can now report this to BAFA (also anonymously) at the following contact address: LKSG.Kontrolle@bafa.bund.de. BAFA may use such information to initiate an audit by sending a written request for information to the company. Disputes with suppliers over the completion of standardised questionnaires and excessive codes of conduct may therefore fall back badly on the addressee of the Act in the form of a request for information from BAFA. The problem is that not every tip-off from a supplier is automatically justified.

Although the information provided by BAFA in the guidances and FAQs, as already said, is not legally binding and no court rulings have been handed down on the issues raised, it is unpleasant enough for companies to have to undergo intensive investigations by BAFA and to possibly be fined, even if the decision is later revoked by a court.

But it does not have to come to that. At least the last sentence in BAFA's FAQs sounds reasonable for the addressees of the Act: 'BAFA will appropriately consider plausible presentations of the risk-based approach with a view to the company’s efforts to meet the corporate due diligence obligations.' This means that companies know what they have to do, at least in principle: if they have not already done so, they should document and implement a coherent concept in which, based on the risk analysis, a large part of their suppliers remain unaffected and suppliers with clearly identified risks are required to comply with a moderate supplier code of conduct and, where necessary, are subjected to additional preventive measures such as targeted training and checks.

Dr André Depping
Dr Daniel Walden

The first omnibus package contains the following steps:

• Make sustainability reporting more accessible and efficient  (relates to the Corporate Sustainability Reporting Directive – CSRD, more on it below)
• Simplify due diligence to support responsible business practices  (betrifft die Corporate Sustainability Due Diligence Directive – CSDDD bzw. CS3D, more on it below)
• Strengthen the carbon border adjustment mechanism for a fairer trade 
• Unlock opportunities in European investment programmes

For details see: Commission proposes to cut red tape and simplify business environment - European Commission

The individual steps are described more precisely on the linked pages. Regarding the first two steps, the EU Commission emphasises the following:

„Making sustainability reporting more accessible and efficient 

Specifically, the main changes in the area of sustainability reporting (CSRD and EU Taxonomy) will:

• Remove around 80% of companies from the scope of CSRD, focusing the sustainability reporting obligations on the largest companies which are more likely to have the biggest impacts on people and the environment;
• Ensure that sustainability reporting requirements on large companies do not burden smaller companies in their value chains;
• Postpone by two years (until 2028) the reporting requirements for companies currently in the scope of CSRD and which are required to report as of 2026 or 2027.
• Reduce the burden of the EU Taxonomy reporting obligations and limit it to the largest companies (corresponding to the scope of the CSDDD),  while keeping the possibility to report voluntarily for the other large companies within the future scope of the CSRD. This is expected to deliver significant cost savings for smaller companies, while allowing businesses that wish to access sustainable finance to continue that reporting.
• Introduce the option of reporting on activities that are partially aligned with the EU Taxonomy, fostering a gradual environmental transition of activities over time, in line with the aim to scale up transition finance to help companies on their path towards sustainability.
• Introduce a financial materiality threshold for Taxonomy reporting and reduce the reporting templates by around 70%.
• Introduce simplifications to the most complex “Do no Significant harm” (DNSH) criteria for pollution prevention and control related to the use and presence of chemicals that apply horizontally to all economic sectors under the EU Taxonomy – as a first step in revising and simplifying all such DNSH criteria.
• Adjust, among others, the main Taxonomy-based key performance indicator for banks, the Green Asset Ratio (GAR). Banks will be able to exclude from the denominator of the GAR exposures that relate to undertakings which are outside the future scope of the CSRD (i.e. companies with less than 1000 employees and €50m turnover).

Simplifying due diligence to support responsible business practices

The main changes in the area of sustainability due diligence will:

• Simplify sustainability due diligence requirements so that companies in scope avoid unnecessary complexities and costs, e.g. by focusing systematic due diligence requirements on direct business partners; and by reducing the frequency of periodic assessments and monitoring of their partners from annual to 5 years, with ad hoc assessments where necessary.
• Reduce burdens and trickle-down effects for SMEs and  and small mid-caps by limiting the amount of information that may be requested as part of the value chain mapping by large companies;
• Further increase the harmonisation of due diligence requirements to ensure a level playing field across the EU;
• Remove the EU civil liability conditions while preserving victims' right to full compensation for damage caused by non-compliance, and protecting companies against over-compensation, under the civil liability regimes of Member States; and
• Give companies more time to prepare to comply with the new requirements by postponing the application of the sustainability due diligence requirements for the largest companies by one year (to 26 July 2028), while advancing the adoption of the guidelines by one year (to July 2026).“

For details see: Commission simplifies rules on sustainability and EU investments

The proposals that have just been published will now have to be analysed more closely.

Please note: These are proposals for legislation by the EU Commission. The Commission has announced that it will submit these proposals to the European Parliament and the Council for examination and decision-making. So it remains to be seen when and with what specific content the EU Commission's proposals will ultimately be adopted.

Dr Daniel Walden
Dr André Depping

The underlying analysis by Commission President Ursula von der Leyen at a press briefing is interesting: "Our business model has basically relied on cheap labor, from China presumably, cheap energy from Russia and partially outsourcing security and security investment. These days are gone."

The consequence of this: the EU Commission's plans for the three core areas of action: innovation, decarbonization and security, which are based on the recommendations of the Draghi report and described in more detail in the Compass. The Commission's aim is to make Europe the place where tomorrow's technologies, services, and clean products are invented, produced and marketed, while staying on course for climate neutrality. The Compass thus provides a first perspective on the question of whether the ESG topic is facing an end in light of the current political developments in the EU (for some basic thoughts on this, see our blog post Is this the End for ESG? | ADVANT Beiten). At least from the perspective of the compass, it appears rather unlikely that the transformation of the economy as such will be put on hold for the time being.

What is obviously set to change significantly, however, are the means: In the Compass, the EU Commission describes five so-called "horizontal enablers for competitiveness" with which it intends to achieve its goals in the three pillars of innovation, decarbonization and security. The first enabler, "simplification", is particularly relevant from a regulatory perspective, as it aims to drastically reduce regulatory and administrative burdens. This simplification is complemented by the reduction of barriers to the Single Market, the idea of a "European Savings and Investment Union" to finance the whole project, the promotion of skills and quality jobs and better coordination of policies at EU and national level.

The aspect of simplification mentioned in the Compass obviously requires a fundamental change. The EU Commission itself wants to make progress here and has already announced a first series of "Simplification Omnibus packages" for February 2025. One - and also the first - omnibus is to cover far-reaching simplification in the fields of sustainability finance reporting, sustainability due diligence and taxonomy. This refers to the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Taxonomy Regulation. The EU Commission had already announced facilitations in this regard following the Budapest Declaration on the "New European Competitiveness Deal" last fall. According to the agenda for the upcoming Commission meeting on February 26, 2025, Commission President Ursula von der Leyen herself is now responsible for the corresponding agenda item "Omnibus package: Chapeau communication and omnibus proposal" alongside Vice-President Stéphane Séjourné. This may reflect the political importance of this project and the many demands made on it (e.g. by the EPP as well as the German and French governments).

A first indication of the content of this "first omnibus" can already be found in the Compass: In order to ensure that regulation is proportionate to the size of the company, the EU Commission intends to propose a definition for a new category of company, the so-called "small micaps". These are to be companies that are larger than SMEs but smaller than large companies. The EU Commission announces that "thousands of companies in the EU will benefit from a tailored regulatory simplification in the spirit as SMEs". This could mean that the scope of application of the CSRD, which currently includes all large corporations as defined in Section 267 (3) of the German Commercial Code (HGB) from January 1, 2025, will be narrowed accordingly.

What does this mean for companies? As a rule, the implementation of the announced simplifications by the respective legislator alone will not be sufficient. In a second step, these simplifications will have to be implemented by the individual companies. The extent to which the processes set up by the respective company can and should be adapted in a meaningful way will have to be examined. The mere removal of a legal requirement does not automatically render an established process obsolete. To illustrate: If, for example, the obligation of the management board of a listed stock corporation to establish an appropriate internal control system (ICS) and risk management system (RMS), which was included in Section 91 (3) of the German Stock Corporation Act (AktG) in the wake of the Wirecard scandal, were to be repealed, it would be unwise to immediately abolish the ICS and RMS completely. However, it remains useful and necessary to keep an eye on what regulatory simplifications will result from the changes announced by the EU Commission over time, and how these can then be translated into corresponding simplifications in internal processes. Companies would have more room for maneuver, at least as long as it is ensured that decisions can be made on the basis of appropriate information, including ESG aspects where relevant. It therefore seems unlikely that ESG issues will cease to play a role for companies. On the contrary, the transformation of the economy and the resulting opportunities and risks for the business models of almost all companies remain on the agenda.

Dr Daniel Walden
Dr André Depping

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

The year 2025 will be at least as dynamic as the years before when it comes to energy law. It remains unclear what impact the upcoming elections in February and the changing geopolitical situation will have on the direction and objectives in the energy sector. The following is a brief overview of what is already known to be introduced in 2025.

1. Obligation for meter operators to install smart metering systems pursuant to section 34 (2) sentence 1 no. 1 of the German Metering Point Operation Act (Messstellenbetriebsgesetz, MsbG)

As from 2025, every household may receive a digital electricity meter. Essentially anyone with an annual electricity consumption of more than 6,000 kWh, solar systems with an output of more than 7 kW and/or controllable heat pumps is eligible. Starting at the beginning of this year, metering point operators are obliged to equip, on request, metering points and submeters installed in a customer system and not requiring accounting with 15-minute smart metering systems (pursuant to section 2 no. 7 MsbG) earlier, but beware, the term 'customer system' has been fundamentally called into question by the ECJ ruling of 28 November 2024 (Case C-293/23) (you can read about this in our article in the December 2024 issue of the newsletter Focus on the Public Sector (available in German only)). The installation of smart meters used to be voluntary but is now mandatory within four months of being commissioned. This is another step in the 'smart meter rollout' announced by the legislature, which has made only slow progress in recent years.

2. Obligation for electricity suppliers to offer dynamic electricity prices pursuant to section 41a (2) of the German Energy Industry Act (Energiewirtschaftsgesetz, EnWG)

From 1 January 2025, all electricity suppliers will be obliged to offer end consumers electricity contracts with dynamic electricity rates, provided these consumers have smart meters. According to section 3 no. 31d EnWG, dynamic rates mean they that reflect the price fluctuations of the energy exchange. This allows end consumers to be flexible in their consumption of electricity and optimise it to coincide with periods of low electricity prices. Electricity suppliers must furthermore comprehensively inform their customers about the dynamic rates and offer information about the installation of a smart metering system.

3. Obligation for electricity suppliers to guarantee a change of supplier within 24 hours

Under ruling BK6-22-024 of the German Federal Network Agency (Bundesnetzagentur), electricity suppliers will be obliged as of 4 April 2025 to guarantee an accelerated change of supplier within a maximum of 24 hours on every working day if end consumers wish to do so.

4. Obligation for system operators to guarantee marking and lighting of wind turbines at night pursuant to section 9 (8) of the German Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG)

From 1 January 2025, onshore wind turbines must be equipped with aircraft detection lighting systems (ADLS) where this is required under aviation law. If system operators fail to comply with this obligation, they will have to make payments to the grid operator in accordance with section 52 (1) no. 3 EEG.

5. Increased CO2 price for end consumers pursuant to section 10 (2) sentence 2 no. 5 of the German Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz, BEHG) 

On 1 January 2025, the price per emissions certificate in national emissions trading will increase to EUR 55. With the higher CO2 price, the legislature wants provide incentives for end consumers to switch to low-CO2 or even CO2-free technologies. This marks the beginning of the last year of the fixed-price phase, in which the price of an emissions certificate is determined by law. From 2026, the price of an emissions certificate will be determined by auction, similar to the European emissions certificate trading system. A price corridor will limit the price of a certificate to range between EUR 55 and a maximum of EUR 65 in 2026.

6. Obligations for owners of combustion plants after the expiry of the transitional provisions in the German Federal Immission Control Regulation (Bundesimmissionsschutzverordnung)

The Federal Immission Control Regulation stipulates that owners of furnaces burning wood, coal and other solid fuels are obliged to adhere to specified carbon monoxide and particulate matter limits. The last transition period for compliance with these requirements ended on 31 December 2024. Owners of a furnace not meeting these legal requirements must make the necessary adjustments or take the furnace out of operation if these requirements cannot be met. Anyone who fails to do so will face fines.

7. Obligations for developers and owners regarding building automation pursuant to section 71a of the German Building Energy Act (Gebäudeenergiegesetz, GEG)

If a heating system or a combined heating or air conditioning and ventilation system with a rated output of more than 290 kilowatts is installed in a non-residential building, this non-residential building must be equipped with a building automation and control system as from 1 January 2025. The requirements for this digital energy monitoring technology are listed in section 71a (2) and (3) GEG. According to the legislature, building automation helps adjust operating times or prevents simultaneous heating and cooling. This Act transposes Article 14 (4) and Article 15 (4) of Directive (EU) 2024/1275 (EPBD).

8. Expiry of the innovation clause (section 103 GEG)

The innovation clause allows owners and developers to apply (usually with the lowest building authority and until 31 December 2025) for an exemption from certain requirements of the GEG on the basis of using innovative solutions. For the time being, this technology-neutral approach has been extended until the end of the year. Given the current, uncertain political situation, however, especially with regard to the GEG, it is impossible to say whether a further extension can be expected. It could therefore be worthwhile for project developers to start implementing innovative projects as early as 2025 and apply for an exemption under section 103 GEG.

9. Waste heat reporting obligation for companies under section 17 (2) of the German Energy Efficiency Act (Energieeffizienzgesetz , EnEfG)

Companies must report data on their waste heat quantities to the Federal Agency for Energy Efficiency (Bundesstelle für Energieeffizienz) for the first time on or before 1 January 2025. From this year onwards, such reports must be submitted every year on or before 31 March. Therefore, companies who report data on their waste heat quantities for the first time in 2025, will have to file two reports in 2025. This obligation applies to companies with a total annual energy consumption of more than 2.5 GWh within the past three years. Anyone who fails to comply with this reporting obligation could be liable to a fine, see section 19 (1) no. 9 EnEfG. This reporting obligation is meant to support mainly district heating network operators and other heat consumers: they will be able to view potential sources of waste heat in order to leverage any efficiency potential. Companies must reuse their waste heat to save energy to the extent this is possible and reasonable.

10. Rulings of the German Federal Network Agency; industrial grid charges and grid capacity

With its key issues paper of 24 July 2024, the Federal Network Agency (Bundesnetzagentur, BNetzA) initiated a reform of industrial grid fees. A new ruling of the BNetzA is meant to create new incentives for electricity-intensive companies. To make this possible, the band load privilege is to be abolished. The purpose of the band load privilege is to provide incentives for electricity-intensive end consumers to keep constant base loads.

In addition, the BNetzA has initiated a procedure to create uniform standards for the allocation of grid capacity above low-voltage level. The relevant consultation process ended on 31 December 2024, meaning that the BNetzA is expected to make a decision in 2025.

Dr Malaika Ahlers
Anton Buro

The LkSG, which was passed in 2021 by the grand coalition government of the time and deals with companies' obligations to protect human rights, has now been in force for almost two years. Nevertheless, it once again is the subject of many a political debate. Mostly in connection with the topic of red tape and red tape reduction. One could almost get the impression the LkSG had been identified as the main cause of the German economy's problems and that everything would be fine once it was removed. It was suggested that the LkSG 'had to go' (Federal Chancellor Olaf Scholz). There was even talk of chain saws to 'cut away' the Act (Economics Minister Habeck). Beyond the pithy political statements, however, there was some confusion as to the details of what should actually be implemented and how. The 'growth initiative' of the traffic-light coalition initiated in the summer of 2024, which is now a thing of the past, could certainly be understood to merely restrict the scope of the LkSG's application (see Initiative for Growth of the Federal Government of 5 July 2024). According to this initiative, only those companies that must be registered under the requirements of the CSDDD as of 2027 should be subject to the LkSG. In 2028 and 2029, the LkSG's application should then be expanded again in line with the requirements of the CSDDD.

The growth initiative also referred to the fact that the law on the implementation of the Corporate Sustainability Reporting Directive (CSRD) planned for the second half of 2024 would remove the specific reporting obligation set out in the LkSG for companies that prepare a sustainability report in accordance with the CSRD. The corresponding draft bill of the German government was submitted to the Bundestag, the German parliament, in September 2024 (see BT-Drs. 20/12787 (available only in German)). Although the EU Commission has already initiated infringement proceedings against Germany for not having transposed the CSRD into national law in Germany in time (i.e. by June 2024), it is unclear whether this bill will still be passed in the current legislative period after the German traffic-light coalition has failed. This has unpleasant consequences for all those companies that have prepared themselves to produce a mandatory sustainability report in accordance with the CSRD for the first time for the 2024 reporting year. As the CSRD reporting obligation can probably no longer be introduced retroactively for the 2024 reporting year in 2025 (at least according to the IDW in a newsletter to its members dated 14 November 2024 (only available in German)), companies may have to re-plan at short notice and submit a 'non-financial report' again for 2024 to comply with the still existing legal situation. This would render companies' extensive preparations for CSRD reporting obsolete for the time being. Also, the originally planned liberation from parallel reporting under the German LkSG would not materialise either, with the result that these companies would have to prepare an LkSG report for 2024 in addition to the non-financial report. This 'back and forth' is highly unlikely to generate any enthusiasm in corporate circles. 

The Bundestag is now once again addressing the issue of a complete abolition of the LkSG, after a draft by the CDU/CSU parliamentary group for a 'Supply Chain Due Diligence Obligations Cancellation Act' ('Lieferkettensorgfaltspflichtenaufhebungsgesetz') (BT-Drs. 20/11752 (available only in German)) failed only two months ago (in October 2024) due to the opposition of the former traffic-light coalition, after the AfD parliamentary group's attempt had been unsuccessful in early 2024. Following the end of the traffic-light coalition, the CDU/CSU parliamentary group has reintroduced a draft for a 'Supply Chain Due Diligence Obligations Cancellation Act' ('Lieferkettensorgfaltspflichtenaufhebungsgesetz') (BT-Drs. 20/14015 (available only in German)). And now that it has left the Federal Government, the FDP parliamentary group has also introduced a draft bill to repeal the LkSG with the meaningful name 'Supply Chain Freedom from Bureaucracy Act' ('Lieferkettenbürokratiefreiheitsgesetz') (BT-Drs. 20/14021 (available only in German)). The drafts were discussed in the Bundestag in first reading on 5 December 2024 and referred to the relevant committees (for more details see German Bundestag - discussion of drafts to repeal LkSG (available only in German)). It will be interesting to see the outcome of these two current drafts within the short time left of the legislative period, and of the draft CSRD Implementation Act (CSRD-Umsetzungsgesetz), which is already slightly more advanced in the legislative process, (and the numerous other ongoing legislative procedures). 

Even if, in our experience, most of the companies affected have basically come to terms with the LkSG, upgraded their personnel and implemented the necessary due diligence measures, a very dangerous potential earthquake fissure is opening up in day-to-day business. Driven by current political statements, the view that the LkSG does not need to be taken so seriously (any more) is evidently growing at management level. After all, it has already been announced at the highest level that the LkSG is 'going away', especially as there seems to almost be a rare cross-party consensus on this. The situation with the LkSG is, however, somewhat different to that relating to the CSRD Implementation Act. This is because sustainability reporting in accordance with the CSRD still has to be transposed into national law; there will be no mandatory sustainability reporting before then. The LkSG, on the other hand, has been national law for some time, with the result that the addressees of the regulations must fulfil the human rights and environmental due diligence obligations set out therein. And this will remain the case, regardless of the current political discussion, until the Bundestag has passed a law to repeal the LkSG and such law has come into force. However, for the reasons outlined above, it is uncertain whether this will happen in the short term.

For the management, the LkSG will therefore remain part of their general compliance obligations until further notice. In other words, the management is responsible for ensuring that the laws applying to the company (including, for the time being, the LkSG) are indeed observed by the company. If, however, in view of the current political discussion and the expected or anticipated future repeal of the LkSG on this basis, the management now lets go of the reins and company-internal measures to implement the LkSG are no longer pursued with the necessary vigour, it risks coming into conflict with its obligation to comply with the LkSG, which definitely is still currently in force. The (debatable) prediction that the LkSG will soon be repealed does not make any difference in this context. This is because the LkSG contains ongoing obligations, i.e., for example, that the company must perform an event-based risk analysis at any time a reason to assume such risk arises. Preventive measures, too, must be implemented on an ongoing basis. 

Inadequate implementation of the LkSG may constitute an administrative offence and accordingly lead to a fine of up to 2% of annual global sales. If such a fine were to be imposed, the question (that has not yet been answered from a legal perspective) would immediately arise as to whether the company can (and possibly must) seek recourse against the individual members of the management on the ground of inadequate implementation of the LkSG, which may have caused the fine. Even if D&O insurance cover is in place, the defence against such a liability claim by the company is not exactly a pleasure for the defendant director. Not to mention other consequences beyond any personal liability. A prudent and conscientious director (according to the legal model of section 93 of the German Stock Corporations Act (Aktiengesetz, AktG) should therefore ensure implementation of the LkSG for as long as the current political discussion remains a discussion and the LkSG remains applicable law.

The potential hope that the supervisory authority responsible for monitoring the implementation of the LkSG (Federal Office for Economic Affairs and Export Control, Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) will no longer so intensely engage with the LkSG in view of the current political discussion and that any insufficiencies will therefore not lead to a fine seems unfounded to us in this generalisation. In September 2024, the Ministry of Labour and the Ministry of Economic Affairs announced the implementation of an 'Immediate programme for sub-legislative measures for the practical application of the LkSG' ('Sofortprogramm für untergesetzliche Maßnahmen zur praxisnahen Anwendung des LkSG')(for more information in German please follow this link). However, this does not affect the statutory monitoring of compliance with the LkSG by BAFA. Nor the fact that BAFA is said to have meanwhile initiated some 40 (!) administrative offence proceedings in connection with the LkSG.

Dr. Daniel Walden
Dr. André Depping

The Forced Labour Regulation is explicitly not intended to create any additional human rights due diligence obligations for economic operators that are not already provided for in Union or national law. Rather, the Forced Labour Regulation is intended to complement the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D), which is to be transposed into national law by mid-2026, and the human rights due diligence obligations for certain (large) EU and non-EU companies to be introduced by mid-2027 at the latest (cf. our German blog post from March 18, 2024: EU Supply Chain Act: Agreement and agreement text | ADVANT Beiten) or alongside the German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG, see the commentary on the LkSG by Depping/Walden). In contrast to the aforementioned "due diligence laws", the Forced Labour Regulation contains a general ban on products made with forced labour (see our German blog post from 14.03.2024 EU Regulation banning forced labour is coming (and EU Supply Chain Act perhaps still?) | ADVANT Beiten). In order to avoid the sanctions that could be imposed in the event of a breach of the ban, the companies concerned have an economic incentive to ensure that the products they sell are not made with forced labour.   

1. Rules for economic operators, the Commission and the Member States

The ban is aimed at economic operators. This is any natural or legal person or association of persons who places or makes available products on the Union market or exports products, regardless of their registered office, company size, sector or similar. In future, the authorities designated by the Member States or the Commission will monitor whether economic operators comply with the obligations under the Regulation - i.e. not placing on the market, not making available and not exporting the relevant products.

For cooperation and communication between the authorities and the Commission, the Commission coordinates the work on the Union network. The Commission provides a website, the forced labour single portal. In particular, helpful information is to be published on this portal. This includes, for example, guidelines still to be drawn up by the Commission (including with regard to due diligence obligations in relation to forced labour), a database still to be set up for areas and products with a risk of forced labour and notifications in connection with inspections and bans. The monitoring authorities are going to use these, for example, to transmit data in connection with investigations.

2. Official investigations

In future, economic operators must be prepared for preliminary and main investigations and field inspections by the competent monitoring authorities. As part of the preliminary investigation, they must provide the competent monitoring authority with documentation on their measures to identify, prevent, mitigate or even end the risk of forced labour in their operations and supply chain at short notice. If there are reasonable grounds for suspicion, the authority will initiate a main investigation, which is accompanied by in-depth inspections. The authorities should apply a risk-based approach to the investigations. They use information from various sources and apply the following criteria:

• the scale and severity of the suspected forced labour, including whether forced labour imposed by state authorities could be a concern.
• the quantity or volume of products placed or made available on the Union market.
• the share of the part of the product suspected to have been made with forced labour in the final product.

The lead competent authority may respond differently if it determines that the product under investigation was produced with forced labour. Depending on the product and the type of violation, it can, for example, prohibit the placing on the market or making available of the product or request the economic operator to prove that forced labour in the supply chain has been eliminated within a certain period of time. Fines can also be imposed.

The Commission is responsible if the suspected forced labour takes place outside the EU. If the forced labour takes place on the territory of a member state, the authority there has lead responsibility. They may cooperate with other competent authorities and request information.

3. Challenges for economic operators

All economic operators should (also) take a critical look at the supply chain of their products with regard to the EU Forced Labour Regulation and the sanctions that may be imposed in the future for violations of the ban on forced labour (in addition to fines, in particular the ban on further distribution of the products in question). To this end, they can also make use of the tools provided by the Commission. In future, companies should monitor their supply chain and document this in order to prepare for investigations. They must be able to make their findings available within a few working days in order to be able to refute the suspicions of the respective authority that justify the preliminary investigation as far as possible. In particular, companies that are subject to the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) can draw on their already established risk management measures and supplement them accordingly.

4. Outlook

The Forced Labour Regulation is intended to open new possibilities for the authorities to intervene in EU law, such as the detention of products, and thus take a further step towards combating forced labour. Once the Regulation has been signed by the President of the European Parliament and published in the Official Journal of the European Union, the Forced Labour Regulation will enter into force on the day after publication. It will apply three years after its entry into force, i.e. probably at the end of 2027.

Dr Daniel Walden
Prof. Dr Rainer Bierwagen
Dr André Depping

^{1 See the press release of the Counsil and the English version of the Regulation}

Today, the European Council gave its final green light for the so-called EU Corporate Sustainability Due Diligence Directive (CSDDD or CS3D) which is the European sister of the German Supply Chain Act. EU member states will have to transpose the CSDDD into national laws within two years after its entry into force (probably already in June 2024).

Which companies will be affected?

The EU CSDDD will apply to companies both from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover.

The CSDDD foresees generous transition periods. Thus, irrespective of the transposition into national laws within the next two years, the new obligations may have the following staggered application:

• For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force of the CSDDD (i.e. in summer 2027)
• For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force of the CSDDD (i.e. in summer 2028)
• For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force of the CSDDD (i.e. in summer 2029).

But even if your company does not meet the above criteria, it will be indirectly affected by the CSDDD if it is part of the relevant supply chain of the above mentioned companies (the CSDDD uses the term "chain of activities" which mainly refers to the upstream part of the supply chain). This is because the CSDDD will require companies to reach out to their business partners in their chain of activities with regard to human rights and certain environmental prohibitions.

And in terms of time, direct and indirect effects of supply chain legislation are already apparent today due to national laws that have already come into force independently of the CSDDD – such as the German Supply Chain Due Diligence Act which applies to companies domiciled in Germany with more than 1,000 employees in Germany (turnover is not a criterion insofar).

Further information

For more information on the CSDDD, reference is made to the today's press release of the European Council Corporate sustainability due diligence: Council gives its final approval - Consilium (europa.eu) as well as our previous blog post on the CSDDD EU Corporate Sustainability Due Diligence Directive - Agreement and Text | Advant Beiten (advant-beiten.com).

The final text of the resolved CSDDD can be found here: pdf (europa.eu)

German Supply Chain Act as a blue print

Irrespective of the differences between the EU and the German Supply Chain Act, the implementation of the latter can serve as a blue print for the implementation of the former. German companies that have already implemented the German Supply Chain Act will therefore definitely have a head start in terms of knowledge and processes. For more information on the German Act, please refer to our respective flyer: The German Act on Corporate Due Diligence Obligations in Suppy Chains | Advant Beiten (advant-beiten.com)

Dr. André Depping
Dr. Daniel Walden
 

The new EU Regulation banning the sale of goods produced using forced labour had just been adopted on 13 March 2024 (see our blog post, EU Regulation banning forced labour products is coming (and the EU Corporate Due Diligence Directive too?)), when the live ticker announced two days later: after much back and forth, sufficient EU Member States voted in favour of the (even more watered down) draft of the EU Corporate Sustainability Due Diligence Directive (Corporate Sustainability Reporting Directive, in short: CSDDD or CS3D).

On 14 December 2023, the chief negotiators from the Parliament and the Council announced that an – informal – agreement had been reached on the content of the EU CSDDD (see our blog post, EU Corporate Sustainability Due Diligence Directive on the home stretch). In Germany, the coalition government was unable to approve the text as the FDP vetoed the results of the trialogue negotiations. Accordingly, Germany abstained in the vote in the Council of the EU. As other Member States were hesitant, the necessary majorities were initially not achieved. Attempts by the Belgian Presidency of the Council to broker an agreement failed. However, following the agreement on the EU Regulation banning forced labour, a new compromise text paved the way for the necessary majorities on the EU CSDDD.

Despite the continued abstention from Germany, the compromise was confirmed at the Meeting of the Permanent Representatives on 15 March 2024. On 19 March 2024, the Committee on Legal Affairs in the European Parliament voted in favour of the modified CSDDD draft - 20 votes in favour and four against. You can find the press release of the European Parliament here. The issue is now on the agenda for the European Parliament meeting on 24 April 2024.

Final adoption will probably take some time, as the so-called corrigendum procedure will apply if the translations are not finalised in time. In this case, the European Parliament will have to vote again on the Directive after the European elections, followed by a final vote in the Council. The agreed text will need to be assessed in detail, subject to the final resolutions. The following cornerstones have been reported.

Personal and material scope

The EU CSDDD will now apply to companies from the EU and third countries and holding companies that have more than 1000 employees and a turnover of more than 450 million euro, as well as to companies that have entered a franchising agreement and have a turnover of more than 80 million euro, where royalties account for at least 22.5 million euro of this turnover. The lower thresholds for high-risk sectors have been deleted.

In addition, the compromise text foresees generous transition periods. The new obligations, which must still be transposed into national law, will have the following staggered application:

• For companies with more than 5,000 employees and 1.5 billion in turnover: three years after the entry into force
• For companies with more than 3,000 employees and 900 million in turnover: four years after the entry into force
• For companies with more than 1,000 employees and 450 million in turnover: five years after the entry into force.

A narrower definition of chain of activities now applies; it was adjusted to be consistent with the term supply chain in the German Act on Due Diligence for the Prevention of Human Rights Abuses in the Supply Chain (LkSG).

Transition plan

The draft also requires companies falling under the scope to adopt and implement a transition plan for bringing their business model into line with the upper limit of 1.5°c for global warming under the Paris Convention. However, the Directive no longer contains financial incentives to encourage companies to implement their plan and comply with their obligations not to exceed such thresholds.

Civil law liability and fines

According to the press release of the European Parliament, companies will still be liable, where they fail to comply with their duties of care and must fully compensate victims. In addition, companies must establish complaint mechanisms and cooperate with individuals and groups adversely affected by their actions. According to the Belgian Presidency, Member States will have greater flexibility when implementing these provisions.

The draft tasks supervisory authorities in each EU Member State with overseeing compliance with the due diligence obligations. Fines of up to 5% of the worldwide net turnover can be imposed on a company which fails to fulfil its obligations. Foreign companies must also name an authorised representative, who has their registered address within an EU Member State in which the company is active, and who can communicate with the relevant supervisory authority in the company’s name about compliance with the due diligence obligations.

Transposition into national law

As explained above, the EU CSDDD will need to be transposed into national law after its adoption at EU level. In Germany, appropriate amendments are expected to be made to the LkSG, which has applied since 1 January 2023. Since 1 January 2024, companies located in Germany with more than 1,000 domestic employees fall under the scope of this Act. German legislators are unlikely to exempt such companies from compliance with the Act until the (maximum) transitional periods for the EU CSDDD have expired. However, it will all become clear in the future.

Dr Daniel Walden
Dr André Depping

The agreement reached now needs to be formally confirmed by the Parliament and the Council. Only then will there be final certainty about the content of the new directive. Once it comes into force, the CSDDD will then have to be transposed into national law by the EU member states. For Germany, this will in all likelihood take place via corresponding amendments to the German Supply Chain Due Diligence Act, which already came into force on 1 January 2023 (for more details, see our respective flyer The German Act on Corporate Due Diligence Obligations in Supply Chains_ADVANT Beiten.pdf (advant-beiten.com)).

Addressees of the new EU regulation shall be:

(i) EU companies and parent companies over 500 employees and a worldwide turnover higher than 150 million euro.

(ii) EU companies with over 250 employees and with a turnover of more than 40 million euro if at least 20 million are generated in one of the following sectors: manufacture and wholesale trade of textiles, clothing and footwear, agriculture including forestry and fisheries, manufacture of food and trade of raw agricultural materials, extraction and wholesale trade of mineral resources or manufacture of related products and construction.

(iii) Non-EU companies and parent companies with equivalent turnover in the EU.

The companies concerned will have to introduce a human rights risk management. In addition, companies, including the financial sector, must adopt a plan to ensure that their business model is consistent with limiting global warming to 1.5°C.

As with the LkSG, fulfilment of the CSDDD requirements will in future be monitored by a national supervisory authority in each EU member state. The supervisory authorities can initiate investigations and impose sanctions on companies that violate the regulations. This includes naming and shaming and the imposition of fines of up to 5% of global net turnover. In addition, compliance with due diligence obligations is to be included as part of the award criteria for public contracts and concessions.

Finally, the CSDDD - in contrast to the LkSG - will apparently also contain explicit provisions on companies being liable for breaches of their due diligence obligations and victims having the right to compensation.

Further details will emerge from the correspondingly revised regulatory drafts.

Dr Daniel Walden
 

Dr André Depping

On June 1, 2023 the European Parliament resolved by large majority vote to adopt its position for the upcoming negotiations with regard to the proposed Corporate Sustainability Due Diligence Directive (CSDDD). In this respect, it has expressed its support for tightening up many aspects of the EU Commission's proposal for a Directive on Corporate Sustainability Due Diligence submitted on February 23, 2022 (see our blog post at that time).

Core topic: Human rights and environmenal supply chain due diligence

The proposed directive includes in particular human rights and environmental due diligence duties for companies, which are similar to the due diligence duties regulated in the German Supply Chain Due Diligence Act (see our flyer on this Act). The core elements of these duties are the identification, prevention, mitigation or termination of current or potential negative human rights and environmental impacts in the company's own operations, in its subsidiaries and in the value chain of the company.

Extended scope of application for EU and non EU companies

According to the resolution of the European Parliament, the due diligence obligations shall apply to all companies based in the EU with more than 250 employees and a global turnover of more than 40 million euros, as well as to parent companies with more than 500 employees and a global turnover of more than 150 million euros. This is a considerable extension compared to the proposal of the EU Commission, according to which the first-mentioned thresholds would only apply to companies operating in certain high-risk sectors. For the remaining companies, those thresholds would apply which, according to the resolution of the European Parliament, should apply consolidated to ultimate parent companies. The proposal of the EU Commission does not provide for any attribution within a group of companies.

Second, similar to the EU Commission's proposal, the due diligence requirements should also apply to non-EU companies with a global turnover of more than 150 million euros but only if at least 40 million euros are generated in the EU.

The CSDDD would therefore contribute significantly to a "level playing field" from the perspective of German-based companies. This is because the German Supply Chain Act is applicable only to companies domiciled in Germany or with a branch office in Germany but not to other foreign companies. However, considerably more companies would also affected in Germany due to the CSDDD, as up to now the aforementioned companies are directly affected by the German Supply Chain Act only if they have more than 3,000 employees in Germany (or from January 1, 2024 more than 1,000 employees in Germany).

Further topic: Sustainability and Climate Change

In addition, companies shall in future develop and implement a plan to ensure that their business model and strategy is aligned with the objectives of the transition to a sustainable economy and with the limiting of the global warming to 1.5 °C in line with the Paris Agreement and the objective of climate neutrality until 2050. For directors of companies with more than 1,000 employees, meeting the plan's targets shall have an impact on variable compensation.

Assessment and next steps

The Council already decided on its negotiating position in November 2022, contrary to the Parliament calling for some easing compared to the EU Commission's proposal. Now that the European Parliament has defined its negotiating position, the way is clear for the trilogue negotiations to begin.

It is still not possible to predict with certainty what the content of the CSDDD will ultimately be. This particularly applies to the topics of sanctions and liability. Even before and even more so after the publication of the EU Commission's proposal, there were fierce political discussions about the regulatory project. Even on the day before the European Parliament passed its resolution, attempts were made to stop the negotiated compromise. It can therefore be expected that the political discussion about the regulatory project will continue.

In all likelihood, however, the companies affected will have an implementation period of several years in some cases.

However, it does not imply that no further measures are necessary for the time being. The CSDDD is not a stand-alone measure. Rather, it is one of several steps that the EU Commission had already planned in its Action Plan on Sustainable Finance in 2018. Other steps such as the EU Taxonomy and, above all, the new sustainability reporting have already been implemented or only need to be transposed into national law. For example, the Corporate Sustainability Reporting Directive, which came into force at the beginning of 2023, will lead to a considerable widening of the range of companies subject to the new sustainability reporting. In Germany alone, around 15,000 companies will be affected in the future, and in total more than 50,000 companies, including non-EU companies (for more details, see our blog post on the new sustainability reporting).

For more information on the European Parliament's decision on the CSDDD (with altogether 381 (!) amendment proposals), reference is made to the Parliament's press release and the documents linked therein.

Dr Daniel Walden

This blog post also appears in the Haufe Business Law Newsletter.

Extension and clarification of sustainability reporting

In the meantime, the EU has revised the non-financial reporting and developed it into a comprehensive sustainability reporting. The Corporate Sustainability Reporting Directive (CSRD) recently came into force at EU level and must now be transposed into national law by the EU member states. This will lead to a considerable widening of the range of companies subject to reporting requirements throughout the EU. In Germany alone, some 15,000 companies will be obliged to provide the new sustainability reports in the future, instead of about 500 companies so far. All in all, more than 50,000 companies will be affected, while the NFRD only covers some 11,700 companies across the EU.

Entities subject to mandatory reporting and commencement of reporting obligations

The duty to report on sustainability is to apply to a large number of companies as of the following dates (see Art. 5 CSRD):
Group 1: For financial years beginning on or after 1 January 2024, companies that are already required to report non-financial information under the NFRD (see above) will be subject to the reporting obligation.

Group 2: For financial years beginning on or after 1 January 2025, all large corporations and parent companies of large groups as defined in ss267, 293 HGB (German Commercial Code) will be subject to mandatory reporting, i.e. companies that exceed two of the following three criteria on two consecutive reporting dates: balance sheet total of EUR20 million , net turnover of EUR40 million, average of 250 employees during the year. Compared to the NFRD, the previous requirement of capital market orientation is dropped and the number of employees is reduced from 500 to 250.

Group 3: For financial years beginning on or after 1 January 2026, capital market-oriented small and medium-sized corporations (with the exception of micro-entities) will be subject to mandatory reporting regardless of the number of employees. Such SMEs may, however, opt out (having to state the reasons for it) in the first two years, so the reporting obligation will apply here no later than for financial years beginning on or after 1 January 2028. Furthermore, small and non-complex banks and company-owned insurance entities will fall into this 3rd group.

Group 4: Finally, for financial years starting on or after 1 January 2028, non-EU companies with a net annual turnover within the EU of more than EUR150 million in the last two financial years and a subsidiary within the EU belonging to Group 2 or 3, or a branch within the EU with a net annual turnover of more than EUR40 million, will also be subject to reporting requirements.

Contents of the sustainability reports

The above-mentioned companies must include in their management report information that is necessary for understanding the impact of the company's activities on sustainability aspects as well as the impact of sustainability aspects on the company's business performance, business results and situation ("double materiality"). According to Art. 19a of the Accounting Directive, this information must include the following:

(a) a brief description of the company's business model and strategy, including, in particular, the resilience of the company's business model and strategy to risks and the company's opportunities in relation to (i) sustainability issues; (ii) how the company intends to ensure that its business model and strategy are consistent with the transition to a sustainable economy and the limitation of global warming to 1.5°C in accordance with the Paris Agreement and the objective of achieving climate neutrality by 2050 as set out in the European Climate Change Act (including, where applicable, the company's exposure to activities related to coal, oil and gas); and (iii) how the company addresses the concerns of its stakeholders and the impact of its operations on sustainability issues in its business model and strategy;
(b) a description of the time-bound sustainability targets that the company has set, including, where applicable, absolute targets for the reduction of greenhouse gas emissions for at least 2030 and 2050, a description of the progress the company has made towards achieving those targets;
(c) a description of the role of the administrative, management and supervisory bodies in relation to sustainability aspects and their expertise in performing that role;
(d) a description of the company's policy on sustainability;
(e) information on the existence of incentive schemes linked to sustainability aspects offered to members of the administrative, management and supervisory bodies;
(f) a description of: (i) the due diligence process carried out by the company with regard to sustainability aspects and, where applicable, in accordance with the EU requirements for companies to carry out a due diligence process (cf. CSDDD-E); (ii) the main actual or potential negative impacts associated with the company's own operations and with its value chain; (iii) any measures taken by the company to prevent, mitigate, remedy or terminate actual or potential negative impacts and the success of those measures;
(g) a description of the main risks to which the company is exposed in relation to sustainability aspects, including a description of the main interdependencies in this area, and the company's management of these risks;
(h) indicators relevant to the disclosures referred to in points (a) to (g).

Sustainability reporting standards

While no reporting standard has been specified for non-financial reports according to the NFRD so far and therefore a wide variety of standards were applied, companies will have to comply with technical standards for sustainability reports defined by the EU (European Sustainability Reporting Standards, or ESRS for short) in the future. In November 2022, the European Financial Reporting Advisory Group (EFRAG), which was given the task of preparing such standards, submitted the first set of twelve cross-sectoral ESRS to the EU Commission; implementation is expected by 30 June 2023.

This first set of draft cross-sectoral ESRS covers the following reporting areas:

1. Cross-sectoral standards: ESRS 1 – General requirements and ESRS 2 – General disclosures.
2. Subject-specific ESG standards: environmental (ESRS 1 Climate change, ESRS 2 Pollution, ESRS 3 Water and marine resources, ESRS 4 Biodiversity and ecosystems, ESRS E5 Resource use and circular economy), social (ESRS S1 Own workforce, ESRS S2 Workers in the value chain, ESRS S3 Affected communities, ESRS S4 Consumers and end-users) and governance (ESRS G1 Business conduct).

The CSRD also provides for the preparation of sector-specific, third-country-specific and SME-specific standards by 30 June 2024.

Taxonomy Regulation

Under Art. 8 of the Taxonomy Regulation, companies that are obliged to report non-financially in accordance with the NFRD must already provide information, independently of the CSRD, on how and to what extent the activities of the company are linked to economic activities that are to be classified as environmentally sustainable economic activities in accordance with Articles 3 and 9 of the Taxonomy Regulation. In the future, the companies required to report under the CSRD will generally have to disclose such information in accordance with the Taxonomy Regulation.

Duties of business managers in connection with sustainability reporting

The management of the reporting companies must ensure, within the scope of their compliance obligation, that all legal requirements applying to the company are met. With a view to non-financial reporting or future sustainability reporting, business managers must therefore take appropriate measures so the company can fulfil its reporting obligations. This refers in particular to the sometimes challenging task of compiling the information and data required for it.

Furthermore, the description of the future sustainability reporting items is partly interpreted to mean that the CSRD presupposes that the companies − and therefore also their business managers − define actions and targets with regard to certain sustainability issues and make progress in achieving these targets. This applies in particular to the 'description of the time-bound sustainability targets' (including greenhouse gas emission reductions, if applicable) and 'the progress the company has made towards achieving these targets' as well as the 'way in which the company intends to ensure that its business model and strategy are compatible with the transition to a sustainable economy and the limitation of global warming'.

However, the discussion on the existence and content of any such obligation for action to be derived from the CSRD with regard to the definition and achievement of sustainability goals has only just begun. Regardless of the further development, there is enough reason for business managers to intensively deal with the sustainability issues relevant to their company and to take them into account when making decisions.

Dr. Daniel Walden
Dr. André Depping

This article was already published in Haufe Wirtschaftsrechtsnewsletter.

What is an ESG Due Diligence?

ESG due diligence is not yet a market standard, even though a number of ESG issues are covered by the traditional due diligence, such as environmental damage, compliance, data protection and risks from contractual relationships. However, the pressure to investigate sustainability aspects of the target company in the run-up to a corporate transaction is increasing: Social pressure is growing just as much as the expectations of customers and employees. More and more often, ESG issues are the subject of legal proceedings. ESG considerations are also of growing importance for the financing banks and financial investors.

Insofar as regulatory requirements already exist, for example when it comes to packaging and emission regulations or equal rights mechanisms, in the area of the German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG), the EU taxonomy as well as the EU Corporate Sustainability Reporting Directive (CSRD), these topics are part of every legal due diligence. For reputational reasons, many companies "undertake" not only to comply with the legal provisions, but also to voluntarily submit to certain rules of the so-called soft law. These include, for example, internal climate protection due diligence obligations based on the Paris Agreement of 12 December 2015 and taking into account the steady increase in climate protection lawsuits filed by associations and private individuals against companies in civil courts. In conformity with core labour standards of the International Labour Organization (ILO), many companies prohibit labour grievances.

Such declarations based on soft law are not strictly binding on the companies concerned. Instead, the "obligation" is created by the expectations of potential investors or business partners whose disappointment might result in reputational damage and possibly a reduction in the value of the company. Many CEOs see compliance with ESG criteria as an opportunity to set themselves apart from competitors and to build a corresponding corporate culture.

Subject of an ESG Due Diligence

What exactly needs to be investigated in an ESG due diligence largely depends on the risk profile of the target company and on whether the transaction is ESG-driven, i.e., whether it (also) serves to improve the ESG profile of the investor. Principally, it should be asked to what extent the company is sovereign in terms of environmental, social and governance aspects and whether government sanctions, loss of reputation, further required investment costs or loss of market share should be expected. In general, it is recommended to look at the following factors:

Environmental

• Environmental management systems
• Emissions/waste management/hazardous substances
• Ecosystems
• Climate change resilience
• Procurement/use of resources (water, raw materials, energy)

Social

• Product safety/product stewardship
• Occupational safety and working conditions
• Diversity
• Equal opportunities
• Code of conduct in the supply chain
• Anti-discrimination policy

Governance

• Risk management systems
• Structure and remuneration of the board
• Implementation of ESG in the business strategy, for example when selecting suppliers
• Cyber security/data protection
• Anti-corruption policy
• Reporting standards

Advantages of an ESG Due Diligence

Sellers preparing for the sale of their company may polish it up with a "vendor ESG due diligence" and avoid potential liability due to lack of disclosure or subsequent breaches of warranty.

From the buyer's perspective, ESG due diligence helps to identify risks of compliance violations and reputational damage, to reduce financing costs and - last but not least - to avoid personal liability of the acting management. Findings from an ESG due diligence will be integrated into the purchase price determination and the list of warranties. In some cases, exemption clauses will be necessary - for example, if there is a threat of fines or exclusion from public assignments; in other cases, so-called post-closing covenants, i.e., obligations to be fulfilled after the transaction has been completed, may be appropriate. If a transaction is designed to improve the ESG profile of the buying company, identified risks may also be grounds for walking away from the deal altogether.

Conclusion

ESG principles are becoming increasingly relevant at the private sector and institutional level in the context of corporate transactions. Findings from an ESG due diligence can have a significant impact on the company valuation and the design of an SPA. In order to adequately consider ESG-related opportunities as well as liability and reputational risks, any due diligence should - also - examine the target company's risk exposure, taking into account relevant ESG issues.

Dr Barbara Mayer

Corporate Sustainability Reporting Is Coming

On 10 November 2022, the European Parliament has adopted the EU Directive on Corporate Sustainability Reporting (Corporate Sustainability Reporting Directive - "CSRD"). The adoption by the Council took place on 28 November 2022. The CSRD amends the Directives 2013/34/EU, 2004/109/EG and 2006/43/EG as well as the Regulation (EU) No. 537/2014. After the adoption by the Council, the CSRD will be published in the Official Journal of the European Union and will enter into force 20 days thereafter. Subsequently, the member states will have to implement the CSRD within 18 months.

What Are Sustainability Aspects?

Art. 1 CSRD names here:

• the sustainability factors within the meaning of Art. 2 Number 24 of the Regulation (EU) 2019/2088, which include environmental, social and employee matters, the respect for human rights and combating corruption and bribery as well as
• governance factors.

Who is affected?

• As of 1 January 2024: large entities of public interest (with more than 500 employees) which are already now subject to the Non-Financial Reporting Directive ("NFDR"), the reporting obligation begins in 2025;
• As of 1 January 2025: large entities which are currently not subject to NFRD (an entity is considered to be large if it fulfils at least two of the following three criteria: more than 250 employees, revenue of more than EUR 40m and balance sheet total of more than EUR 20m), the reporting obligation begins in 2026; and
• As of 1 January 2026: listed SMEs and certain other entities, the reporting obligation for these begins in 2027, whereby SMEs can have themselves exempted from this obligation by 2028.

In addition, there will be reporting obligations for non-European entities if they achieve a net revenue of more than EUR 150m in the EU and if they have at least one branch or subsidiary in the EU.

What Does Reporting Include?

The report is supplemented by the chapter Corporate Sustainability Reporting which has to be created in a consistent electronic format in accordance with the ESEF Regulation (European Single Electronic Format).

The CSRD distinguishes between information covered by Corporate Sustainability Reporting and standards for reporting.
The former includes pursuant to the new Art. 19 a (2) of the amended Directive 2013/34/EU:

"A) a brief description of the business model and strategy of the company, including information i) on the resilience of the business model and strategy of the company with regard to sustainability aspects; ii) on the opportunities of the company in connection with sustainability aspects; iii) on the way in which the company intends to ensure that its business model and its strategy are compatible with the transition to a sustainable economy and limiting global warming to 1.5 °C in accordance with the Paris Convention; iv) on the way in which the company takes account of the interests of its stakeholders and the impact relevant to sustainability of its activities in its business model and strategy; DE 52 DE v) on the way in which the strategy of the company is implemented with regard to sustainability aspects;

B) a description of the sustainability goals which the company has set itself and the progress it has made in order to achieve these goals;

C) a description of the role of the administrative, management and supervisory bodies in connection with sustainability aspects;

D) a description of the sustainability policies of the company;

E) a description i) of the due diligence process implemented with a view to sustainability aspects; ii) of the most important actual or potential negative effects which are associated with the value chain of the company, including its own business activities, its products and services, its business relationships, and its supply chain; iii) of any measures aiming to prevent, reduce or remedy actual or potential negative effects and of the success of these measures;

F) a description of the most important risks to which the company is exposed in connection with sustainability aspects, including the most important dependencies in this area and the way in which it manages these risks;

G) indicators which are relevant for the disclosures referred to in para-graphs a to f."

Furthermore, information on intangible assets should be provided, including details on intellectual capital, human capital, social capital, and relational capital.

The information has to include forward-looking and retrospective as well as qualitative and quantitative information, "where appropriate" also information on the value chain of the company, including information on its own activities, products and services, its business relationships, and its supply chain. As regards all information it is laid down that the companies also have to communicate the procedure for determining the information and have to take into account short-, medium- and long-term time horizons in the framework of this procedure.

In this context, the new Art. 19 c of the amended Directive 2013/34/EU stipulates that the standards should determine what information has to be reported by SMEs.

The Commission adopts standards which specify the information which companies have to provide on environmental, social and governance factors. In this context, accurately defined key figures are queried in order to ensure the comparability of the information.

Control and Publication

• The Corporate Sustainability Reporting will be subject to an external examination of the contents. This examination occurs from the first reporting year. The examination may also be carried out by the auditor. Details for the coming years have not yet been determined.
• The sustainability report has to be disclosed.

Practical Tips

• Every company should clarify whether and to what extent it is affected by the CSRD.
• The developments concerning the standards have to be followed actively.
• Compliance with the sustainability requirements in the business year before the first reporting is decisive, not the year of the first reporting;
• Budgets for personnel planning or external service providers as well as the procurement of the software required for the reporting obligations have to be planned in due time.

We will be happy to support you with any questions you may have related to the CSRD.

Insa Cornelia Müller

The Draft Law can be found on the website of the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales, BMAS) on the German Due Diligence Act. Further information can also be found there, starting with a further summary from the point of view of the BMAS on the original draft bill of the BMAS up to a total of more than thirty comments on the draft law.

Finally, the website of the Federal Ministry for Economic Cooperation and Development (Bundesministeriums für wirtschaftliche Zusammenarbeit und Entwicklung, BMZ) on the Supply Chain Act is also instructive (a uniform terminology has not yet been developed). The BMZ has summarised the central regulations there and answers initial questions about the Supply Chain Act. In addition, a more detailed catalogue of questions and answers issued by the BMZ is available for download as a pdf. These FAQs provide a good overview of the current draft legislation. The same applies to the FAQ, which the BMAS has made available on its website www.csr-in-deutschland.de (see here).

Finally, the Federal Ministry for Economic Affairs and Energy has also issued a press release on the draft law.

According to the BMZ, the objective is still for the German Federal Parliament to pass the law before the summer break. Not least in view of the sometimes fierce criticism of the draft law from both the business community and human rights organisations, it remains to be seen whether this will actually happen.

The BMAS' comment that the Due Diligence Act (not yet passed by the Federal Parliament) is to be adapted to a future European regulation with the aim of preventing competitive disadvantages for German companies is also cause for concern. According to the German daily newspaper FAZ, EU Commissioner for Justice Didier Reynders expects the German government's legislative initiative to provide support for the planned regulation at the EU level. At the same time, he had clearly expressed that the EU Commission would like to go farther in its proposal for an EU-wide supply chain law. The Commission wanted to send a "strong signal". To be precise, this means: "We want to go far, far down the supply chain and far in terms of the number of companies affected." In other words, it is to be expected that a European regulation will go beyond the current draft for the German Supply Chain Act. A specific regulatory proposal from the EU Commission is expected next June. According to current planning, the German Supply Chain Act should then almost be passed.

Conclusion:

It remains enthralling! Even if there are delays along the way, the Supply Chain Act can definitely be expected at German and/or European level in one form or another sooner or later. This is not only relevant for those companies for which the human rights due diligence obligations provided for by law in the future will apply directly. It is to be expected that precisely these companies will expand their supplier contracts in order to fulfil their human rights due diligence obligations. This means that the future legal requirements will also be passed on to companies that do not necessarily fall directly within the scope of the law. Not only, but also for this reason, all companies would do well to deal more intensively with the topic of human rights due diligence in the future.

Dr André Depping

Dr Daniel Walden

The Study, compiled by EY on behalf of the EU Commission, addresses centrally the phenomenon of "short termism" in corporate governance. The focus of corporate decision-makers on short-term shareholder value maximisation instead of long-term corporate interests reduces the long-term economic, environmental and social sustainability of European companies, according to the underlying thesis of the Study. The Study identifies several causes ("Drivers") of short termism and finds that legal frameworks and market practices in Europe had the effect that a long-term orientation of corporate management played a relevant role neither in the duties, remuneration or liability of the management.

In order to counteract short termism, the Study argues that the time horizon and perspective of corporate decisions need to be broadened, for instance through measures such as:

• Duty of corporate management to consider the long-term interests of the company (beyond 5 to 10 years) and other stakeholders, i.e. not only shareholders;
• Duty of the corporate management to integrate sustainability aspects into the business strategy and, among other things, to identify and monitor measurable sustainability targets;
• Improved enforcement of liability against corporate management, also by stakeholders.

To move away from short termism, the Study finds that "EU intervention" is needed, and offers two "soft" and one "hard legislative" option. The Study favours the "hard legislative" option, as does the EU Commissioner for Justice Didier Reynders.

The Study is a follow-up to the Commission's "Action Plan for Financing Sustainable Growth" of March 2018 and works through the Action 10 set out therein. The Study also fits into the global discussion on "stakeholder capitalism" as an alternative model to the "shareholder primacy model" (shareholder value).

For more details on the presentation and assessment of the "Drivers" of short termism, the three options for "EU intervention" proposed by the Study, and the question of whether a turnaround in corporate governance in Europe from "short termism" to "long termism" is imminent, please read our current Newsletter mentioned above.

Dr Matthias Etzel

Dr André Depping

Dr Daniel Walden

The corona crisis has not stopped the discussion about sustainability, on the contrary, it has perhaps even promoted it further (see our Newsletter "Corona vs. CSR: Does the Virus also Stop Sustainability?" of early April 2020). The new decade will therefore continue to be in the spotlight of sustainability (see fundamentally our Newsletter "Outlook Corporate Social Responsibility 2020: More Sustainability, More Acts, More Risk" of early February 2020).

In our Newsletter "ESG and Law: Sustainability Remains a Political Focus" we now report on the following current topics:

• First we will present the main sustainability-related aspects of the Trio Programme (No. 1 of the newsletter) as well as the national programme for the current EU Council Presidency based on it (No. 2 of the newsletter). Accordingly, sustainability is and will remain a very important factor on the political stage, even in times of pandemics; we then go into detail about the rapid developments in the area of human rights due diligence, key word Supply Chain Act (No. 3 of the newsletter).
• Not only have the key features of a national Supply Chain Act of March 2020 become public knowledge in the meantime. In view of the results of the second round of monitoring of the NAP, Federal Ministers Müller and Heil have announced a national supply chain law for this legislative period. The plans for an EU supply chain law are also rapidly gaining momentum;
• In view of the high financing requirements for the transition to sustainable management, the topic Sustainable Finance also remains a high priority on the agenda (No. 4 of the newsletter); in addition to the EU Commission's Renewed Sustainable Finance Strategy, the revision (expansion) of non-financial reporting is under discussion.
• Of particular relevance in this area is the EU Taxonomy which has most recently been finally adopted, the world's first classification system for ecologically sustainable economic activities (No. 5).
• Finally, a recent World Economic Forum (WEF) white paper on Stakeholder Capitalism provides an outlook on how the EU Commission's plans in the field of Sustainable Corporate Governance announced in the European Green Deal could take shape (No. 6).

Enterprises should thus prepare for increased ‑ also regulatory ‑ measures to promote a sustainable economy and the announced transition to a "Green Economy". At present, this is particularly true with regard to the national law on due diligence in the supply chain which has now been explicitly announced.

Dr Daniel Walden

In its national programme, too, the German government is placing the management of the economic and social consequences of the COVID-19 pandemic at the centre of its efforts. To this end, it announces to pursue a "sustainable and inclusive growth strategy". The government seeks to ensure that the transition to a sustainable economy on the basis of the European Green Deal is accomplished and that the digital transformation plays a key role in this regard.

The pandemic was turning the spotlight on the vulnerabilities of global supply chains and the people working in them. A comprehensive risk management system for enterprises that is in line with the global agenda for sustainability could help to increase the resilience of supply chains. Therefore, the government is committed to an EU action plan to strengthen corporate social responsibility in global supply chains that promotes human rights, social and environmental standards and transparency, and which takes the experiences and lessons learned from the COVID-19 pandemic into account. This supported the coherent implementation of the Guiding Principles on Business and Human Rights of the United Nations and the OECD Guidelines for Multinational Enterprises.

An EU supply chain law with binding due diligence requirements in the supply chain, as EU Commissioner for Justice, Didier Reynders, had announced some weeks ago (see our blog entry "Cross-sector supply chain due diligence obligations underway"), is however not explicitly mentioned in the programme. It therefore remains to be seen what the content of the announced EU action plan to strengthen corporate responsibility will be in detail, and whether it will also take up the issue of sustainable corporate governance. It is also possible that the German government will await the results of the second round of NAP monitoring which are expected at the end of the summer.

In its national programme for the German presidency of the EU Council, the government dedicates a separate chapter to further sustainability aspects: "IV. A sustainable Europe". The chapter begins with the following introduction:

"Our goal is to overcome the economic and social consequences of the COVID-19 pandemic sustainably and inclusively and thereby help shape the transition to a sustainable economy. Our priorities to this end are an ambitious climate, environmental and biodiversity policy, a focus on the United Nations 2030 Agenda for Sustainable Development and sustainable agriculture. The German Presidency of the Council of the EU will also work to ensure that the European Union and its Member States continue to fulfil their role in the international arena as ambitious and active players in the area of climate diplomacy, sustainability and European values."

Specifically, that means:

• Support for the Green Deal by the EU Commission as a "comprehensive and ambitious strategy"
• Adoption by the European Council of conclusions on the Commission’s new Circular Economy Action Plan
• Launching of Council conclusions on the new EU Biodiversity Strategy (in view of the relationship between biological diversity and human health)
• Conclusion of the deliberations on the draft of a European Climate Law in the European Council which will specifically write into law the goal for the European Union to become climate-neutral by 2050, and agreement on the increase of its nationally determined contributions for the year 2030; here the government welcomes the European Commission's goal to increase the EU’s reductions target for 2030 to 50 to 55% compared with 1990 levels.
• In the transport sector, the government intends to continue to work towards climate-friendly, sustainable and affordable mobility.
• In the energy sector, the government aims to formulate Council conclusions on the European framework conditions for joint renewable energy projects by the Member States, in particular in the area of offshore wind power. The government has further set out to contribute to a secure and sustainable supply of carbon-neutral and preferably carbon-free gases, such as hydrogen derived from renewable energies. At an international level the German government will work to establish a level playing field in the prevention of CO2 emissions, taking account of the principle of joint but differentiated responsibility, as well as striving as far as possible to avoid the creation of incentives for carbon leakage to third countries.
• The 2030 Agenda for Sustainable Development and the Sustainable Development Goals (SDGs) are guiding principles for Germany’s Presidency of the Council of the EU. The government works towards the submission of the concept announced by the Commission for the comprehensive implementation of the 2030 Agenda, so that the relevant Council consultations can begin in the second half of the year
• The German government intends to contribute to implement the SDGs through a modern and sustainable agricultural and fishing industry. In the negotiations on the common agricultural policy (CAP) after 2020, a general approach of the Council is aimed at. In the spirit of sustainable development, the common agricultural policy and other policy areas ought to make a greater contribution to safeguarding the future of rural spaces, tapping the development potential of rural areas and preserving and developing them as attractive places.
• Finally, the German government is calling for the Council to be involved from an early stage in drafting the new Consumer Agenda which the Commission wants to present in the second half of 2020. The Agenda had to help consumer protection in the European Union to adapt to the current digital and environmental challenges.

Dr Daniel Walden

Dr Matthias Etzel

Dr André Depping

In the Press Release of the European Commission of 18 June 2020, the Executive Commission Vice-President Valdis Dombrovskis, responsible for financial stability, financial services and the Capital Market Union, made the same statement:

“The adoption of the Taxonomy Regulation today marks a milestone in our green agenda. It creates the world's first ever classification system of environmentally sustainable economic activities, which will give a real boost to sustainable investments. It also formally establishes the Platform on Sustainable Finance. This Platform will play a crucial role in the development of the EU Taxonomy and our sustainable finance strategy over the coming years.”

The taxonomy should enable investors to focus their investments more strongly on more sustainable technologies and businesses, thus making a decisive contribution to making the EU climate neutral by 2050. To this end, it provides an EU-wide classification system with standardised terms.

The taxonomy will be of particular relevance for financial market participants and financial advisors as well as for all businesses that are or will be obliged to provide non-financial reporting:

Importance of the Taxonomy Regulation for Financial Market Participants and Financial Advisors

Under Regulation (EU) 2019/2088 on Sustainable Finance Disclosure Regulation (SFDR), financial market participants and financial advisors will be required to disclose sustainability-related information both on the Internet and in their product documentation as from 2021/2022. In this respect, implementation is not required under national law; the SFDR is directly applicable law (for more details on the SFDR, see our newsletter "Outlook Corporate Social Responsibility 2020: More Sustainability, More Acts, More Risk" published in early February 2020). However, the SFDR authorises the three European supervisory authorities (EBA, EIOPA and ESMA, in short: ESAs) to develop so-called Regulatory Technical Standards (RTS) on the content, methodology and presentation of ESG [Environment Social Governance] disclosures at both company and product level. To this end, the ESAs published a Consultation Paper on 23 April 2020 in which they request contributions to the RTS they propose for the disclosure of ESG factors for financial market participants, advisors and products.

Importance of the Taxonomy Regulation for Non-Financial Reporting

In addition, the taxonomy is relevant for all companies that are required to supplement their management report with a non-financial statement in accordance with the so-called CSR Directive (Non-Financial Reporting Directive, or NFRD for short) and the German CSR Directive Implementation Act (CSR-RUG) for fiscal years starting 1 January 2017. In their non-financial reporting they will in future also have to include information on how and to what extent the activities of the company are linked to economic activities that are to be classified as environmentally sustainable economic activities pursuant to Articles 3 and 9 of the Taxonomy Regulation, cf. Art. 8 Taxonomy Regulation. In particular, non-financial businesses must indicate the following:

a) the share of their sales proceeds generated from products or services that are linked to economic activities that are to be classified as environmentally sustainable in accordance with Articles 3 and 9 of the Taxonomy Regulation; and

b) the share of their investment expenditure and, where applicable, the share of operating expenditure related to assets or processes associated with economic activities that are to be classified as environmentally sustainable in accordance with Articles 3 and 9 of the Taxonomy Regulation.

According to Article 3 of the Taxonomy Regulation, an economic activity is considered ecologically sustainable if, among other things, it makes a significant contribution to achieving one or more of the following environmental objectives set out in Article 9 of the Taxonomy Regulation:

a) climate change mitigation;

b) climate change Adaptation;

c) sustainable use and protection of water and marine resources;

d) transition to a circular economy;

e) pollution prevention and control;

f) protection and restauration of biodiversity and ecosystems.

The EU Commission will adopt delegated legal acts with specific technical evaluation criteria to supplement the principles laid down in the Taxonomy Regulation and to define which economic activities are eligible for each environmental objective. According to the above-mentioned press release, the first two criteria for climate change mitigation and adaptation should be adopted by the end of this year and the criteria for the other four environmental objectives by the end of next year.

Outlook

With the Taxonomy Regulation and the SFDR, the EU Commission has implemented key elements of its 2018 Sustainable Finance Action Plan. As announced in the European Green Deal, the EU Commission has now launched the consultation on the Renewed Sustainable Finance Strategy on 8 April 2020 (see the update at the end of our Newsletter of early April 2020 "Corona vs. CSR: Does the Virus also stop Sustainability?"). The EU Commission intends to also integrate sustainability more closely into the corporate governance framework in future.

It was as well announced in the European Green Deal that the EU Commission will revise the CSR Directive on Non-Financial Reporting. With this initiative, the EU Commission wants to ensure that investors, civil society and other interested parties have access to the information they need without imposing excessive reporting obligations on companies. The intended consultation published in the Schedule at the end of January 2020 has recently been closed, and implementation by the EU Commission has been announced for the fourth quarter of 2020.

The current programme for the Trio Presidency of Germany, Slovenia and Portugal includes in addition to a coherent implementation of the UN's Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy (see our blog post "Cross-sector supply chain due diligence obligations underway"), the drawing up of a new Communication on Corporate Social Responsibility (CSR) including an EU Action Plan for Responsible Corporate Behaviour (see our blog post "The Trio Presidency Commits to More Sustainability").

The tendency towards more regulation in the area of sustainability is thus continuing.

Dr André Depping

Dr Matthias Etzel

Dr Daniel Walden

In our newsletter "Corona vs. Does the Virus also Stop Sustainability?" we concluded at the beginning of April 2020: The coronavirus crisis will not stop sustainability, on the contrary, it may even promote it. The new decade would thus continue to be in the spotlight of sustainability (see our previous newsletter on that "Outlook Corporate Social Responsibility 2020: More Sustainability, More Acts, More Risk" of February 2020). The current developments since then further point in this direction. So it remains the same: A diligent and anticipatory CEO will be well advised to keep the issue of sustainability in view. In detail:

18-month Programme of the Future Council Presidency Trio is Set

The General Affairs Council, which prepares and follows up on the European Council meetings, dealt with the programme of the future German, Portuguese and Slovenian Presidencies on 16 June 2020. The three countries had agreed on cooperating closely in their presidencies of the Council of the EU. The Cabinet of Germany had approved the draft programme already on 3 June 2020.

It came as no surprise that the final agenda of the 18-month programme (or Trio Programme for short) was strongly influenced by the coronavirus crisis and its management. Nevertheless, or perhaps precisely for this reason, the Trio Programme continues to be based on the main priorities of the strategic agenda 2019-2024 agreed by the Heads of State and Government of the EU last year:

• protecting citizens and freedoms
• developing a strong and vibrant economic base
• building a climate-neutral, green, fair and social Europe
• promoting European interests and values on the global stage

The Trio Programme is now expected to be endorsed by the European Council by written procedure by the end of this week.

Already the introduction shows clearly that (also) the trio of presidencies continues to give top priority to the goal of sustainable and inclusive growth and a green economy. This is what it says about overcoming the coronavirus crisis and restoring the economies of Europe:

" ...a lot more remains to be done, in particular as regards controlling the pandemic and getting Europe’s societies and economies back to full functionality by fostering sustainable and inclusive growth, integrating inter alia the green transition and the digital transformation, and by drawing all lessons from the crisis and tackling its socio-economic consequences. To this end, as an overarching priority, the three Presidencies are determined to implement all appropriate measures serving a robust recovery of the European economy, in line with a sustainable and inclusive growth strategy, that takes account of the goal to achieve climate-neutrality by 2050 and addresses the significant social impacts and human dimensions."

Section IV. of the 18-month Programme on "Building a Climate-Neutral, Green, Fair and Social Europe" lists specific goals: Achieving a climate-neutral EU by 2050, while ensuring that the transition is costeffective, just, socially balanced, fair and achieved in a way that preserves the EU's competitiveness, as well as the protection and sustainable use of biodiversity and natural resources are called "key elements in the green transition". This is framed by the commitment to implement the 2030 Agenda for Sustainable Development and the 17 Sustainable Development Goals (SDGs) enshrined therein. In addition, the following paragraph in particular stands out, which clearly aims in the direction of an EU-wide supply chain law (see also our blog post "Cross-sector supply chain due diligence obligations underway").). It also announces an EU action plan for responsible corporate conduct:

"The three Presidencies will drive forward efforts to achieve an EU-wide coherent implementation of the UN Guiding Principles on Business and Human Rights, the OECD Guidelines for Multinational Enterprises and the ILO's Tripartite Declaration of Principles on Multinational Enterprises and Social Policy. They call for the development of a new communication on “Corporate Social Responsibility (CSR)” including an EU action plan on responsible business conduct and taking into account experience and lessons from the COVID-19 crisis."

The coronavirus crisis has highlighted the vulnerability of a globalised world at its most sensitive spots, thus highlighting the importance of strengthening the resilience of companies with regard to possible future crises. The consideration of climate change and climate protection is a prominent example of this (see also our newsletters above).

German Chancellor Angela Merkel: "Investing in sustainable development"

In her Video message to the Annual Conference of the German Council for Sustainable Development (RNE) on 15 June 2020, German Chancellor Angela Merkel emphasised that in dealing with the coronavirus crisis it was important to "bring together short-term crisis management and long-term future planning". The Federal Government's comprehensive economic stimulus package served these goals.

On the one hand, the Federal Government is concerned with "strengthening the resilience of the economy and society to pandemics, climate change and other major challenges". On the other hand, it aims "to achieve a sustainable economy and lifestyle in our country".  The 2030 Agenda with its Global Sustainability Targets was the compass "to set the course for sustainability in the future".

Speaking at the opening of the conference, Werner Schnappauf, Chairman of the German Council for Sustainable Development, said that sustainability should become the guiding principle for the future, "not only for words but also for actions."

With regard to the issue of the environment and human rights in the supply chain, RNE had already recommended in mid-May that Germany should play a "pioneering role in supply chain legislation in Europe". In its Statement on "Sustainable Supply Chains" it advocates, among other things, "anchoring the perception of care for social and ecological aspects in globally networked supply chains and business relationships by means of a smart mix". This smart mix should consist of "legal requirements and binding framework conditions, the description of minimum requirements and voluntary initiatives by industry and civil society".

Outlook

On 18 June 2020, the Chancellor will make a government declaration to the German Bundestag on the European Council and the German presidency of the Council.

The press is currently reporting on a still confidential draft work programme for the German presidency of the Council of the EU from 1 July 2020. This is to be a 24-page paper. This German work programme is obviously not identical with the above-mentioned Trio Programme and therefore remains to be seen.

In addition, an update of the German sustainability strategy is pending. The draft of the German sustainability strategy 2020/2021 is expected to be published for comment after mid-September 2020. The RNE presented initial recommendations for the further development of the German sustainability strategy 2020/2021 in its Statement on "Ambitiously opening the Decade of Sustainability" in May 2020.

Dr. André Depping

Dr. Matthias Etzel

Dr. Daniel Walden

The EU Commission wants to push ahead with the project of a European supply chain law, whereas the further course of action is based on a study of several hundred pages on supply chain due diligence obligations (see Daily News 24/02/2020 of the EU Commission with the meaningful title "Commission study shows the need for EU-level legislation on due diligence throughout the supply chain on human rights and environmental impacts"). A substantial result of the study points in a similar direction as the first round of the German NAP monitoring: EU-wide, only one in three companies carries out assessments on human rights and environmental impacts. Voluntariness as a concept is therefore not sufficient in the view of EU Justice Commissioner Didier Reynders who is now addressing two issues: A public consultation in 2020 following the study and the presentation of a legislative proposal for a European supply chain law in 2021. According to Didier Reynders, the legislative proposal will provide for sanctions in the event of "non-compliance" and, if necessary, the possibility of legal action for parties concerned. "A regulation without sanctions is no regulation", said Reynders. The EU Commission's deliberations could thus move in the direction of the French "Loi de Vigilance" (2017), which to date is considered worldwide to be the toughest national law in connection with human rights due diligence obligations, as it imposes not only reporting obligations on companies (though only large French companies with 5,000 employees in France or 10,000 employees worldwide) but also extensive obligations to act, which are also sanctioned (see our "Update Corporate Social Responsibility: Binding CSR due diligence obligations on the rise" of July 2019).

Many companies support a regulatory approach at EU level to cross-sectoral, binding supply chain due diligence obligations. For instance, Bayer Group has only recently advocated an EU-wide supply chain law. "We support a supply chain law but one at European level, not only in Germany," says Matthias Berninger, Global Head of Public Affairs & Sustainability of Bayer Group. As early as December 2019, 42 German companies had already signed up to the law, and a further 19 companies have now joined the list. The signatories include Hapag-Lloyd, Nestlé Deutschland, Ritter Sport, Tchibo and Vaude. However, in light of the heated debate about a national supply chain law, it cannot be argued that this would be in line with the "mainstream" in the economy.

Now the German EU Council Presidency comes into play. Although the cornerstones of the EU Council Presidency are known from an organisational point of view, the specific contents, also and especially in the area of sustainability, are less known. The programme which will also be coordinated with Portugal and Slovenia (the so-called "Trio EU Presidency"), will be published soon. It remains to be seen whether, with regard to corona follow-up topics such as the European Reconstruction Programme, the focus will be on what "must be dealt with in a legally binding manner until the end of 2020" (said European Minister of State Michael Roth). Is there room for human rights due diligence obligations in the supply chain? Moreover, although the governing parties had agreed in the coalition agreement to bring forward a national supply chain law, the results of the current second round of German NAP monitoring are not expected to be known until during the German EU Presidency. Hence, according to the letter of the coalition agreement, the point at which the German government would actively support an EU-wide regulation would not have been reached by the beginning of the German EU Council Presidency, especially since - as mentioned - the national German draft law is on hold. It is thus doubtful whether the German activities during the Council Presidency will result in the promotion of European initiatives for more sustainability in the supply chain - and this prominently at the top for the next six months. However, it is not to be expected that the EU Commission will allow itself to be held back by a lack of support from Germany and stop the process already initiated. Rather, the clear message is likely to be that the EU Commission is taking the lead in the process and does not want to hand over the reins.

It is therefore highly probable that the plans for a European supply chain law will materialise in 2021. Avoiding a national hotchpotch is also an understandable concern, a reliable framework that is a "level playing field" for everyone. It should thus not be a question of "whether" but of "when" and "how" a European solution is to be structured. It remains to be seen whether the EU Commission will base its legislative proposal on the French "Loi de Vigilance" model.

Companies would therefore do well to keep an eye on this further development and to prepare themselves for the introduction of binding supply chain due diligence obligations. The first sector-specific due diligence obligations will come into force anyway at the beginning of 2021 as a result of the Conflict Minerals Regulation (see our "Update Corporate Social Responsibility: Binding CSR due diligence obligations supply chain for conflict minerals" of November 2019).  The actual layout of a European supply chain law project would also have an impact on the existing compliance structures of companies. Companies would then also have to map human rights and environmental impacts with a supply chain due diligence. Which companies will be covered by the new regime that are trusted to be able to afford mandatory and sanctioned due diligence processes and compliance structures is another issue with potential for conflict.

Dr André Depping

Dr Matthias Etzel

Dr Daniel Walden

Our assessment: Not at all! A diligent and forward-looking CEO will do well to keep the issue of sustainability in view during and especially after the coronavirus crisis. Maybe now is exactly the time for a mind shift. Only recently, Germany manager Joachim Löw, one of the most important representatives of German professional football which is otherwise not necessarily known for its profundity, warned, "The pace we set could no longer be beaten. [...] Power, greed, profit, even better results, records were in the centre", while environmental disasters and diseases were pushed to the margins of perception.

In our current newsletter "Corona vs. CSR: Does the Virus also Stop Sustainability?" we give a detailed overview of current developments on the topic of sustainability in times of the coronavirus and the resulting arguments for the unbroken relevance of sustainable management. We have summarised the most important points briefly and concisely below:

1. Preliminary considerations: The coronavirus crisis and the efforts to achieve greater sustainability in the economy are not irreconcilable. On the contrary, it reveals clear how important it is to avoid or mitigate, where possible, future crises that could be triggered or favoured by insufficiently sustainable economic activity, or at least to be as well prepared as possible for them. Keywords are: cost efficiency of climate protection measures, resilience to the effects of climate change, transparency in the supply chain, interdependence of economy and society. It is one of the most important material contractual obligations of every manager to secure the long-term existence of the company. Especially when it comes to strategy and investment decisions, it is essential to make these decisions on the basis of adequate information. Sustainability aspects cannot simply be ignored.

2. European Green Deal, EU Climate Law and New Marshall Plan: The EU Commission has already made it quite clear that, even in view of the coronavirus crisis, it wants to continue to adhere to the European Green Deal and the goal of climate neutrality by 2050. To this end, the EU presented, among other things, the draft of an EU climate law at the beginning of March. In addition, European Commission President Ursula von der Leyen announced that the funds mobilised to combat the coronavirus crisis would have to be invested "wisely and sustainably". The aim is to "build a more modern, sustainable and resilient Europe."

3. Dealing with sustainability risks: It is not apparent that existing and future sustainability risks will change or be reduced fundamentally as a result of the coronavirus crisis. In accordance with applicable legal regulations, the managements of financial companies and companies in the real economy must (also) deal appropriately with sustainability risks, and of course with the opportunities as well. The German banking supervisory authority BaFin's leaflet on dealing with sustainability risks is therefore still valid.

4. Special: Climate Change Litigation: In addition to the actual risks associated with advancing climate change, companies are also exposed to liability risks resulting from an increasing number of climate-related lawsuits worldwide (so-called climate change litigation). Judgments in pending lawsuits as well as potential future plaintiffs will not be stopped by the coronavirus crisis. The risks related thereto will therefore continue to exist.

5. Institutional Investors: It is not to be expected that investors - and here especially large institutional investors - will pay less attention to sustainability aspects in the future. Larry Fink's recent statement that BlackRock will stick to his sustainability-oriented investment approach, and even that long-term thinking has never been more critical than it is today, is a prominent example. Companies and investors with a strong sense of purpose and a long-term approach would be better able to navigate this crisis and its aftermath.

6. Stakeholder Capitalism: Klaus Schwab, founder of the World Economic Forum, shares Larry Fink's view. Following the discussion on new Stakeholder Capitalism at this year's World Economic Forum, Klaus Schwab calls for support for stakeholder companies in particular in the current crisis, as they represent the economic model They represent the economic model "that will make us survive today, but thrive again tomorrow".

7. Rights and duties of the management: The legal situation ‑ that the management must also take sustainability aspects into account appropriately when making decisions (see above) ‑ remains unchanged. The discussion on sustainable corporate governance which is already in full swing, also and especially at EU level, is unlikely to be interrupted.

8. NAP-Monitoring and Supply Chain Law: The already lively discussion about a possible supply chain law which was further fuelled by the unsatisfactory results of the first round of monitoring, will certainly not ease up under the impression of the economic consequences of the coronavirus crisis. Gerd Müller, Minister of Economic Cooperation and Development, recently declared that he nevertheless remains committed to the goal of sustainable global supply chains. There are also strong intentions at EU level for regulations in this respect.

9. Conclusion Corona vs. CSR: As we currently see it, the coronavirus crisis will not stop sustainability; on the contrary, it may even promote it. It is already predictable that the coronavirus crisis will lead to a change in behaviour in many respects. Similarly, a reassessment of many assumptions about the global economy does indeed seem appropriate. The corona crisis shows the vulnerability of a globalised world at its most sensitive spots. This may raise awareness of the fact that other future crises ‑ above all those resulting from progressive climate change ‑ could have very similar consequences and that it is therefore important to prevent or mitigate them wherever possible. It also highlights the importance of strengthening the resilience of companies. This also includes creating more transparency, especially at the critical points in the supply chain, and diversifying risks. The coronavirus crisis also reveals how closely economy and society are linked nationally and globally. Ultimately, global challenges can only be tackled efficiently if all players work together. States, business and society would be well advised to make their respective contributions to this end in order to achieve sustainable growth for all in line with the United Nations' 2030 Agenda and prevent the dangers that would otherwise threaten. This however requires, among other things, precisely the economic transformation that the EU Commission is aiming for in its European Green Deal.

Find more details in our current CSR newsletter here.

Dr. André Depping

Dr. Matthias Etzel

Dr. Daniel Walden

Companies are therefore well advised to address the topic of sustainability and the resulting risks and opportunities, and to take these into account in their business models. To help you find your way through the “sustainability jungle,” here are the TOP 10 issues that are particularly relevant for companies at the Moment.

1. The EU Commission’s European Green Deal aims to transition the EU economy into one of sustainable economic growth, in line with the UN Agenda 2030. In light of recent scientific evidence, the EU aims to become climate-neutral by 2050. This will also entail considerable opportunities for companies. In addition, the EU is intending to strengthen its support of sustainable Investments.
2. In its Guidance Notice on Dealing with Sustainability Risks, the German Federal Financial Supervisory Authority (BaFin) provides companies supervised by the authority with some guidance on how to deal with the increasingly important topic of sustainability. In particular, the BaFin expects that entities under their supervision will ensure that sustainability risks are analysed and that this analysis is documented. This is relevant not only for banks and insurance undertakings, but is also directly relevant for all other undertakings that are their customers.
3. There will be further discussion on the question of whether and to what extent sustainability should play a role in the monetary policy of the ECB and with Basel III. With respect to the latter it would appear that the EU Commission’s draft directive, announced for the middle of 2020, will actually include a green supporting factor.
4. In a recent study entitled “Climate Risks and Response”, McKinsey describes the extensive impact and risks of climate change. McKinsey concludes that companies (too) should occupy themselves with the issue of climate change risks.
5. In a recent letter entitled “A Fundamental Reshaping of Finance”, Larry Fink, CEO of Blackrock, predicts that there will soon be a significant redistribution of capital with a view to climate change. Blackrock will make sustainability a focus of its investment approach and will exit investments with significant sustainability risks. In the long term, only those companies which identify and pursue their “purpose” and take into account a broad spectrum of stakeholders will be profitable.
6. The motto of the 2020 World Economics Forum Annual Meeting in Davos was “Stakeholders for a Cohesive and Sustainable World”. The transformation from shareholder capitalism to stakeholder capitalism, of which Larry Fink spoke, has significant implications for company corporate governance.
7. Under the current law, executive and supervisory boards must appropriately address the opportunities and risks for the company resulting from sustainability aspects (see ARUG II and GCGC 2020). Laws designed to protect the public interests establish a mandatory minimum CSR standard.
8. In light of the current results of the Monitoring of the National Action Plan on Business and Human Rights (NAP), a new draft bill for a supply chain law can be expected soon. It will target the (mandatory) implementation by companies of the UN Guiding Principles on Business and Human Rights.
9. The German Federal Ministry of Justice and Consumer Protection (BMJV) has published an information booklet on “Access to Justice and the Courts” for human rights violations. This describes when and how victims can bring proceedings before the German courts for human rights abuses. To what extent the existing legal protections are sufficient for victims of human rights abuses is expected to be assessed in the future.
10. From 10 March 2021, the Regulation on sustainability-related disclosures in the financial services sector will apply. This will require financial market participants and financial consultants to provide certain sustainability information pre-contractually and publish it on the internet.

This all shows: Sustainability and corporate responsibility urgently belong on the desks in the executive offices. Both aspects can yield new opportunities and risks for your company. In addition, the expectations of customers and suppliers, banks and insurance companies, of the public and legislators are likely to (further) Change.

For further information please contact Dr Daniel Walden.