ESG - Sustainable Management

Our clients’ needs to meet ESG expectations are growing by the day. Environmen-tally friendly use of our natural resources (Environmental), compliance with social requirements (Social), and ethical business management (Governance) already play a vital role in virtually all fields of law.

News

ESG ratings more transparent in future

This article was first published in the trade magazine Bondguide on February 23, 2024

February 23, 2024 At the beginning of February 2024, the EU Council and Parliament (provisionally) agreed on a draft regulation on ESG ratings. This draft is part of the EU's Sustainable Finance Strategy and is based on a proposal by the EU Commission from 2023. ESG ratings are to become more transparent, reliable and comparable. However, the rating methods will not be harmonized.

ESG ratings are increasing significantly, especially with green and sustainable finance. It is therefore important that they can provide a sound basis for decision-making.

Certain activities such as the mere publication or dissemination of data on environmental, social, human rights and governance factors as well as pure external reviews such as frameworks and allocation reports as well as impact reports in relation to EU green bonds and second-party opinions on green bonds or financing marketed as environmentally sustainable are not covered by the regulation.

ESG rating agencies established in the EU must be authorized and supervised by ESMA. ESG rating agencies established outside the EU must also meet certain requirements.

To avoid conflicts of interest, ESG rating activities must be separated from other activities such as consulting and auditing, but internal shielding is sufficient.

Significant transparency rules are defined: ESG rating agencies should ensure the independence of their ESG ratings and the implementation of all requirements of the EU regulation. They must ensure that the ESG ratings are based on a thorough analysis of all available information and in accordance with their rating methodologies. The ESG ratings should be systematic, independent and justifiable and the rating methodologies should be applied continuously and in a transparent manner. The rating methodologies should also be reviewed on an ongoing basis, at least annually.

The approved ESG rating agencies and certain transparency requirements must also be published on the European Single Access Point (ESAP) to be set up. The ESG rating agencies must provide an overview of the rating methods used, as well as whether their analyses are retrospective or forward-looking and what time horizon they cover. They must also provide an overview of the data sources.  ESG ratings could cover E, S and G in aggregate. However, their weighting must then be specified.

The draft still has to be approved by the EU Council and the EU Parliament. The regulation is to be applied 18 months after it comes into force, i.e. in 2026 at the earliest.

Dr. Anne de Boer, LL.M. (RSA) Partner and Attorney at Law

Read more news...

EU Parliament approves directive to restrict greenwashing

January 18, 2024 On 17.01.2024, the European Parliament approved a draft directive aimed at improving product labeling and preventing the use of misleading environmental claims ((2022/0092 (COD) - Proposal for a Directive of the European Parliament and of the Council amending Directives 2005/29/EC and 2011/83/EU).

This directive aims to ensure that traders do not mislead consumers about the environmental and social impact, durability or reparability of products. The proposal also contains an addition to the so-called "black list" of environmental claims that are misleading in any case and without further evaluation. In future, generic terms such as "eco", "green", "ecological" and "environmentally friendly" will be added to this list, which may only be used if the corresponding environmental properties can be proven. The countries must now formally approve the draft directive in the Council. The member states then have two years to transpose the directive into national law. At the same time, Brussels is still working on the so-called "Green Claims Directive".

Astrid Luedtke and Antje Münch, LL.M., both Salaried Partners and Attorneys at Law

European Green Bond Standard for green bonds adopted

All EU bodies have now adopted the European Green Bond Standard (EUGBS) for green bonds. The EU wants to create a gold standard for such European Green Bonds (EUGB) and counteract greenwashing. The new standard is also intended to contribute to coherence and comparability.

The use of the EUGBS is voluntary and therefore sits alongside well-established market standards such as the ICMA. This has led to much discussion, as some have called for mandatory application.

The EU taxonomy is used for the use of proceeds, thus further consolidating the uniform valuation standard for sustainability. The proceeds from an EUGB must be invested in taxonomy-compliant economic activities and, in addition to compliance with minimum labor and human rights standards, the do no significant harm principle must also be observed. Under certain conditions, up to 15% of the proceeds from emissions can be invested in economic activities for which there are no technical assessment criteria under the EU taxonomy or other specific activities. This flexibility framework is to be reassessed in the coming years and adjusted if necessary.

A factsheet and a securities prospectus are required for the issue of EUGBs. The securities prospectus must adequately present the sustainability aspects in accordance with the requirements of the Prospectus Regulation and ESMA of July 11, 2023. The corresponding bond must be designated as a European Green Bond or EUGB and the application of the EUGBS must be stated. The factsheet must also be reviewed by an auditor (second party opinion); the auditor must be registered with and supervised by ESMA. The reporting includes a regular report on the use of funds (allocation report), which must also be audited externally, as well as a one-off impact report.

In the event of changes to technical evaluation criteria under the EU taxonomy, there is limited protection for unused revenue and revenue contained in a CapEx plan.

The regulation will enter into force 20 days after publication in the Official Journal of the EU and will apply 12 months after entry into force, i.e. probably from the end of 2024.

Dr. Anne de Boer, partner and lawyer

Consultation on the Disclosure Regulation by the EU Commission

The European Commission has published a consultation document on the Disclosure Regulation (Regulation (EU) 2019/2088) on its website. The consultation period runs until December 15, 2023. The consultation will address the following four blocks of topics:

  1. Current requirements of the Disclosure Regulation
  2. Interaction with other sustainable finance legislation
  3. Possible changes to disclosure requirements for financial market participants
  4. Possible introduction of a categorization system for financial products.

Particularly against the background of the aforementioned topic blocks No. 3 and No. 4, it remains to be seen whether the Disclosure Regulation will undergo relevant changes in the short to medium term, which could, in particular, replace or supplement the categorization into so-called "Article 8" and "Article 9" products.

Sven Johannsen, Salaried Partner and Attorney at Law

First common understanding on greenwashing by the European Supervisory Authorities ESMA, EIOPA and EBA

What actually is greenwashing?

In first interim reports of May 2023, the three European supervisory authorities EIOPA (European Insurance and Occupational Pensions Authority ), ESMA (European Securities and Markets Authority) and EBA (European Banking Authority) have published a first common understanding and categorization of greenwashing case groups.

According to this, the supervisory authorities understand greenwashing as a practice in which sustainability-related statements, declarations, measures or communications do not present the underlying sustainability profile of a company, a financial product or a financial service in a transparent and appropriate manner - not clearly and fairly - and may be misleading for consumers, investors or other market participants.

The EU Commission had asked the three European Supervisory Authorities EIOPA, ESMA and EBA for input on greenwashing risks and the supervision of sustainable financial policies. This covers in particular

  • Definition of greenwashing;
  • Cases, incidents and complaints related to greenwashing;
  • Oversight of greenwashing, including related challenges;
  • The status of implementation of sustainable finance legislation;
  • Gaps inconsistencies and problems in the current legal framework that could lead to greenwashing.

By May 31, 2024, the final reports of the supervisory authorities are to be published. These should then also provide concrete proposals for measures to prevent and prosecute greenwashing in the financial sector.

Dr. Anne de Boer, Partner and Attorney at Law

Sustainability issues in securities prospectuses

ESMA published guidelines on the disclosure of sustainability issues in securities prospectuses on July 11, 2023. These do not establish any further publication obligations, but are intended to enable the uniform presentation of sustainability topics in securities prospectuses in accordance with the current Prospectus Regulation (EU) 2017/1129). ESMA makes detailed specifications, including in which sections of a prospectus sustainability topics are to be elaborated, in particular for non-equity securities that explicitly have a sustainability aspect or pursue sustainability goals, i.e. in particular for bonds that are advertised with the fact that their issue proceeds are used for sustainable purposes (use of proceeds bonds), or whose conditions vary depending on whether the issuer achieves predefined sustainability goals or not (sustainability linked bonds).

For all securities prospectuses, information and specific risks must be included that are necessary and material for investors to make an informed judgment about the issuer and the investment. This naturally also applies to material environmental, social and corporate governance aspects. In this context, the significance of sustainability-related disclosures in the issuer's investor advertising is an important indicator of their materiality. In addition, issuers must map the basis for any sustainability claims relating to the issuer or security in the prospectus. For example, (i) by stating that the issuer or security meets a particular market standard or bears a seal of approval (while also including in the prospectus material information about the content and originator of that standard or seal), (ii) by referring to underlying data and assumptions, and/or (iii) by referring to third-party research or analysis. Risk disclosures may not be misused as disclaimers of non-compliance with sustainability requirements, compliance with which is influenced by the issuer itself.

Mandatory sustainability disclosures that an issuer is required to fulfill must be repeated in the prospectus, if applicable. This concerns, among other things, material disclosures under the current Non-Financial Reporting Directive and, in the future, the Corporate Sustainability Reporting Directive (CSRD).

Dr. Anne de Boer, Partner and Attorney at Law & Meike Dresler-Lenz, Senior Associate and Attorney at Law

Federal cabinet agrees on climate fund

The Climate and Transformation Fund (KTF) is to make a key contribution to achieving Germany's energy and climate policy goals. Accordingly, government funds totaling 211.8 billion euros will be made available from 2024 to 2027 to promote the energy turnaround, climate protection and transformation. Funding will be provided, among other things, through an increase in the CO2 price in national fuel emissions trading and through European emissions trading. Subsidies from the federal budget are not envisaged.

Dr. Tobias Woltering, Partner and Attorney at Law

Düsseldorf Higher Regional Court on advertising with the term "climate neutral"

Recently, courts have increasingly had to deal with the question of how the term "climate neutral" is to be interpreted when advertising products. There has not yet been any supreme court ruling on this matter by the Federal Court of Justice.

With the ruling of 06.07.2023 of the OLG Düsseldorf, there is again a new decision on the interpretation of the term "climate neutral". The OLG Düsseldorf has decided in two proceedings (Ref. I-20 U 72/22, I-20 U 152/22) that the advertising of products as "climate neutral" does not without further ado constitute a misleading of consumers.

In its reasoning, it argues that the average consumer does not understand the term "climate neutral" to mean that no CO2 was emitted in the manufacturing process. Rather, the average consumer understands the term "climate neutral" in the sense of a balanced CO2 balance, whereby he is aware that neutrality can be achieved both through avoidance and through compensation measures. This is true because the consumer is aware that goods and services are also advertised as being climate-neutral which - such as air travel - cannot be provided without emissions and for which climate neutrality is only possible through compensation payments. The OLG Düsseldorf thus shares the view of the OLG Frankfurt a.M., which interpreted the average consumer's understanding of the term "climate neutral" in the same way in its ruling of 10.11.2022 (Case No. 6 U 104/22).

According to the OLG Düsseldorf, it is irrelevant whether the term "climate neutral" refers to the specific product or the company as a whole.

However, the advertiser has a duty to provide information on how the climate neutrality of the advertised product is achieved. This constitutes essential information, since climate protection is an increasingly important topic for consumers, which also determines their everyday lives, and can thus significantly influence their purchasing decisions. In particular, due to the consumer's knowledge that climate neutrality can also be achieved through compensation payments, there is an interest in clarifying the basic circumstances of climate neutrality. The interest in clarification is satisfied if the information is available on an additional website.

The decision of the Düsseldorf Higher Regional Court was based on two proceedings in which the Wettbewerbszentrale filed a claim against a manufacturer of jams and a producer of fruit gums for an injunction against the advertising of their products as "climate-neutral".

In the case of the jam manufacturer, the court of first instance, LG Mönchengladbach (judgment of February 25, 2022, Case No. 8 O 17/21), affirmed the misleading nature of the claim within the meaning of Section 5 (1) of the German Unfair Competition Act (UWG) on the grounds that a reasonably attentive consumer would not understand the term "climate-neutral" to mean that climate neutrality was achieved through compensation measures. The Düsseldorf Higher Regional Court also considered the advertising to be unfair, but justified this on the grounds that there was no indication either on the product packaging or in a food magazine as to how the advertised climate neutrality was achieved.

In the second case, the OLG also confirmed the first-instance ruling. However, in this case the fruit gum manufacturer had sufficiently provided the necessary information in that a website containing the required information could be accessed via a QR code in its advertisement in the food magazine.

In the view of the OLG Düsseldorf, this was sufficient, as there was no space in a newspaper advertisement to provide more detailed information on the type and scope of any compensation measures beyond the mere information of "climate neutrality". The Düsseldorf Higher Regional Court therefore dismissed the action brought by the Wettbewerbszentrale against the fruit gum manufacturer.

The appeal was allowed due to the fundamental importance of the issues in dispute. It remains to be seen whether an appeal will be lodged and whether the BGH will rule on the interpretation of the term "climate-neutral".

Astrid Luedtke and Antje Münch, LL.M., both Salaried Partners and Attorneys at Law

BaFin publishes Sustainable Finance Strategy

On 5 July 2023, the German Federal Financial Supervisory Authority ("BaFin") published its Sustainable Finance Strategy and defined the focus of its supervisory activities in this regard.

In doing so, BaFin intends to focus on risk-oriented and practicable regulation, more reliable data on financial climate risks and appropriate management of environment-related risks. Furthermore, the fight against so-called "greenwashing" as well as the generation and sharing of knowledge in an open dialogue are in its focus.

BaFin understands greenwashing to mean in particular the case that the sustainability profile of a financial product is not clearly and honestly disclosed. Furthermore, BaFin also understands greenwashing as cases in which supervised companies underestimate the extent of transition and physical risks or do not transparently present the handling of these risks in their risk management.

In product and market supervision, BaFin examines compliance with transparency and disclosure obligations regarding ESG impact (especially the Disclosure Regulation and Articles 5 to 7 of the Taxonomy Regulation) with regard to greenwashing. With regard to conduct of business supervision, BaFin looks in particular at the implementation of the distribution requirements according to the Delegated Regulations on the Insurance Distribution Directive (IDD) and MiFiD II. BaFin's balance sheet control will monitor compliance with the CSRD transparency requirements. BaFin addresses the appropriate management of transition and physical risks and the related transparent disclosure within the scope of solvency supervision.

BaFin's complete Sustainable Finance Strategy can be found at www.bafin.de/DE/DieBaFin/Sustainable_Finance_Strategie/SF_Strategie_node.html.

Sven Johannsen, Salaried Partner and Lawyer

Final consultation on the first set of standards for the CSRD Sustainability Report

The Corporate Sustainability Reporting Directive ("CSRD") must be transposed into national law by EU member states by July 6, 2024. Through it, a growing group of companies will gradually be required to produce a sustainability report that follows certain uniform EU-wide standards.

In November 2022, a first set of these European Sustainability Reporting Standards ("ESRS") was submitted in draft form to the European Commission, which is to convert it into a delegated act in a timely manner. This ESRS set 1 consists of two overarching standards and ten topic-specific standards from the areas of environment, social affairs and governance. The overarching standard ESRS 1 explains the overall structure of the ESRS and defines the general requirements for the identification, measurement and presentation of sustainability information as well as the structure of the sustainability report. ESRS 2 governs the general, topic- and industry-independent duties to disclose material sustainability aspects, including in the context of governance structure, strategy and business model.

On June 9, 2023, the European Commission has now published the draft delegated regulation on ESRS Set 1. This includes an annex with a revised version of ESRS Set 1. The German Accounting Standards Committee e.V. ("GASC") published a comparative version to the November 2022 version on June 21, 2023. The public has the last opportunity to comment on ESRS Set 1 within a sporting deadline of July 7, 2023.

In particular, the following changes are intended to relieve reporting entities and ensure the proportionality of the ESRS:

  • All topic-specific disclosure requirements of the ESRS only have to be fulfilled if the company classifies their subject matter as material, whereby the basic principle of dual materiality continues to apply. Only the "General Disclosures" of ESRS 2 continue to be mandatory at all times. Previously, significantly more disclosures were mandatory regardless of materiality.
  • The options for postponing the fulfillment of certain reporting requirements by means of a "phasing in" have been extended. So has the flexibility in the presentation of some mandatory data points.
  • The Commission has converted certain disclosures that were mandatory under the previous draft into voluntary disclosures.

The bottom line is that reporting companies must assume more personal responsibility in the design of their sustainability report. The materiality analysis takes on even greater importance than it already had. Although the reports are likely to become significantly shorter as a result of the new regulations, the internal effort required of companies to prepare them will not necessarily decrease to the same extent. After all, various data may already have to be collected in order to assess materiality.

Meike Dresler-Lenz, Senior Associate and Attorney at Law

New Commission Package of Measures on the Sustainable Finance Framework

On June 13, 2023, the European Commission presented a new comprehensive package of measures on the Sustainable Finance Framework to further promote private financing of sustainable transition projects and technologies.

In particular, the package includes the adoption of the proposals consulted in April 2023 on the Delegated Regulation on the EU Environmental Taxonomy with a total of seven annexes. This complements the Delegated Regulation (EU) 2021/2139 of June 4, 2021 (so-called Delegated Climate Change Regulation on the Taxonomy) and its technical assessment criteria on the so-called climate objectives (1) climate change mitigation and (2) climate change adaptation. Thus, the technical assessment criteria for the previously missing sustainability goals (so-called non-climate environmental goals):

  •     the use and protection of water and marine resources (3),
  •     the transition to a circular economy (4),
  •     pollution prevention and control (5),
  •     protection and restoration of biological and ecosystems (6).

set up. Furthermore, the package includes, among other things:

Julia Cramer, Attorney at Law and Salaried Partner

Climate protection contracts - the preparatory procedure has started!

On June 6, 2023, the Federal Ministry of Economics and Climate Protection (BMWK) officially launched the preparatory procedure for the funding program "Climate Protection Contracts". Climate protection contracts are a new type of funding tool that is intended to pave the way towards climate neutrality in energy-intensive industries as part of the "Guideline for the promotion of climate-neutral production processes in industry through climate protection contracts (FRL KSV)". Funding sums in the mid double-digit billions are envisaged for the program and are to be distributed to bidders in a complex bidding process. Companies wishing to submit a bid must participate in the preparatory procedure.

Read more about this in our current Update Energy (in german language).

Susanne Christine Monsig, Partner and Attorney at Law, and Dr. Tobias Woltering, Partner and Attorney at Law

Levy obligation for single-use plastic products

On May 16, 2023, the Single-Use Plastics Fund Act (EWKFondsG) came into force. This will introduce a levy obligation for certain single-use plastic products, for example in the area of food packaging, as of January 1, 2024. The obligation primarily affects companies that are making products available on the German market for the first time.

The relevant levy rates are to be set by statutory order by the end of 2023. Stakeholders expect significant shifts in the profitability of certain forms of packaging. A fund is to be set up from the levies, which is intended in particular to compensate for collection and cleaning costs incurred by public waste management authorities.

The legislation serves to implement the Single-Use Plastics Directive (EU) 2019/904, as did the Single-Use Plastics Labeling Ordinance and the Single-Use Plastics Ban Ordinance previously. The overall aim is to reduce the impact of certain plastic products on the environment by reducing their volume and preventing them from entering the environment. In this way, the law and directive also aim to protect the oceans in particular. The current new legislation is thus closely linked to ongoing regulatory efforts at international level, such as the UN Conference on the Reduction of Plastic Pollution in Paris.

Draft legislation: Those who rely on single-use packaging should pay - an interview with Michael Below

Michael Below, Salaried Partner and Attorney at Law

EU Council takes action against global deforestation

As expected, the Council of the European Union today (Tuesday, May 16, 2023) adopted a regulation to combat deforestation and forest degradation, establishing new raw material and product-related due diligence obligations for companies.

The background to the measure is the continuing global destruction of forests. Between 1990 and 2020, an estimated 420 million hectares of forest were lost worldwide. European lawmakers want to do more to counteract this in the future.

Unlike the German Supply Chain Sourcing Obligations Act or the draft CS3D, the regulation is not primarily linked to companies of a specific size (or, like the CS3D, to specific sales figures), but opts for a "product-based" approach that applies in principle regardless of company size.

Specifically, the new regulation prohibits the placing on the Union market and provision of certain raw materials (cattle, cocoa, coffee, oil palm, rubber, soy and timber) and related products, as well as their export from the Union market, unless they have been produced without deforestation and in accordance with the relevant legislation of the producing country. In addition, market participants and traders will be required to submit a due diligence declaration in advance and to comply with certain due diligence requirements.

Violations of this can lead not only to corrective measures (such as product recalls), but also to sanctions (such as turnover-based fines, temporary bans on activities, etc.).

The regulation will now be published in the Official Journal of the EU and will then enter into force 20 days after publication. For companies, however, the regulations will only have to be implemented after a transition period of 18 months (or 24 months for certain micro and small enterprises).

Dr. Christoph Schork, LL.M. and Dr. Thomas Sikorski explain more about this regulation and other European measures in the area of corporate due diligence in their ESG Briefing webinar "New ESG requirements for purchasing in Europe - What's in store for companies?".

Dr. Thomas Sikorski, Salaried Partner and Attorney at Law

New EU Directive Proposal on Green Marketing

At the end of March, the EU Commission presented the draft Green Claims Directive. It contains special regulations and concrete specifications for the substantiation, communication and verification of explicitly environment-related claims made by traders to consumers for goods and services.

According to the Commission's intention, statements such as "30% plastic packaging", "bee-friendly juice", "climate-neutral shipping", "30% recycled plastic packaging" or "ocean-friendly sunscreen" will in future be subject to the requirements set out in the Green Claims Directive.

Companies will then have to comply with certain minimum standards relating both to how such claims are to be substantiated and to how they are communicated.

Read more about this in our latest update (currently only in german language)

Astrid Luedtke, Salaried Partner and Attorney at Law

Effective immediately: Sustainability preference query by independent intermediaries

The ordinance amending the Trade Notification Ordinance and the Financial Investment Intermediaries Ordinance came into force today - yesterday it was published in the Federal Law Gazette. This means that the obligation to make sustainability preference inquiries must be observed with immediate effect. There is no transition period. This closes a gap that previously applied in financial sales to financial investment intermediaries under Section 34f GewO and fee-based financial investment advisors under Section 34h GewO.

Background

As of August 2, 2022, regulated financial product distributors are required by the European regulation on MiFID II (Delegated Regulation on MiFID II, DelVO2017/565) to ask clients about their sustainability preferences before selling financial investment products (for more information: Sustainability preferences in investment advice (heuking.de)).

This obligation previously applied only to strictly regulated entities under the KAGB, the KWG or the WpIG (e.g. asset managers and liability umbrella intermediaries). Intermediaries under § 34f GewO and § 34h GewO were not previously subject to this regulation. For them, only the national regulations of the Financial Investment Brokerage Ordinance (FinVermV) apply, and this in turn did not refer to the corresponding European regulation on MiFID II.

Ordinance amending the Trade Notification Ordinance and the Financial Investment Intermediaries Ordinance

The Ordinance Amending the Trade Notification Ordinance and the Financial Investment Intermediaries Ordinance closes this gap. Now, financial investment intermediaries and fee-based financial investment advisors are also subject to the obligation to request information about clients' sustainability preferences as part of their investment advice.

Julia Cramer, Attorney at Law and Salaried Partner

EU Commission publishes new Q&As on the Disclosure Regulation (Regulation (EU) 2019/2088)

Regarding the Disclosure Regulation, the EU Commission has published new interpretative guidance in the form of Q&As in April 2023. With regard to the Disclosure Regulation, which must be observed by financial market participants, among others, as of March 10, 2021, there are still various questions of interpretation. In the current Q&As, the EU Commission has now clarified in particular that the Disclosure Regulation does not set any minimum requirements in Article 2 (17) with regard to "sustainable investment". Rather, financial market participants must make their own corresponding assessment for each investment and disclose the underlying assumptions (Q&A 2).

Sven Johannsen, Salaried Partner and Attorney at Law

New requirements in the area of ecodesign

On April 17, 2023, the European Commission issued a regulation setting new ecodesign requirements for the energy consumption of electrical and electronic household and office equipment in off-mode, standby mode and networked standby mode. This replaces existing regulations dating back to 2008. The new requirements will largely take effect after a transition period beginning May 09, 2025 (with some limits being updated incrementally).

Dr. Thomas Sikorski, Salaried Partner and Attorney at Law

Obligation to record working hours - first draft law of the German government is available

Since the rulings of the ECJ (so-called "time clock ruling" of May 14, 2019, C-55/18) and the subsequent landmark decision of the BAG in 2022 (decision of September 13, 2022, 1 ABR 22/21), it is clear that health protection requires employers in Germany to ensure that the daily working hours (start, end, duration) of their employees are documented. How this is to be done in detail, e.g. whether electronic recording is generally required or whether the recording can also be done manually by the employees themselves, has not yet been clarified. The question of whether and to what extent exceptions apply or can be agreed for certain groups of employees has also been left open by the court decisions to date. There is an urgent need for clear legal regulations in this area.

Now, according to reports, an initial government draft for a law on the recording of working hours is available and must now be analyzed. According to this draft, the recording of working hours is apparently to be carried out electronically on a daily basis "across the board" in the future, although it is not specified whether the recording is to be carried out automatically or personally (or, for example, by superiors). Exceptions for certain employees, such as the recording of times in paper form or a slightly delayed recording (within a week), should (only) be able to be agreed on the basis of collective agreements.

Read more about this in a recent update on labor law (only in german language).

Christoph Hexel, partner and attorney, specialist in labor law

Preliminary agreement for EU Green Bond Standard - EUGBS

EU Council and Parliament negotiators have agreed on a proposal for EU Green Bond Standards (EUGBS), according to a February 28, 2023 press release. This agreement still needs to be adopted by the bodies; the details are expected to be published soon. The EU's goal is to create a gold standard for green bonds with the EU Green Bond Standard. Through an established set of rules, greenwashing in particular is to be avoided and the EU is to be established as a leading market for sustainable financing.

In principle, all proceeds must be used in conformity with the EU taxonomy. For areas not yet covered by the EU taxonomy and for certain very specific activities, there will be a flexibility framework of 15%.

In addition, there will be strict disclosure and external valuation obligations. This will be combined with a registration system and a supervisory framework for such external valuers.

The national competent authorities of the respective home member state are to monitor that issuers comply with their obligations under the EU GBS, according to the press release.

The release is also understood to state that the EU Green Bond Standards will be voluntary and not mandatory as has been discussed in some quarters. Established guidelines such as ICMA can thus also continue to be used. This is particularly important as long as there are still a number of open questions and issues in the application of the EU taxonomy.

Dr. Anne de Boer, Partner and Attorney at Law

Tightening of CO2 emission standards for new heavy-duty vehicles

With a new proposed regulation dated Feb. 14, 2023, the EU Commission intends to revise existing regulations and, in particular, set more ambitious emission reduction targets for heavy-duty vehicles and new reporting requirements.

EU Commission unveils new Green Deal industrial plan

On February 1, 2023, the European Commission unveiled its new Industrial Plan for the Green Deal. With it, the Commission intends to make European industry more competitive in the global "cleantech race" and to accelerate the transformation to climate neutrality initiated by the Green Deal. The strategy is based on four pillars:

    Planning certainty and a simplified regulatory environment (various legislative initiatives will be proposed for this purpose, in particular on a CO2-neutral industry, critical raw materials and a reformed electricity market design),
    Acceleration of access to funding (in particular, the granting of subsidies is to be accelerated and simplified, and a European Sovereignty Fund is to be proposed as early as summer 2023),
    Skills development (such as through academies with continuing education and retraining programs for a carbon-neutral industry), and
    Open and fair trade for resilient supply chains (in particular, through the expansion of free trade agreements and increased international cooperation for CO2-neutral technologies, and by protecting the internal market from unfair trade in clean technologies).

The extent to which the individual projects in the plan will actually be implemented remains to be seen. The Czech government, for example, has already clearly spoken out against the announced European Sovereignty Fund at the beginning of March 2023.

Dr. Thomas Lukas Sikorski, Salaried Partner and Attorney at Law

Our advisory topics

Our ESG team’s lawyers have the requisite legal expertise in all relevant subject ar-eas and will assist you in implementing the applicable ESG regulations in an effi-cient and practical manner.

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

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

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

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.

What ESG stands for

The acronym “ESG” (for “Environment, Social, and Governance”), as well as the principle of action of sustainability, have become not merely motivation but an intrinsic part of legal development in all disciplines of law.

We offer comprehensive legal advice on all aspects of ESG and view it as our responsibility to help define corporate practice.

The financial sector was and continues to be a crucial starting point for ESG legislation, but the topic now pervades all aspects of our life, including our advisory fields. Businesses are already preparing to have their products, company structure, and strategy evaluated against ESG criteria as increasingly expected by consumers, investors, and financiers, as well as employees and business partners.

Please also visit our Corporate Social Responsibility (CSR) topic page:

Visit topic page

 

Developing uniform classification systems

The EU is in the process of adopting taxonomies and consistent classification systems. The Environmental Taxonomy has begun its classification of environmental friendliness of economic activity based on six environmental objectives.

In the meantime, however, attention is being focused not only on the “E” but also on the “S” and the “G” in “ESG”.

In February 2022, the Platform on Sustainable Finance of the EU Commission presented its Final Report on a potential comparable social taxonomy based on the social goals of decent work, adequate living standards, inclusiveness, and sustainability.

In Germany, the new Supply Chain Due Diligence Act has already codified the human rights due diligence duties that companies are required to ensure for their supply chains.

Environmental

In ESG, the term “Environmental” refers to the interaction between businesses and the environment and climate. The overall objective, according to the Taxonomy Regulation (Regulation (EU) 2020/852) is to facilitate environmentally sustainable economic activities. An investment is considered environmentally sustainable if it contributes significantly to the achievement of at least one of the environmental objectives of the Regulation and there is no risk of considerable harm to (potentially other) environmental objectives. The Regulation also refers to minimum social criteria within the framework of environmental sustainability (more on this below under “Social”).

Key environmental objectives are:

  • climate change mitigation and adaptation,
  • the sustainable use and protection of water and marine resources,
  • the transition to a circular economy,
  • pollution prevention and control, and
  • the protection and restoration of biodiversity and ecosystems.

Individual requirements are outlined in the Taxonomy Regulation and delegated acts. For instance, Delegated Regulation 2021/2139 specifies evaluation criteria for assessing when a significant contribution has been made to climate change mitigation or adaptation. Delegated Regulation 2022/1288establishes standards for financial market participants and financial advisors to communicate appropriate product information.

Social

The term “Social” in ESG refers to the social and societal aspects of a company’s operations. In accordance with Regulation (EU) 2020/852 on environmental taxonomy, a categorization system is to be used to identify social targets for assessing whether an investment is socially sustainable. This is meant to regulate money flows.

Similar to the environmental taxonomy, social taxonomy will establish societal objectives, specify categories of major contributions, clarify that none of these objectives may be seriously compromised, as well as define a specified minimum level of protection. Details will be contained in delegated acts, and there will be reporting requirements. Acceptance will be increased by employing a comparable methodology to the environmental taxonomy, notwithstanding their variances. Similarly, references to a number of international and European principles, including human rights, will be made.

Targets

The expert platform sets three objectives adapted to the many stakeholder groups, including employees, customers, and communities:

  • decent work (including for value-chain workers),
  • adequate living standards and well-being for end-users, and
  • inclusive and sustainable communities and societies.

Governance

The “G” for Governance stands for sustainable corporate management. This encompasses topics such as business ethics, company values, and management and control procedures (corporate governance). Corruption and anti-competitive activity must be eliminated by independent oversight bodies within the organization.

Performance-based compensation schemes for management that are connected with sustainability objectives are an essential governance issue. Good corporate governance is inextricably tied to sustainability reporting, which is gaining importance across all ESG domains.

The “Recommendation for a Social Taxonomy” formulates governance (business management) standards from the standpoint of the social and environmental taxonomies, with two goals in mind:

  1. strengthening sustainability aspects of traditional corporate governance with sustainability assessment skills in the highest governance body and transparency on sustainability objectives and targets;
  2. strengthening corporate governance topics which have an independent significance for sustainability. These include in particular anti-bribery and anti-corruption measures, responsible lobbying and political engagement, non-aggressive and transparent tax planning, diversity of board members, and the option of employee representation on supervisory boards.

Environmental

In ESG, the term “Environmental” refers to the interaction between businesses and the environment and climate. The overall objective, according to the Taxonomy Regulation (Regulation (EU) 2020/852) is to facilitate environmentally sustainable economic activities. An investment is considered environmentally sustainable if it contributes significantly to the achievement of at least one of the environmental objectives of the Regulation and there is no risk of considerable harm to (potentially other) environmental objectives. The Regulation also refers to minimum social criteria within the framework of environmental sustainability (more on this below under “Social”).

Key environmental objectives are:

  • climate change mitigation and adaptation,
  • the sustainable use and protection of water and marine resources,
  • the transition to a circular economy,
  • pollution prevention and control, and
  • the protection and restoration of biodiversity and ecosystems.

Individual requirements are outlined in the Taxonomy Regulation and delegated acts. For instance, Delegated Regulation 2021/2139 specifies evaluation criteria for assessing when a significant contribution has been made to climate change mitigation or adaptation. Delegated Regulation 2022/1288establishes standards for financial market participants and financial advisors to communicate appropriate product information.

Social

The term “Social” in ESG refers to the social and societal aspects of a company’s operations. In accordance with Regulation (EU) 2020/852 on environmental taxonomy, a categorization system is to be used to identify social targets for assessing whether an investment is socially sustainable. This is meant to regulate money flows.

Similar to the environmental taxonomy, social taxonomy will establish societal objectives, specify categories of major contributions, clarify that none of these objectives may be seriously compromised, as well as define a specified minimum level of protection. Details will be contained in delegated acts, and there will be reporting requirements. Acceptance will be increased by employing a comparable methodology to the environmental taxonomy, notwithstanding their variances. Similarly, references to a number of international and European principles, including human rights, will be made.

Targets

The expert platform sets three objectives adapted to the many stakeholder groups, including employees, customers, and communities:

  • decent work (including for value-chain workers),
  • adequate living standards and well-being for end-users, and
  • inclusive and sustainable communities and societies.

Governance

The “G” for Governance stands for sustainable corporate management. This encompasses topics such as business ethics, company values, and management and control procedures (corporate governance). Corruption and anti-competitive activity must be eliminated by independent oversight bodies within the organization.

Performance-based compensation schemes for management that are connected with sustainability objectives are an essential governance issue. Good corporate governance is inextricably tied to sustainability reporting, which is gaining importance across all ESG domains.

The “Recommendation for a Social Taxonomy” formulates governance (business management) standards from the standpoint of the social and environmental taxonomies, with two goals in mind:

  1. strengthening sustainability aspects of traditional corporate governance with sustainability assessment skills in the highest governance body and transparency on sustainability objectives and targets;
  2. strengthening corporate governance topics which have an independent significance for sustainability. These include in particular anti-bribery and anti-corruption measures, responsible lobbying and political engagement, non-aggressive and transparent tax planning, diversity of board members, and the option of employee representation on supervisory boards.

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