Ensuring governance in the ESG environment

The relevance of sustainability has increased considerably in recent years. Today, it is a key success factor for companies. Both social expectations and new legal requirements call for a holistic governance concept that harmonises environmental, social responsibility and corporate governance (ESG).

Since the Corporate Sustainability Directive (CSRD) came into force on 5 January 2023, listed companies have had to implement the requirements of the EU directive and establish corresponding measures and processes for non-financial reporting. As part of the Green Deal, the EU Commission is planning to make things easier for companies despite the high economic significance. The first omnibus package is intended to revise the sustainability reporting obligation (CSRD) and the due diligence obligations (CSDDD) in particular:

• CSRD: The reporting obligation will be postponed by two years. In addition, in future only companies with more than 1,000 employees and either more than 50 million euros in turnover or more than 25 million euros in total assets will be obliged to submit a sustainability report in accordance with the CSRD.
• CSDDD: The obligations will be postponed by one year and will initially only affect direct business partners.

The European Financial Reporting Advisory Group (EFRAG) is developing the Voluntary Sustainability Reporting Standard (VSME Standard) for micro, small and medium-sized enterprises (SMEs) that are not covered by the CSRD. This standard is a voluntary reporting standard for SMEs that is intended to help these companies to fulfil the information requirements of banks, investors and their downstream value chain in a uniform manner. As sustainability reporting is also important for SMEs without the obligation of the CSRD, the VSME standard represents a pragmatic alternative.

Despite regulatory simplifications, sustainability remains a decisive competitive factor. Stakeholders such as investors, customers, employees and business partners are increasingly evaluating companies based on their ESG strategy. Financing decisions, tenders and market preferences are based on credible environmental and social information.

Companies are operating in an increasingly complex regulatory environment. The most important developments include

• EU deforestation regulation
• EU taxonomy
• Act to strengthen financial market integrity
• EU General Data Protection Regulation (GDPR)
• Whistleblower Protection Act
• EU measures against money laundering

These regulations illustrate the political will to make companies more accountable - particularly with regard to sustainable business practices - and show the continued relevance for companies to engage with ESG regulations.

With increasing ESG relevance, new forms of white-collar crime are emerging. Companies are confronted with the following risks in particular:

• Greenwashing and carbonwashing
• Falsification of environmental certificates
• Misleading sustainability claims
• Corruption in the approval process
• Violations of human rights
• Rainbow and purplewashing

In particular, fraud risks can arise in connection with the requirements of the CSRD.

Prevention and control are essential here in order to avoid reputational damage and liability risks.

A sustainable company needs ESG not just as a strategy, but as part of its DNA. This means that only companies that establish clear processes and responsibilities for ESG can act credibly and successfully. Even with simplified reporting obligations, strong ESG governance remains crucial. It protects against risks, strengthens the brand and creates sustainable added value. Companies must continuously adapt and improve their governance structures.