Environmental, Social & Governance (ESG)

Employment

Employers need to perform multi-layered procedures to consider ESG objectives under employment legislation. On the one hand, it is necessary to identify which goals, particularly those related to the “Social” and “Environmental” categories, have a direct impact on the company’s workforce and organizational structure. This is due to the fact that implementing ESG objectives also involves the company’s own workforce’s social and health issues (e.g., with regard to diversity, inclusion, equal treatment, etc.). Employees of the organization must be encouraged to act in an ecologically sensitive and sustainable manner.

In addition, it is critical to establish measures to guarantee that employees always promote the achievement of overarching ESG goals while interacting with other groups, such as suppliers, consumers, and other business partners. Hence, mechanisms and processes must be devised to ensure that employees help the company achieve the specified ESG goals in the best possible way, both internally and externally.

This might entail a variety of activities and concerns for HR managers, such as:

• incorporating ESG targets in board / management compensation schemes
• modifying all staff bonus systems (particularly Sales, Purchasing, and Administration) to include ESG objectives
• transforming travel policies and pay structures (moving away from company vehicles to sustainable transportation options)
• employee training on corporate ESG objectives
• supporting initiatives to create a diverse workforce structure
• heightened emphasis on occupational health protection, particularly for at-risk employee groups
• additional training (programs) by/for employees
• internal idea management / ESG Kaizen process
• digitalization
• whistleblowing system

The development and introduction of the aforementioned strategies require thorough and methodical planning. Initially, it must be defined which ESG goals will be pursued and with what priority, as well as the extent to which existing regulations and structures will need to be modified to achieve these objectives.

Suitable measures must then be taken to aid in achieving the goals and to permit continual assessment and monitoring of the measures to support ESG goals. The increasing significance of ESG is also evident in talks and negotiations with employee representatives (particularly works council bodies and trade unions), who are raising these issues with increasing frequency. Moreover, the introduction of steps to promote ESG goals may affect employee representatives’ statutory co-determination rights in a number of areas, necessitating support for these initiatives in employment law.

We advise business owners and HR departments on all necessary modifications and assist them in developing and implementing all HR-related ESG promotion strategies.

Commercial

ESG considerations are becoming increasingly important in commercial and distribution law. The voluntary adoption of socially and ecologically responsible corporate governance is currently being legalized and about to become a legislative mandate.

Companies with more than 3,000 employees in Germany must comply with the Supply Chain Due Diligence Act as of January 1, 2023. Beginning on January 1, 2024, the requirement will be reduced to 1,000 employees. The upcoming EU Supply Chain Directive will push the restrictions even further. The majority of businesses in the EU will then be required to meet corporate due diligence criteria to protect human rights and the environment.

Members of our CSR Taskforce advise businesses on all aspects of the Supply Chain Due Diligence Act.

We assist with human rights risk analysis in the supply chain, the negotiation and drafting of supply and purchase contracts, and the development of supplier codes of conduct, as well as training and seminars on the Supply Chain Due Diligence Act.

Corporate Governance / Corporate Law

Sustainability or ESG criteria are progressively finding their way into corporate governance and becoming an intrinsic element of the operations of management and supervisory bodies as their importance grows. This “trend” toward sustainable corporate governance is being driven by investors and other stakeholders that value sustainable management on the one hand, and rising initiatives by national and European legislatures on the other.

For instance, sustainability considerations must be incorporated when drafting articles of incorporation, rules of procedure for management, the executive board, or the supervisory board, as well as shareholder agreements. The amendments to the German Corporate Governance Code (GCGC) 2022 for listed companies includes various new principles and guidelines for environmental and social sustainability. In addition, the CSR Directive has, for a number of years now, mandated that large corporations and organizations in the EU produce a non-financial statement that includes information on environmental, social, and employee concerns, as well as on the respect for human rights.

We advise corporate bodies of all sizes on any legal issues arising in connection with performing their management or supervisory duties and are always available as a point of contact.

In particular, we advise

• on corporate governance issues and the drafting of customized articles of incorporation, sets of rules, and codes of conduct (such as business codes, supplier codes of conduct, and declarations of principles);
• on convening and conducting shareholders’ and general meetings including our availability as contact persons throughout the meetings;
• on the scope of management disclosure and information duties in conjunction with non-financial reporting.

Energy

The “E” in ESG stands for “Environment” and requires companies to operate in a sustainable manner. This includes, among other things, the prudent use of natural resources such as water and forward-thinking waste avoidance and recycling strategies. Yet, in light of the global climate issues, the emphasis in this context is on reducing and offsetting carbon emissions. Companies’ motivations for becoming involved in this field range from pure marketing to contractual partner needs (such as from major clients) and the conviction that they wish to contribute to reducing greenhouse gas emissions.

We advise comprehensively on all aspects relating to climate protection as well as on the various options and techniques for reducing a company’s carbon footprint. Individual energy supply is especially important because it contributes significantly to a company’s greenhouse gas emissions. In addition to energy efficiency measures, converting the energy supply to renewable energies is particularly suited for reducing greenhouse gas emissions, for example, by direct procurement of renewable energy (through “PPAs”) or the construction of own projects (such as solar equipment on the factory floor).

Encouraging electromobility within the organization can also make a significant difference. Where avoiding carbon emissions is not possible, (voluntary) compensation for direct emissions of greenhouse gases from company-owned and controlled resources (scope 1), indirect emissions from the generation of purchased energy (scope 2), or indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream (scope 3), may be considered (e.g., through the use of “verified carbon units”).

In addition, we advise our clients on all other criteria related to climate protection and energy supply to businesses, such as European and national emissions trading, energy contract law, and the possibility of claiming energy cost relief.

Finance

ESG Sustainable Finance

The EU’s sustainability policy attempts to direct money flows in such a way as to encourage investment in sustainable products and initiatives in the future. Financing is therefore a fundamental topic of ESG, particularly in the environmental taxonomy (Regulation (EU) 2020/852).

Hence, the EU is establishing a sustainable European financial system. This relates to reporting under the Disclosure Regulation (Regulation (EU) 2019/2088) and the CSRD (Directive (EU) 2022/2464), as well as the design of financial products and financed products and projects. Additionally, certain promotional loans require sustainability considerations. The environmental taxonomy (Regulation (EU) 2020/852), as well as additional requirements for social and governmental sustainability, will be used to evaluate sustainability.

There are already a plethora of non-binding criteria for sustainable and social financing, including those of the ICMA and LMA. In addition, the European Union is developing an EU Green Bond Standard, the substance and binding character of which continue to be debated.

A growing number of investors are requesting sustainable financing. This means that if a company positions itself in an ESG-compliant manner, it will have a greater chance of securing funding, including better terms.

We advise on structuring ESG-compliant financing and investments, and on drafting the necessary documentation such as financing terms, frameworks, and prospectuses.

In addition, we examine the ESG compliance of our clients’ financing and satisfy the reporting duties associated with ESG financing.

Real Estate

Owing to its size and economic significance, the real estate industry plays a crucial role in accomplishing climate protection goals. With sustainability as the most important ESG criterion for the real estate industry, the ESG standards are relevant to all sector participants, including owners and investors, as well as asset, property, and facility managers, in their respective fields of activity.

Green lease and green building standards are already being considered in construction and lease contracts, but also in service contracts such as asset and facility management contracts and will become indispensable in contract design in the future. It is hardly surprising, then, that building certification in line with existing certification systems (e.g., DGNB or LEED) has virtually become a market standard for new commercial property construction.

In addition to considering relevant structural criteria and incorporating sustainability clauses into asset and property management contracts to implement an ESG and sustainability strategy, the topic of green leases is gaining prominence. Tenants are a decisive component in “green” leases, as more and more businesses, irrespective of the industry in which they are operating, are pursuing a corporate policy that mandates them to pay attention to criteria such as sustainability and energy efficiency even when leasing office or manufacturing space. It is no surprise that efficient buildings, in particular, frequently attract the best tenants and, as a result, command the highest rents.

Hence, ESG cannot be viewed in isolation from investments, reputation, and business hazards. As a result, it is becoming increasingly important to incorporate ESG criteria, and specifically the issue of sustainability, as a fixed component in acquisition specifications and thus in the entire transaction process, resulting in new aspects and reviews of focal points when submitting bids, assessment topics during legal due diligence, and in drafting the respective acquisition agreements, whether as part of asset or share deals.

Issues such as above-average energy usage, which results in high ancillary costs and, as a result, poorer returns, are set to gain more prominence in future acquisition reviews. On the one hand, this may result in significant cost savings as well as greater market attractiveness. On the other hand, compliance with ESG standards may provide enterprises with not just enhanced property profitability, but also the potential to set themselves apart from competitors.

We advise our clients on all issues that may arise during a property’s life cycle.

Specifically, we advise on

• ESG-compliant transaction process structuring, both in due diligence and contract drafting
• and the contracts required for property development and subsequent portfolio maintenance such as construction, lease, and property management contracts, taking into account green lease and green building standards.

Investment/Capital Investment

In March 2018, the EU adopted an action plan that calls for a fundamental reorganization of the European financial system in terms of sustainable finance. This action plan includes the EU Disclosure Regulation, as well as other measures such as the Benchmark Regulation and the EU Taxonomy Regulation.

Against this backdrop, we advise capital management firms and other financial market participants on all pertinent ESG issues.

We advise on the following aspects in particular:

• investment asset structuring in compliance with Articles 8 and 9 Disclosure Regulation
• disclosure of sustainability-related data in pre-contractual materials, such as sales brochures
• inquiries about sustainable preferences during investment advice and documentation support
• duties of financial market participants to publish sustainability-related disclosures on their websites

Antitrust

Sustainability and environmental protection are now prevalent in antitrust law, including the competitive assessment of cooperation agreements between corporations to meet specified sustainability goals. As a result, not only are agreements on the cooperative development of resource-saving technologies or the establishment of industry-wide sustainable production standards becoming more common, but so are associated specifications between manufacturers and distributors at the distribution level. While such horizontal and vertical agreements are essentially desirable, not just in light of the European Green Deal, they may also pose a threat of violating the ban on cartels.

Neither German nor European antitrust law provides for a blanket exemption for such sustainability agreements. The competition authorities may assess the suitability of such collaborations on an individual basis. To date, the exemption options provided by law that are not particularly geared toward attaining sustainable objectives have been interpreted narrowly. Consumers must benefit directly from efficiency benefits (such as low electricity costs of energy-saving washing machines).

In the case of comparable agreements between competitors, a rigorous analysis under antitrust law and, where necessary, consultation with the relevant authorities are strongly advised. After extensive consultations with the enterprises involved, for example, the German Federal Cartel Office has explicitly tolerated agreements by well-known food retailers on a standard levy on meat products to enhance husbandry conditions for a transitional period.

As for mergers subject to merger control, the question arises as to whether sustainability and environmental protection considerations can be factored into the essential competition authorities’ analysis. To date, both the European Commission and the German Federal Cartel Office have employed a purely competition-focused approach, despite the fact that verifiable efficiency benefits may also play a role in merger control as part of the competitive assessment.

Under German antitrust legislation, at least, non-competitive issues may be taken into account by ministerial approval, so that even a merger that would otherwise be prohibited can be enforced in this manner.

We advise on concerns pertaining to cooperation agreements and mergers with the goal of reaching specified sustainability objectives and aim to find a solution that is sustainable, compliant with antitrust law, and economically prudent. In our experience, antitrust authorities are willing to engage in dialogue, which we facilitate for our clients.

We are also keeping an eye on the legal developments in the (perceived) tension between antitrust law and sustainability, which seem to be picking up steam year after year. In view of the recent vigorous debate on antitrust law and society’s rising awareness of the need for stronger environmental protection, we believe that timely political signals and possibly harmonized antitrust rules at the European level are likely.

Litigation

Litigation risks in the ESG environment have increased significantly in recent years, owing in part to a shift in social discourse and the resulting new or revised regulations. Examples include litigation surrounding diversity on executive boards, liability issues under the Supply Chain Due Diligence Act, and, of course, climate change issues, which have not only become more prominent in people’s minds but have also gained the attention of state courts. Climate protection goals are increasingly being required and obligated of governments, legislators, and private organizations.

Companies face significant responsibility as a result of the increased risks associated with ESG concerns. HKLW is also highly familiar with these rapidly emerging issues as a result of its expertise in many contentious proceedings.

We advise and assist businesses in positioning themselves in compliance with ESG, including from a procedural law perspective. We also conduct disputes for our clients at the highest legal level and develop the most effective litigation and defense strategies with them.

Trademark – Green Label

Companies are increasingly employing trademarks and other identifiers for their products and services that are meant to signal the sustainability of their products. Germany’s first governmental “Green Button” warranty mark is one of such well-known examples.

The registration and use of environmentally related signs, such as environmental advertising, must comply with applicable legislation. The protectability of such marks may fail in particular where the specific sign must remain unclaimed, is descriptive, or is deceptive.

We assist our clients in all aspects of trademark and labeling law, from registration procedures to licensing and enforcement against infringers.

We provide first-class service to customers globally through our international GALA network partner law firms and the World Services Group (WSG).

Mergers & Acquisitions and Equity Investments

In the context of corporate transactions, ESG factors are becoming increasingly key value drivers. ESG considerations are gaining importance in planning, preparing, and implementing transactions for both buyers and sellers.

Potential buyers and investors are increasingly focused on selecting investment properties that have a beneficial impact on the achievement of the buyer’s sustainability goals. A target’s high sustainability performance might thus have a beneficial impact on an intended sale for potential sellers and businesses. Conversely, if a company has a poor ESG profile, this typically results in a lower valuation and might complicate the overall sales and investment process.

We advise and support our clients comprehensively on all ESG elements of transactions.

Our advisory services include in particular:

• facilitating the identification and weighting of pertinent ESG criteria, as well as the pre-selection of transaction parameters
• planning, conducting, and supervising the legal due diligence process with an emphasis on ESG issues, as well as advising on due diligence findings analysis
• designing the pertinent acquisition and investment documentation, including purchase price structure, with consideration for sustainability and ESG, as well as the outcome of due diligence
• assisting with the target company’s legal integration, in particular optimizing its ESG profile and transferring it to the buyer’s current ESG framework
• planning, performing, and administering an exit. Specifically, we assist with examining how the investment’s ESG profile might be leveraged in the intended exit/sale.

Restructuring / Insolvency

ESG rules and regulations have only an indirect, but no less vehement, impact on restructuring/insolvency law. “Cash is king,” especially in times of crisis. Moreover, (debt) capital resources that are secured at least in the medium term and can be financed by the company are crucial for any crisis-affected organization. This is true at all levels of a crisis. Thus, our advisory activities are inextricably linked to the field of (corporate) finance.

As a result, the objective of our ESG-related advice is to safeguard the continued financing of the firm in crisis.

Another critical responsibility in the field of reorganization and insolvency is to determine or ensure the “ability to reorganize,” particularly when assisting with the compilation of reorganization reports or IBR. This hinges (also based on the application of ESG criteria) on the recovery of the industry-standard return, of positive equity, of debt service capability, and the recovery of refinancing capability at market-standard terms. This is where the “ESG criteria” come into play. All energy-intensive businesses can serve as examples. Owing to the current “energy crisis,” it is extremely difficult to obtain medium-term or even long-term financing. This becomes even more challenging by the ESG requirements, necessitating comprehensive support and counsel.

Environmental

Increasingly stringent environmental and sustainability standards, frequently influenced by European law, are governing legal requirements for products and their distribution.

This necessitates advice on environmental law, particularly for manufacturers, importers, and retailers, such as on new and updated information duties in sales or on present and upcoming product characteristics legislation. In our advisory practice, various questions arise such as whether certain packaging can be placed on the market in the future, how end customers should be informed about return options when selling electrical appliances, or how mandatory information on the energy consumption of household appliances needs to be presented.

We advise and represent our clients in all aspects of product-related environmental law.

In addition, we address environmental issues in building and planning law in depth.

Advertising – Green Claims / Greenwashing

Environmental claims are becoming increasingly essential in product, service, and corporate advertising. At the same time, they are becoming an increasing focus of consumer protection.

The EU Commission has set the goal of combating greenwashing and protecting consumers from deceptive sustainability claims. The 2020 edition of the Commission’s New Consumer Agenda includes the topic of “Green Change.”

In 2021, the European consumer protection network CPC examined information on the sustainability of products and services on websites across Europe. In Germany, the Federal Office of Justice conducted the review alongside the Federation of German Consumer Organizations (Verbraucherzentrale Bundesverband e.V.) and the Central Office for Combating Unfair Competition (Zentrale zur Bekämpfung unlauteren Wettbewerbs e.V.). The CPC network discovered deceptive claims about sustainability in 42% of the cases; in particular, vague words such as “environmentally friendly” or “sustainable” stood out.

Such deceptive comments are typically penalized not by the German government but by civil law, with competitors or consumer groups sending out warning letters.

We advise and represent our clients in all legal matters pertaining to the use of environmental claims, particularly in developing and implementing marketing and advertising campaigns. For international advice, we can draw on the extensive expertise of our GALA (Global Advertising Lawyers Alliance) network in the field of green marketing, which encompasses more than 40 countries globally.