Ever-increasing ESG regulation is moving onto the management agenda. At the same time, a “stakeholder approach” has long been considered as part of the management’s task to align the company’s objectives with a plurality of interests. “Stakeholders” have a legitimate interest in the company’s actions and are directly affected by the resulting consequences. The inclusion of ESG in internal corporate processes can be seen as an increasing “politicization of the corporation”. ESG issues are part of the overall social and political discourse, which is illustrated below using prominent positions.
Larry Fink, the founder of BlackRock, has spoken out in favor of sustainable corporate governance in his annual CEO Letter under the headline “The transformative power of capitalism”:
“[…] It has never been more relevant for CEOs to take a stand and have a clearly defined corporate purpose, a coherent business strategy and a long-term perspective. […][…] The transition to a climate-neutral world will fundamentally change every company and every industry. The question is: will you lead this change – or be led? […][…] Capitalism is a creative force for society and can act as an engine for change. […] ” (Cf. Larry Fink’s letter to CEOs)
The opposite position, known as the “ESG backlash”, is represented by conservative politicians in the USA. For example, in November 2022, Republican senators warned that they would use their oversight powers in Congress “to investigate the institutionalized antitrust violations committed on behalf of ESG.” The senators speak of “secret efforts to restrict supplies of coal, oil and gas that drive up energy costs worldwide and strengthen America’s adversaries abroad.” The ESG movement is trying to use companies as a weapon. (See Kevin LaCroix, Senators Warn Law Firms Concerning ESG-Related Advice)
In Europe, nuclear energy is at the center of the dispute. The Executive Board of Greenpeace Germany, among others, is fighting against the EU Commission’s decision that investments in gas and nuclear will be considered sustainable from 2023 (quote): “With this taxonomy, the EU is betraying its self-imposed environmental and climate goals of the Green New Deal. We therefore urge the Commission to correct this blatant failure and repeal the delegated act on gas and nuclear. Otherwise, we will bring an action before the European Court of Justice.” (See: Greenwashing by the EU taxonomy)
This shows that political discussions and guidelines are involved. Regulation will certainly increase. It remains to be seen whether ESG will replace shareholder capitalism with stakeholder capitalism.
Regulation and business decisions in the context of ESG
Under current law, the alignment of management decisions with ESG objectives via the duty of legality is only mandatory to the extent that the company is subject to statutory ESG regulations. Apart from this, the management board is entitled, but not obliged, to pursue ESG concerns when making business decisions (see Weller / Fischer, ESG-Geschäftsleitungspflichten, ZHR 25/2022, p. 2253, 2265). This will change in the future: With the proposal for a Corporate Sustainability Due Diligence Directive published in February 2022, the EU Commission is planning to introduce a general obligation for members of company management to consider the consequences of their decisions for sustainability aspects, human rights, climate protection and the environment (see Harbarth, Corporate Sustainability Due Diligence Directive, AG 2022, 633).
Particular importance is attached to the consideration of social and ecological aspects when defining and adapting the business model, business policy and business strategy. The German Stock Corporation Act makes the sustainable and long-term development of the company a target for the Management Board and Supervisory Board (see Walden: Corporate Social Responsibility: Rights, duties and liability of the Executive Board and Supervisory Board, NZG 2020, p. 50, 60).
According to the German Corporate Governance Code, the Management Board should systematically identify and assess the risks associated with social and environmental factors. The Code recommends aligning the internal control and risk management system with sustainability-related issues. The effects of some sustainability factors are so serious that they can endanger the continued existence of the company. Structural change in the automotive industry or the energy sector is caused by environmental factors. Companies whose activities are primarily dependent on combustion engines or coal-fired power can be jeopardized by environmental factors. Companies must also identify and assess material risks below the threshold of going concern. Financing is becoming more difficult for business models that are classified as unsustainable. The increasing density of regulation in the environmental and social area can cause costs and give rise to risks of fines or liability. Legal risks also arise from climate change litigation (see Rothenburg: Ecological and social sustainability in the draft of the new German Corporate Governance Code, ESG 2022, p. 2, 3).
Implementation of ESG regulation in corporate practice
“What gets measured gets managed” – the famous quote by US economist Peter Drucker predates ESG, but sums up the crux of the matter. Clear ESG standards can only be set through transparency. The prerequisite is a comprehensible data situation. Digitalization thus becomes the solution in the ESG process. Digital platforms are able to record ESG data, carry out modelling and calculations and provide meaningful visualizations. This is based on a large number of ESG-relevant key performance indicators. The systems are supported by artificial intelligence and can provide secure, trustworthy and traceable data (see Georg Kühl, Nachhaltigkeit & ESG – Wege aus dem Datenlabyrinth, BOARD 1/2022, p. 11 ff. with the interview on page 13). The challenge lies in identifying and defining the key performance indicators. This is not the responsibility of the management. This is where science and politics come into play. An improved type of data analysis also says nothing about the data content and weighting.
In corporate practice, the legally compliant implementation of ESG regulations can be achieved through the use of technology. This applies, for example, to supply chain due diligence in accordance with the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz) and in the area of the circular economy.
For the supply chain, the technology solutions were developed to track the sustainability of supply chains and ensure that products are produced in an ethical and environmentally friendly manner. To this end, the systems have AI-supported risk and sustainability monitoring. They also enable real-time monitoring to implement preventive measures and issue up-to-date policy statements. The systems therefore serve to implement legal requirements.
For the circular economy, blockchain-based software systems can be useful in various areas of the circular economy, particularly for production, waste management and recycling. Some of the benefits that blockchain can offer in these areas are the creation of transparency, participation, sustainability and automation. Successful applications of blockchain-based solutions are in use for tracking waste streams and recycling processes, promoting resource efficiency in production and sustainable investments.
Recommendation for practice
The management should observe 3 ESG guidelines:
(1) “Walk the talk”,
(2) “What gets measured gets managed” and
(3) “The trend is your friend”.
