Germany moves ahead with new environmental, social and governance reporting requirements

As previously discussed in blog posts documenting the rise of supply chain legislation and the emergence of disclosure-based lawsuits, slavery is not a phenomenon of the past but a persistent form of abuse in many parts of the globe.  This has been highlighted by the award of this year’s Pulitzer Prize to the Associated Press for exceptional research into working conditions in the Asian fishing industry.  And in order to tackle modern slavery, the UK and California have implemented laws promoting corporate supply chain responsibility, and requiring certain companies to report on their specific actions to eradicate slavery and human trafficking in their supply chains.

The EU is going further.  Directive 2014/95/EU (the 2014 Directive) on the disclosure of non-financial and diversity information was adopted and published by the EU in the fall of 2014.  It requires larger companies to disclose a variety of information in their annual reports not limited to labour-related issues, but extending to environmental concerns, social and employee-related matters, and measures undertaken in respect of human rights and against corruption and bribery.

The 2014 Directive must be transposed into German law by December 2016 and it will take effect at the start of the 2017 financial year.  The German government has drafted a legislative proposal to amend the German Commercial Code.  New rules memorialized in the proposal will apply to stock corporations, banks and insurers with an annual average of more than 500 employees and an annual balance sheet total exceeding 20 million euros or revenues exceeding 40 million euros a year.  In addition, companies must be listed on capital markets.

Hundreds of companies already fulfil these criteria, and it is likely that these companies will require their business partners and suppliers to fulfil reporting requirements as well.  Under the proposal,  companies will be obliged to disclose, via their management reports or separate reports, the possible impact of their business activities on non-financial matters and how they address those impacts.

Neither the 2014 Directive nor the German proposal requires companies to develop additional measures or concepts specifically to address any reported impact.  So long as disclosure obligations are met, companies will not be sanctioned if they do not pursue separate environment or human rights policies.  The financial auditor examines whether non-financial issues are disclosed but not what is reported.  However incorrect information or non-disclosure with regard to non-financial issues could potentially lead to sanctions.  And additional pressure will undoubtedly be exerted by civil society, compelling companies to act in accordance with law and also do the “right thing” for reputational reasons.

In addition to transpose the Directive, the German government is developing a National Action Plan on business and human rights – an additional measure to promote increased corporate social responsibility.  As a result, for the export-focused German industry, non-financial issues (including in relation to the supply chain) should feature in a company’s business strategy and compliance management systems. All companies should evaluate the potential applicability of the proposed German regulations and adjust their practices as necessary to become compliant before enforcement in 2017.