According to the Brundtland Report, “Our Common Future,” published by the World Commission on Environment and Development in 1987, sustainability can be understood as development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
The Federal Financial Supervisory Authority (BaFin) defines sustainability risks as events or conditions in the areas of the environment, social issues, or corporate governance (Environmental, Social, and Governance, or ESG for short) that, if they occur, may have actual or potential negative impacts on a company’s net assets, financial position, earnings, and reputation.
As examples of ESG, BaFin cites, among other things, tax compliance, measures to prevent corruption, adherence to recognized standards, and compliance with occupational safety and health protection requirements. There are therefore many different ways to approach the topic of sustainability. Here are a few examples from a corporate perspective:
- Sustainable finance, for example, the impact of sustainability on future credit terms
- The impact of sustainability on transfer pricing within an international corporate group
- The impact of sustainability on mergers and acquisitions (M&A) and the due diligence that precedes them
- The impact of sustainability on corporate valuation
- Sustainability reporting in companies’ management reports
- Topics with a stronger legal focus, such as the Supply Chain Due Diligence Act or the EU Supply Chain Directive (CSDDD), and the General Equal Treatment Act (AGG)
- Aspects such as equality and workplace safety, inclusion, and whistleblowing
- Dual materiality
- Outside-in perspective (financial materiality): Impact of sustainability issues on the company
- Inside-out perspective (impact materiality): The company’s impact on the environment and society
Dr. Harald Riedel
Dr. Harald Riedel is a certified public accountant, tax advisor, and founding partner of PKF Riedel Appel Hornig GmbH, with more than 30 years of experience in auditing, tax consulting, and management consulting. He specializes in auditing and advising manufacturing, retail, and service companies; designing tax models; conducting business valuations; and advising on structural measures. Dr. Riedel is a member of the executive board of PKF Deutschland GmbH and a member of the Chamber of Tax Advisors and the Chamber of Public Accountants.
Dr. Harald Riedel will be happy to assist you:
His areas of expertise include:
- Restructuring/Conversions
- Acquisition and sale of companies
- Corporate tax law
- International tax law
- Contact person for small and medium-sized businesses
His key industry areas are:
- Automotive
- Fashion
- Service Companies
- Renewable Energy
Sustainability in the Company's Performance Management System
Sustainability has become an integral part of companies’ sets of objectives. Those who fail to take it into account will not be able to operate profitably in the long term. At the same time, sustainability goals can only be met if companies operate profitably.
This can certainly lead to conflicting goals. This happens, for example, when environmental protection measures incur costs that cannot be passed on to the market. However, goals can also be complementary—for instance, when energy demand based on renewable energy sources results in lower energy prices than demand based on fossil fuels.
It is also conceivable that a company could achieve comparatively higher profit margins with sustainable organic products. Furthermore, holding online meetings instead of in-person meetings can reduce travel costs on the one hand, and on the other hand, reduced travel also contributes to environmental protection and thus to sustainability. For example, video conferences improve companies’ environmental footprint and promote their profitability.
The rapid tightening of the legal framework in the area of sustainability—such as sustainability reporting or the Supply Chain Act—as well as stakeholder expectations ensure that companies must address the issue of sustainability—and that a transformation process will take place. Without pursuing sustainability goals, a company will not be able to survive in the market in the long term.
Legally Mandatory Sustainability Reporting
Until now, Section 289b et seq. of the German Commercial Code (HGB) required certain companies to include sustainability reporting as a non-financial statement in their management report. This requirement is being significantly expanded as a result of an EU directive and is currently the talk of the town as “sustainability reporting” or the Corporate Sustainability Reporting Directive (CSRD). This also significantly broadens the scope of application. While only an estimated 500 companies in Germany were previously affected by the non-financial statement, the “German Accounting Standards Committee” (DRSC) estimates that approximately 15,000 companies in Germany will be affected in the future. For most large companies, sustainability reporting will apply for the first time to the 2025 fiscal year, which must then be reported on in 2026.
In terms of content, sustainability reporting is intended to cover both the effects of the external environment on the company (outside-in perspective) and the company’s impact on its environment (inside-out perspective). A central element of the amended CSRD is the establishment of uniform European reporting standards that companies must apply when preparing their reports. The European Sustainability Reporting Standards (ESRS) will be adopted by the European Commission as delegated acts and thus transposed into applicable law.
The EU Taxonomy Regulation (including transition periods) must also be taken into account in the context of sustainability reporting. In this context, companies must report, among other things, what proportion of capital expenditures (Capex), operating expenses (Opex), and revenue contributes significantly to environmentally sustainable economic activities in accordance with the taxonomy. Companies subject to audit must have this information (implicitly) attested by their auditor as part of the annual financial statement audit. Affected companies are advised to address this issue early on and seek external expertise if necessary.
Communicating Sustainability for Advertising Purposes
In the future, sustainability will play an increasingly important role in advertising to optimize a company’s public image, product sales and profit margins, as well as customer relationships. Sustainability in advertising can refer to the portrayal of the company as a whole or to the individual product itself (e.g., “x percent of this product’s packaging is made from recyclable materials,” “packaging contains x percent less plastic”), it can highlight transparency throughout the supply chain (e.g., by indicating the origin of food products, “locally sourced food”). But advertising slogans should also convey sustainability—see “100% Whopper – 0% Beef” (Burger King), “One planet – one health” (Danone), “Good for me, good for the environment” (SodaStream), or “Pure Nature. Perfect Balance” (Primavera).
However, the use of sustainability in advertising can also be counterproductive. A prominent example of this is the Golden Vulture, a (derogatory) award presented annually by Deutsche Umwelthilfe for the “most brazen environmental lie.”
The concept of “greenwashing” is also relevant in this context. It is generally understood as misleading information regarding a company’s environmental practices or the environmental benefits of a product or service. Greenwashing can have legal consequences. For example, DWS, a fund subsidiary of Deutsche Bank, was fined $25 million by the U.S. Securities and Exchange Commission (SEC) last fall for inadequate anti-money laundering controls and false statements regarding green investments.
Corporate Sustainability Reporting Directive (CSRD)
The Corporate Sustainability Reporting Directive (CSRD) took effect on January 5, 2023. Compared to the previous regulations under Section 289b of the German Commercial Code (HGB), the CSRD significantly expands the scope of application and the extent of reporting.
It applies, among others, to:
- Capital market-oriented companies with more than 500 employees
- A balance sheet total of 20 million euros and 250 employees
- Banks, insurance companies, and investment fund management companies
- Companies that exceed at least two of the following thresholds in two consecutive years:
- 40 million euros in annual revenue
- 20 million euros in total assets
- 250 employees
The EU Taxonomy Regulation
The EU Taxonomy Regulation—officially Regulation (EU) 2020/852—took effect on January 1, 2022. It supports the European Green Deal by defining criteria for environmentally sustainable economic activities. It is considered an important step toward promoting investment in sustainable projects—and influences the EU Disclosure Regulation.
The EU Taxonomy Regulation includes a reporting requirement: financial market participants must disclose the proportion of environmentally sustainable investments in their portfolios. Companies required to report on sustainability under the CSRD must also report on their sustainable economic activities.
How companies implement sustainability in practice depends on many factors, such as...
from the wording of the sustainability goal ×
For more on this, see in particular the section above titled “Sustainability in the Company’s System of Objectives.” A sustainability goal is likely to be influenced by, on the one hand, how it promotes a company’s profitability—and, on the other hand, whether it is pursued “merely” to meet legal or social obligations, and finally, whether it is pursued because the company wishes to assume social responsibility.
Regarding the Company's Purpose ×
The measures and actions required of a service company differ from those of an industrial company, and those of a chemical company differ from those of an automotive company. A service company is also more likely to focus on social and governance aspects, while industrial companies tend to place greater emphasis on environmental issues.
legal requirements ×
Depending on the industry, company size, and other factors, legal requirements alone already impose comprehensive obligations regarding sustainability. One example is the Supply Chain Due Diligence Act (LkSG). Affected companies are required to appropriately observe the human rights and environmental due diligence obligations set forth in the LkSG within their supply chains —with the aim of preventing or minimizing human rights or environmental risks, or putting an end to violations of human rights or environmental obligations (Section 3(1), sentence 1, LkSG). In addition to documentation and reporting, these due diligence obligations include, for example, establishing a risk management system, conducting regular risk analyses, implementing preventive measures within the company’s own operations and with respect to direct suppliers, taking corrective measures, and implementing due diligence obligations with respect to risks associated with indirect suppliers.
due to financial constraints ×
Of course, the implementation of sustainability goals is also limited by the company’s financial resources and cost-benefit considerations. On the other hand, raising capital may also require the implementation of sustainability measures if stakeholders increasingly take sustainability aspects into account when allocating capital in the future.
Infrastructure ×
The implementation of sustainability initiatives also depends on the existing infrastructure. This is easily illustrated by the example of electric cars: The purchase of electric cars instead of internal combustion engine vehicles requires, among other things, an appropriate charging infrastructure—and sufficient available energy for charging.
