Companies must keep this in mind

The consideration of governance—or corporate governance—in companies’ operations and reporting is not a new concept. For example, the German Corporate Governance Code (DCGK) has provided a framework for governance since 2002, which publicly traded companies are required to follow under Section 161 of the German Stock Corporation Act (AktG). The DCGK defines corporate governance as the legal and factual framework for the management and oversight of a company. The governance component of sustainability reporting—specifically the ESRS—complements existing governance reporting requirements. The ESRS comprise twelve standards: two cross-cutting standards and ten topic-specific standards. The thematic standards cover the three ESG topics—“Environmental, Social, and Governance”—and are divided into five standards on environmental issues, four on social issues, and one on governance. In addition, the cross-cutting standard ESRS 2, “General Disclosures,” also contains mandatory disclosures regarding governance. While ESRS 2 must be followed by all companies subject to reporting requirements, ESRS G1 is subject to the materiality test. 

The disclosure requirements in the general standard ESRS 2 cover the following areas and supplement ESRS G1: 

• ESRS 2 GOV-1: The Role of the Administrative, Management, and Supervisory Bodies
• ESRS 2 GOV-2: Information and sustainability issues addressed by the company’s administrative, management, and supervisory bodies
• ESRS 2 GOV-3: Incorporation of sustainability-related performance into incentive systems
• ESRS 2 GOV-4: Statement on due diligence
• ESRS 2 GOV-5: Risk Management and Internal Controls for Sustainability Reporting

As mentioned at the outset, this article is limited to the reporting requirements under the ESRS G1 thematic standard.

ESRS G1, “Corporate Policy,” begins by providing an overview of the standard’s objective and how it interacts with other ESRS standards. The requirements contained in ESRS G1 should be read in conjunction with the disclosure requirements regarding governance (GOV), strategy (SBM), and the management of impacts, risks, and opportunities (IRO) set forth in ESRS 2. 

ESRS G1 addresses disclosures related to corporate policy and covers eight subtopics: 

• ESRS 2 GOV-1: The Role of the Administrative, Management, and Supervisory Bodies
• ESRS 2 IRO-1: Description of the procedures for identifying and assessing material impacts, risks, and opportunities
• ESRS G1-1: Strategies Regarding Corporate Policy and Corporate Culture
• ESRS G1-2: Management of relationships with suppliers
• ESRS G1-3: Prevention and detection of corruption and bribery
• ESRS G1-4: Confirmed Cases of Corruption or Bribery
• ESRS G1-5: Political Influence and Lobbying Activities
• ESRS G1-6: Payment Practices

Finally, an appendix containing application requirements rounds out the standard. The appendix supports the application of the disclosure requirements set forth in ESRS G1 and has the same binding force as the other parts of the standard.

According to ESRS G1-1, the company must disclose and explain its strategies regarding the aspects of its corporate policy. For example, this includes describing the mechanisms for identifying, reporting, and investigating reports of unlawful conduct and activities that violate its Code of Conduct or similar rules. The company must also address reporting by internal and/or external stakeholders. Furthermore, the company must describe how it protects whistleblowers. This includes, for example, information on procedures to protect its own employees from retaliation. If the company does not have strategies to combat corruption and bribery that are consistent with the United Nations Convention against Corruption and/or does not have strategies to protect whistleblowers, it must state and disclose whether such strategies are to be introduced and, if applicable, provide a corresponding timeline for doing so. With regard to corporate culture, for example, specific incentives or tools for its own workforce may be described to promote and support the corporate culture.

ESRS G1-2 addresses information regarding the management of relationships with suppliers and their impact on the supply chain. This includes, for example, a description of the strategy for preventing late payments, particularly to small and medium-sized enterprises (SMEs). Information on whether and how social and environmental criteria are taken into account when selecting suppliers, and how these criteria are reviewed and evaluated, must also be included. The same applies to the company’s practices regarding vulnerable suppliers—that is, suppliers exposed to significant economic, environmental, and/or social risks.

According to ESRS G1-3, information must be provided regarding the company’s system for preventing, detecting, investigating, and prosecuting allegations or incidents related to corruption and bribery, including relevant training. If the company does not have such procedures in place, it must disclose this and, where applicable, outline its plans for implementing such procedures. With regard to the training required in the area of preventing and detecting corruption and bribery, information is required, for example, on the nature, scope, and depth of the training programs that the company offers or requires. Information must also be provided regarding the extent to which members of the administrative, management, and supervisory bodies receive training.

While ESRS G1-3 focuses on procedures for preventing and detecting corruption and bribery, ESRS G1-4 requires the disclosure of information regarding incidents of corruption or bribery that occurred during the reporting period in order to ensure transparency. For example, the number of convictions and the amount of fines imposed for violations of anti-corruption and anti-bribery regulations must be disclosed here.

ESRS G1-5 addresses information regarding the company’s activities and commitments related to political influence, including its lobbying activities and their material impacts, risks, and opportunities. This includes, for example, disclosures regarding financial contributions or in-kind contributions made to political parties, their elected representatives, or individuals seeking political office. Indirect political contributions made through intermediary organizations, such as NGOs, that are affiliated with or support specific political parties or causes must also be disclosed.

The disclosure requirements of ESRS G1-6 are intended to provide stakeholders with information about the company’s payment practices and insights into its contractual payment terms, particularly with regard to late payments to SMEs. Among other things, disclosures are required regarding the average time (in days) required to settle an invoice from the payment due date—as well as the number of pending legal proceedings due to late payments.