Compliance and sustainability - progress through synergy effects
Social expectations and trends, as well as the growing awareness of all economic participants for the ongoing climate crisis and its consequences, prompts ever more companies to implement comprehensive compliance measures. First and foremost, it is sustainability-based legislative proposals that provide the most convincing arguments for the introduction of sustainability-oriented compliance structures. A closer look reveals that the organisational and financial effort necessary to establish compliance measures often conceal the potential benefits for companies deciding to take that route.
There is an increasing tendency to assume social and ecological responsibility through compliance measures. Discussions about (future) legal requirements are also further companies interest in this topic and raise questions that cannot be answered in a general way (yet).
In order to be able to understand a possible interplay between compliance and sustainability, it is necessary to explain both terms.
What is "compliance"?
The conventional concept of compliance is one in which companies try to ensure that they adhere to the applicable rules, i.e. compliance with the law.
For a long time, compliance measures meant implementing risk management and avoiding criminal liability with as little effort as possible. In many cases, compliance departments merely checked compliance with minimum legal requirements. In recent years, there has been a trend to create "green" compliance structures in companies that go beyond the legislative requirements and increase the attractiveness of the company for investors, customers and employees.
What is "sustainability"?
There is no generally valid definition of "sustainability", nevertheless legal norms that include the term "sustainability" generally adhere to the following principle:
No more resources may be consumed than can be regrown, regenerated or provided again in the future at any one time.
The so-called three-pillar concept represents the prevailing understanding of the term "sustainability" and contains three elements: economy, ecology and social issues. The model assumes that sustainability can only be achieved through the simultaneous and equal implementation of environmental, economic and social goals.
Sustainability means aiming the current thinking and actions towards improving the living situation of the present generation without worsening the prospects of future generations.1
Legal measures relating to sustainability
At the moment, there are many legal provisions that (aim to) have a positive impact on the environment. In the following, some of these laws, which are also relevant for compliance officers, are presented, starting from the status quo.
Proposal for a Directive on corporate sustainability due diligence
The draft EU Directive on corporate sustainability obligations was published by the European Commission in February 2022. It is to be implemented through separate supply chain laws enacted by member states. More details on this have already been explained in the blog post on the "Directive on corporate sustainability obligations - key points of a (possible) supply chain law" of 28 March 2022.
The SDGs (Sustainable Development Goals) of the United Nations include 17 goals for sustainable development of the 2030 Agenda. The Agenda is primarily directed at the community of states and their governments, but also appeals to the responsibility of companies. The SDGs are intended to support organisations on their way to sustainable business. The aim is also to create a common language and facilitate comparison among those who choose their strategies in line with the SDGs.
ESG stands for "Environmental, Social, Governance". Governments, organisations and companies have committed to advancing sustainable development by incorporating ESG values. By adhering to ESG standards, social, ethical and environmental considerations determine corporate decisions in addition to economic considerations. ESG ratings provide a scientific assessment of corporate sustainability performance, creating transparency for clients and enabling them to distinguish between greenwashing and genuinely sustainable corporate activities.
The inclusion of ESG practices in the term "compliance" expands its original meaning. However, there are already companies that are pioneers in this regard. They no longer just wish to implement legal requirements but rather try to find approached tailored to stakeholders’ interests. Therefore, their values and goals exceed the bare minimum laid down in the legal framework.
In June 2022, the Council and the European Parliament reached a preliminary political agreement on the CSRD (Corporate Sustainability Reporting Directive). As a result, companies will be required to publish transparent and detailed reports on environmental rights, social rights, human rights and governance factors. In comparison to the previous Non-Financial Reporting Directive (NFRD) the proposed CSRD has a broader remit and thus expands the field of companies that report on these issues. All large companies along with all companies whose shares are listed in regulated markets, including listed SMEs, are affected by the Directive. Furthermore, non-European companies are also subject to a reporting obligation on their ESG impacts under the condition that they have a subsidiary or branch in the EU and a net turnover of more than €150 million. The reporting obligation, which is intended to enable a comparison of environmental, social and governance-related aspects, will be applied in three stages:
- From 01 January 2024 for companies that are already subject to the NFRD.
- From 01 February 2025 for large companies that are currently not subject to the NFRD.
- From 01 January 2026 for listed SMEs and small, non-complex credit institutions and captive insurance companies.
The agreement still requires approval by the European Parliament and by the Council through the exclusion of the Permanent Representatives Committee (Coreper).
As a result of the upcoming reporting obligations, there is a need to adapt compliance and reporting structures.
EU taxonomy for sustainable activities
In order to prevent greenwashing and promote sustainable investments, the EU Taxonomy Regulation (Regulation (EU) 2020/852) introduces a classification system for environmentally sustainable economic activities.
Affected by the EU Taxonomy Regulation are
- Companies with more than 500 employees that fall under the NFRD,
- financial institutions, including occupational pension providers, which offer and distribute financial products in the EU, and
- the EU and its MS in setting public policies, standards or labels for green financial products or (corporate) bonds.
The regulation includes the following six environmental objectives:
- climate protection
- adaptation to the climate crisis
- sustainable use and protection of water and marine resources
- transition to a circular economy
- prevention and reduction of environmental pollution
- protection and restoration of biodiversity and ecosystems.
Since 01 January 2022, the first two environmental goals of the EU taxonomy have been applied. The remaining four objectives are still being formulated and are to be applied from 01 January 2023.
According to the Taxonomy Regulation, an economic activity is "environmentally sustainable" if it (cumulatively)
- makes a significant contribution to one of the six environmental objectives mentioned,
- does not have a negative impact on any of the other environmental objectives ("Do No Significant Harm" criterion)
- complies with the minimum level of social protection, and
- complies with the Commission's technical assessment criteria.
Only a company that fulfils these requirements can be classified as sustainable.
Need for action for companies
The question is whether or to what extent there currently is a need for action on the part of companies. In particular, it is up to the compliance departments to integrate sustainable considerations into guidelines, programmes and corporate codes of conduct. Furthermore, employee training, for example, can have a positive effect on the ecological and moral attitude and thus on the actions of the employees (for the company).
In practice, the integration of sustainable ideas, e.g. ESG standards, into compliance structures works as illustrated below:
Companies choose ESG frameworks for reporting, thereby action targets can be set, performance indicators developed, and their impact compared. For successful and transparent implementation of ESG standards requires accurate data collection and management. The data that needs to be collected are often spread across different departments of a company. Therefore, to increase efficiency, especially in large companies, a simplified process of data analysis should be introduced through automated tools.
What benefits can companies gain from excessive compliance practices?
The inclusion of stricter environmental, social and governance practices may offer companies a competitive advantage, as the number of customers, investors and (potential) employees who attach great importance to working with sustainably operating companies increases. Legislation is also gradually imposing stricter requirements on corporate transparency in these areas. The need to react quickly and under some pressure if new and stricter regulations are introduced in future can be avoided by proactively redesigning of compliance measures.
The fact that the trend to act sustainably and beyond the legal provisions has already arrived in compliance departments is also made clear by the study "The Future of Compliance 2021"2 from Germany. 42 % of the compliance officers surveyed stated that they are strongly to very strongly concerned with the topic of sustainability. Although other departments primarily deal with environmental issues, compliance is gaining massively in importance as an overarching organisational and goal-setting structure in this regard.
Furthermore, due to media and advertisements, the increased importance of sustainably oriented compliance structures for attracting investors is becoming progressively clearer. Based on the high demand, "green investment funds", "eco funds", etc. are being advertised more frequently. This creates an advantage over traditionally and – in the eyes of many investors – “short-sightedly” operating companies.
Future-oriented, ecologically motivated action should be strived for as a long-term corporate goal. It is necessary to deal with the influences of the topics of ESG and sustainability on compliance because compliance and sustainability are in a kind of symbiosis with each other, which makes it possible to build value-based corporate cultures that increase the value for all stakeholders.
The increased focus on sustainability and ESG standards is still new and a challenge for compliance officers due to the not yet completely uniform and incomplete regulatory framework. Particularly due to the different definitions of "sustainability" in the respective legal provisions, precise work is required. These definitions are also shaped by political influences. This is particularly evident in the fact that the EU classifies, for example, nuclear power and gas as sustainable in the taxonomy regulation. Therefore, it is important to keep an eye on the underlying definitions and to pay attention to differences in order to react to newly implemented legislation in a legally compliant and sustainable manner.
It is thus clear that conscientious, forward-looking and constant attention to current and future legal measures, as well as ethically desirable procedures, are required in order to use sustainable compliance measures to increase profits and be environmentally friendly at the same time.
1 Cf. Müller/Widl/Sonnleithner in Zahradnik/Richter-Schöller (Hrsg), Handbuch Nachhaltigkeitsrecht 2021 Rz 2.17.
Please note: This blog merely provides general information and does not constitute legal advice of any kind from Binder Grösswang Rechtsanwälte GmbH. The blog cannot replace individual legal consultation. Binder Grösswang Rechtsanwälte GmbH assumes no liability whatsoever for the content and correctness of the blog.