Sustainability is a top priority
How to use the chance for a sustainable transformation
LkSG, CSRD, CSDDD, EU taxonomy - sustainability regulation is a high priority in Berlin and Brussels, even if the discussions are sometimes rather diverse. New regulations such as the Corporate Sustainability Reporting Directive (CSRD) are making it an obligation for companies to disclose their environmental, social and governance (ESG) performance transparently and comprehensively. How do companies manage to take a deep breath in the regulatory corset, though? How can management boards and supervisory boards master the actual sustainable transformation?
Sustainable action is no longer something that is ‘nice-to-have’. Instead it is an elementary component of the business strategies and specifications of companies. This has also reached the boardroom. The aim is to utilise entrepreneurial opportunities and at the same time avert reputational damage or potential liability risks. Ignoring or breaching obligations can lead to considerable reputational damage and resentment among stakeholders. This jeopardises the loyalty of customers and employees - not to mention financing challenges.
And even if external expectations and regulatory hurdles are often perceived as unnecessary and excessive, there is a growing understanding that sustainability also represents a significant opportunity. The pursuit of sustainability can drive the engine of strategy and innovation: from product innovations and optimised processes to the alternative use of raw materials and cost savings. Sustainable management means using resources more efficiently. Minimising rejects and waste through recycling or optimising supply chains offer considerable savings potential and bring real benefits.
Against this backdrop, companies are at a turning point: sustainability management is no longer a mere compliance exercise, but a transformative journey towards an integrated, holistic approach that is firmly anchored in the corporate strategy. But where should you start? How can management boards ensure that the transformation journey succeeds?
ESRS - clear allocation of roles
The management boards are already responsible for preparing the sustainability report, while the supervisory board is responsible for monitoring it. The CSRD and the associated European Sustainability Reporting Standards (ESRS) now concretise this content both for listed companies and for a large number of European SMEs.
The aim of the ESRS is to make sustainability information related to the company's material topics verifiable and comparable. The Governance Standard ESRS G1 focuses on six core aspects of corporate policy: corporate governance, management of relationships with suppliers (including payment practices, political commitments and lobbying activities), the prevention of corruption and bribery, and the somewhat detached topic of animal welfare.
But does this reflect the current reality? Are these requirements already being put into practice? In a recent study, BDO and Kirchhoff Consult examined the annual and sustainability reporting of the 80 leading index companies from the DACH region (DAX 40, ATX, SMI) with regard to their corporate governance reporting.1 At 86 per cent, the majority have already anchored the topic of ESG at board level.
At 83 per cent, the representatives from the DAX 40 are slightly behind those from the ATX (90 per cent) and SMI (90 per cent), where only two companies each lacked corresponding reporting. In both the ATX and the SMI, all companies reported that the management board levels are informed about ESG issues. In the DAX 40, this figure is only 78 per cent.
In addition to the governance standard ESRS G1, the overarching and mandatory standard ESRS 2 emphasises the involvement of the Management Board and Supervisory Board in decision-making processes and the integration of ESG into risk management. ESRS 2 requires various disclosure obligations and also regulates specific requirements in the area of governance and strategy. For example, information must be provided on the competences of a company's management and supervisory bodies with regard to sustainability and whether these aspects are also integrated into remuneration. This is intended to ensure transparency and accountability in management and reporting.
ESG monitoring by the Executive Board
An effective management approach is crucial for integrating sustainability management into the corporate strategy. Management boards must work together with specialist managers to identify and prioritise ESG risks and opportunities for their company and systematically integrate them into traditional risk management. Benchmarking with other companies and stakeholders can help to define and regularly update the key ESG issues. The integration of ESG risks into existing risk management systems is necessary from a business management perspective in order to ensure comprehensive and strategic risk management that no longer distinguishes between financial and sustainability-related risks, but instead takes a holistic approach.
Forward-thinking management boards will not see the integration of sustainability as an additional burden, but will view activities relating to ESG factors as an opportunity to improve the company's resilience and capitalise on future opportunities. Investors are increasingly focusing on ESG criteria because they know that climate change threatens assets. Possible scenarios range from flooded production facilities to the collapse of supply chains due to droughts. Companies that take these factors into account in their strategy and manage risks have a good chance of obtaining funding on better terms. For example, the European Union is driving the market for so-called green bonds with its regulations. Green bonds, which are specifically designed to finance ecological projects, have a price advantage over conventional bonds, e.g. through lower interest rates.
Sustainability has also become more important from a customer perspective: Sustainable products and services increase the attractiveness of the services offered by a company. For companies, this can mean that services can be sold as premium products, leading to higher profit margins. The fact that this approach can also work without a price premium is demonstrated by supermarkets and discounters with their own organic brands, which, in addition to ecological promises, also offer a convincing price.
The role of the supervisory board in ESG governance
In addition to the communicative involvement of the Executive Board in the company's ESG activities, the Supervisory Board must also fulfil its supervisory function with regard to ESG matters, with the ESRS paying particular attention to the corresponding competence profiles. Today, ESG expertise is an indispensable prerequisite for supervisory boards to fulfil their substantive audit duties. Companies and shareholders are recommended to ensure that at least one member of the supervisory board also has ESG expertise, in line with the legally required expertise of supervisory board members in accounting or auditing. In addition, supervisory boards can consider setting up an ESG committee - similar to the audit committee. This is the only way to ensure effective monitoring of corporate sustainability performance and advice from the supervisory board in the area of sustainability. How exactly can this necessary expertise be accessed? In our survey, only 58 per cent of the reports indicated that there is an ESG reference to the supervisory board and a description of the competence profiles of relevant members.
In the DAX 40, the figure of 48 per cent is even just under half. In the future, however, precisely this information will have to be provided. Companies and supervisory board members are therefore well advised to address the need for qualification in relation to ESG issues at an early stage. In addition to qualifications, it will be much more important to strategically manage sustainability aspects in the core business. Companies must rethink and expand their sustainability management processes in order to minimise risks and exploit opportunities - and not just to meet the requirements of the CSRD.
The first step in this strategic direction is to conduct a materiality analysis to identify and prioritise the ESG issues relevant to the company. Double materiality, which encompasses the company's impact on the environment and society as well as the financial risks posed by external environmental and social factors, plays the decisive role here.
Conclusion
The environmental, social and regulatory challenges facing not only the large capital market-oriented companies in the EU make structured corporate governance in the sense of holistic and effective ESG governance essential. Management and supervisory boards are required to continuously educate themselves and lead the internal company discourse in order to keep an eye on emerging ESG aspects and contribute to the long-term resilience of the company.
A key aspect to consider is continuous risk assessment, which enables companies to identify relevant ESG risks and opportunities. Stakeholder input, benchmarking with other companies and the documentation of a structured assessment framework are key steps in this process. Close cooperation between the Executive Board and Supervisory Board is crucial in order to integrate ESG factors into existing management processes and develop clearly defined measures to address identified risks. The use of a customised ESG framework makes it possible to effectively manage sustainability-related risks and opportunities and translate them into measurable goals that benefit both the company and its value chain.
In view of the ecological and social challenges of our time, as well as the expansion of the CSRD user group in the coming years, it should be essential for corporate management to address the requirements accordingly.
1 BDO & DKI (2024): „BDO/Kirchhoff Consult (2024): Governance – Reporting zur nachhaltigen Unternehmensführung. URL: https://www.kirchhoff.de/fileadmin/static/pdfs/2024_news/20241216_DAX160_Studie%E2%80%93Teil_3.pdf. [Status: 28 January 2025]
