Complementing previous governance reporting requirements
A framework for the topic of governance or corporate governance has existed in Germany since 2002 in the form of the German Corporate Governance Code (Deutscher Corporate Governance Kodex, DCGK); under Section 161 of the German Stock Corporation Act, compliance with the Code is mandatory for German listed companies, at least. In the DCGK corporate governance is defined as the legal and factual regulatory framework for the management and supervision of an enterprise. The governance reporting requirements that already exist will now be complemented, in the context of sustainability reporting, by ESRS provisions.
As we have already explained at several junctures throughout our series (cf. PKF newsletter 3/24 and most recently 6/24), the ESRS include twelve standards, of which two are cross-cutting standards and ten are topical standards. The governance area is covered by just one topical standard, namely, ESRS G1. In addition, the cross-cutting standard ESRS 2 “General disclosures” includes reportable information on governance.
General disclosures under ESRS 2
The general standard ESRS 2 has already resulted in the following governance reporting requirements:
- ESRS 2 GOV-1: The role of the administrative, management and supervisory bodies
- ESRS 2 GOV-2: Information on sustainability matters addressed by the company’s administrative, management and supervisory bodies
- ESRS 2 GOV-3: Integration of sustainability-related performance in incentive schemes
- ESRS 2 GOV-4: Statement on due diligence » ESRS 2 GOV-5: Risk management and internal controls over sustainability reporting
The requirements laid down in the governance-specific standard ESRS G1
‘ESRS G1 - Business Conduct’ begins with an overview of the objective of the standard and its interactions with other ESRS. Accordingly, the requirements included in ESRS G1 should be read in conjunction with the disclosure requirements on governance (GOV), on strategy (SBM) and on the management of the impacts, risks and opportunities (IRO) that are provided for in ESRS 2.
Please note: ESRS 2 has to be observed by all the entities that are subject to the reporting obligation; however, ESRS G1 is subject to the generally known materiality provision (cf. PKF newsletters 4/24 and 6/24).
ESRS G1, which is the focus of the following section, addresses the obligation to report on eight sub-topics (cf. an overview of them in Table 1) of which, in turn, the first two still relate to ESRS 2 and, following this, G1-1 to G1-6 then constitute disclosure requirements for six specific subjects.
An appendix rounds off the standard. This supports the application of the disclosure requirements set out in ESRS G1 and has the same binding force as the other parts of the standard.
A closer insight into the standard ESRS G1
In the following section, by way of example, we have presented individual disclosure requirements.
G1-1 on fostering culture
According to ESRS G1-1 the company has to specify and explain its policies with respect to the various aspects of business conduct. For example, there should be a description of the mechanisms for identifying, reporting and investigating concerns about behaviours that are in contradiction to legal norms, a code of conduct or similar rules.
Furthermore, the company has to communicate how it protects whistleblowers. This also includes information about the steps taken to protect its own employees against retaliatory measures. If the company has no policies for combating corruption and bribery or protecting whistleblowers then it has to state this. In addition, the company has to specify if such policies will be implemented and, where applicable, provide a timetable accordingly.
Example: With regards to corporate culture, the company could describe the specific incentives or tools for its own workers to foster and encourage its corporate culture.
G1-2 on relationships with suppliers
ESRS G1-2 concerns information about the management of the relationships with suppliers and about the impacts on the supply chain. This includes providing a description of the policy to prevent late payments, or also information about whether and how social and environmental criteria for the selec-tion of suppliers are taken into account, verified and evaluated.
G1-3 on the prevention of corruption and bribery
According to ESRS G1-3, information has to be provided about the company’s system to prevent, detect, investigate, and respond to allegations or incidents relating to corruption and bribery including the related training. If the company has no appropriate procedures in place, then it has disclose this fact and, where applicable, its plans to introduce such procedures.
Example: With regard to the necessary training in the area of prevention and detection of corruption and bribery, a company would need to disclose the type, scope and depth of the training programme that it provides or requires.
G1-4: Disclosed cases of corruption
While the main focus of ESRS G1-3 is on the procedures to prevent and detect corruption and bribery, by contrast, ESRS G1-4 requires information to be provided about incidents of corruption or bribery that occurred already during the reporting period in order to create transparency here.
Examples - Here, the number of convictions and the amount of fines for violations of anti-corruption and anti-bribery regulations have to be disclosed.
G1-5: Exerting political influence
This topic addresses information about activities and commitments related to how a company exerts its political influence (including its lobbying activities) and the material impacts, risks and opportunities stemming from these. These include, for example, donations to political parties, their elected representatives or else persons seeking political office.
Please note: Indirect political donations, which are made via intermediary organisations (e.g., NGOs), likewise have to be disclosed if the intention is to support particular political parties or causes.
G1-6: Information about payment practices
The disclosure requirement under ESRS G1-6 aims to convey information to stakeholders about a company’s payment practices and insights into its contractual payment terms.
Examples: Information is required about, among other things, the average time it takes to pay an invoice from the date when the term of payment starts; the number of legal proceedings outstanding for late payments also has to be reported.
Conclusion
The series of articles on sustainability reporting - which kicked off in the following article and has now been completed with this Part VI - has shown that this is a highly complex topic. The companies that are directly or indirectly affected, including SMEs, are advised to address this issue early on. In negotiations with banks on financing and in the supply chains of large companies, in many places, it is already common practice to insist on cooperation obligations in respect of sustainability reporting.
Takeaways
- The governance(G) area, in contrast to the environmental (E) and social (S) areas, is covered by just one specific topical standard.
- Apart from the topical standard ESRS G1, the general standard ESRS 2 also includes specific reporting requirements on governance topics.
- While the disclosures under ESRS G1 are subject to the materiality provision, ESRS 2 has to be taken into account by all the entities that are subject to the reporting obligation.
- Besides issues such as corruption, bribery and lobbying, ESRS G1 notably also address a company’s relationships with suppliers and its payment practices, including late payments.
