The newly introduced Corporate Sustainability Reporting Directive (CSRD) will in future place extensive requirements on companies and supervisory boards with regard to their sustainability reporting. With the inclusion of sustainability reporting in the management report of the annual financial statements, this will take on the character of accounting law. For companies with supervisory boards in accordance with the law or controlling advisory boards in accordance with the articles of association, the requirements for the board in general and its members in particular or personally will increase. Knowledge on sustainability topics can be acquired through CSRD training or webinars, among other things. Large consulting firms also offer special courses for supervisory boards.
Core tasks of the Supervisory Board
The primary tasks of the Supervisory Board can be summarized as follows:
- The Supervisory Board is responsible in particular for the (ongoing control and) monitoring of the management (Section 111 (1) AktG);
- A catalog of transactions requiring approval can be defined;
- The Supervisory Board is also responsible for appointing and dismissing members of the Management Board (Section 84 AktG);
- Monitoring and reviewing the appropriateness of and compliance with an internal control system (ICS), a risk management system (RM) and a compliance management system (CMS);
- The audit of the annual financial statements, the management report (including a separate non-financial report, if applicable) and the proposal for the appropriation of profits (Section 171 AktG).
In addition to monitoring activities, appropriate qualifications are also required for the accompanying advisory function, which should ideally be documented in the form of competence profiles and qualification matrices.
CSRD requirements for supervisory boards and supervisory advisory boards
The German Corporate Governance Code (GCGC) requires that the Supervisory Board’s function of monitoring and advising the Management Board in its management of the company also includes sustainability issues in particular (see GCGC 2022, Principle 6). Section C.1 contains the recommendation that the competence and qualifications of the Supervisory Board should also include expertise on sustainability issues of importance to the company.
With regard to the internal organization of the Supervisory Board, although there is a requirement to form committees at larger companies to improve the effectiveness of the work of the Supervisory Board, such as the establishment of an audit committee, there is no explicit recommendation to establish a sustainability committee (GCGC 2022, Principle 14).
The role of the Supervisory Board under the CSRD
The reporting obligations set out in the European Sustainability Reporting Standards (ESRS ), which specify the CSRD, are relevant to the work of the monitoring bodies due to the breadth of the reporting points in and of themselves, while specific points in the ESRS also require information on the structure of related governance issues in the organization.
The following CSRD requirements for supervisory boards result from the ESRS:
Expert knowledge with regard to sustainability aspects (ESRS 2 GOV-1 paragraphs 19, 20)
The company must disclose the composition of the administrative, management and supervisory bodies, their duties and responsibilities, and their access to expertise and skills relating to sustainability aspects.
The aim is to provide an understanding of how the tasks and responsibilities of the supervisory bodies are distributed with regard to the supervision of the process for dealing with the impacts, risks and opportunities of sustainability aspects and what expertise supervisory boards have in relation to sustainability aspects or to which they have access.
Specialist knowledge with regard to company policy (ESRS G1 para. 5)
Information on the expertise of the administrative, management and supervisory bodies with regard to aspects of corporate policy.
In accordance with the objective of the standard (ESRS G1 para. 2), “corporate policy” refers to topics such as corporate ethics and culture, combating corruption and bribery, whistleblower systems, animal welfare, relationships with suppliers and lobbying activities.
Referral to significant IROs (ESRS 2 GOV-2 para. 26)
List of material impacts, risks and opportunities (IROs) relating to sustainability aspects that the Supervisory Board has dealt with directly or via the relevant committees. These material IROs are determined in the course of the double materiality analysis.
In practice, this could mean that companies establish a sustainability committee alongside the audit committee in the future. Due to the complexity of the requirements and the necessary separation of preparation and audit, external expertise, for example from CSRD experts, could be brought in.
Incentive schemes (ESRS 2 GOV-3 para. 27)
The company must provide information on the inclusion of sustainability-related aspects in the incentive systems. This includes the following descriptions (ESRS 2 GOV-3 para. 29):
- Main features of the incentive systems;
- whether the assessment was based on specific sustainability-related objectives and/or impacts;
- whether sustainability-related performance parameters were included in the remuneration policy;
- the proportion of variable remuneration that depends on sustainability-related targets;
- the level of responsibility within the company that approves and updates the conditions of incentive systems.
Remuneration (ESRS E1 para. 13)
The E1 standard requires the company to disclose, with reference to ESRS 2 GOV-3, whether and how climate-related considerations are included in the remuneration of members of the administrative, management and supervisory bodies. This includes the following information:
- Was the performance assessed against GHG emission reduction targets (according to E1-4);
- the percentage of remuneration linked to climate-related considerations;
- Explanation of the climate-related considerations.
Stakeholder dialog
On the one hand, the ESRS standards require the inclusion of relevant stakeholder perspectives as part of the materiality analysis; on the other hand, particularly in the case of capital market-oriented companies, relevant investors or proxy advisors increasingly expect information on the existence of corresponding qualifications in the supervisory body (qualification matrices), the integration of sustainability targets in the incentives of the management body and the anchoring of sustainability targets in the business model or strategic planning.
In this context, it should also be noted that the ESEF regulation introduced with the CSRD, which requires the information in the sustainability report to be machine-readable through XBRL tagging and mapping, will lead to increasing transparency and analyzability by interested third parties. In conjunction with the use of AI, this will lead to more critical questions about the ambition and consistency of published sustainability activities in the future.
In general, the company’s reputation will therefore also be determined by its focus on sustainability issues in the future.
Last but not least, (external) investors and other financial market players will demand corresponding reports or statements on how the company deals with these sustainability issues as part of the Sustainable Finance Disclosure Regulation (SFDR) and take them into account when granting loans, among other things.
Liability avoidance for supervisory boards through appropriate governance structures
The liability of the Supervisory Board is generally based on the incorrect monitoring of the Management Board in the sense of a breach of duty. The duties of the Supervisory Board are in turn derived from the individual provisions of the German Stock Corporation Act (AktG) (in particular Section 111) and from the general standard of conduct of a prudent and conscientious businessman to whom the Supervisory Board mandate is entrusted. In individual cases, these are, in particular, control duties and fiduciary duties.
In terms of CSRD reporting requirements, this includes the review of sustainability-related disclosures in the management report of the annual financial statements, as well as non-compliance with labor law regulations by the company’s own employees and in the value chain, as well as compliance issues. In all cases, effective control systems must be in place.
With regard to the composition and working structure of the Supervisory Board, the aim here will be to be able to demonstrate the necessary expertise on the one hand and to be able to document a sufficient time budget for discussing the relevant sustainability issues on the other.
Other specific points could be whether the catalog of transactions requiring approval should be expanded from the perspective of “double materiality” and whether any self-assessment of the board also takes into account sustainability aspects or expertise.
Conclusion
In an increasingly dynamic environment, the already broadening list of tasks for supervisory boards will be expanded to include the topic of sustainability, at the latest with the validity of the requirements surrounding the CSRD and the EU taxonomy. For the members of supervisory boards, this means developing an understanding of the challenges posed by sustainability reporting, but also of the necessities and opportunities that arise for companies through a transformation towards a more sustainable orientation. The breadth of the requirements speaks more in favor of a more qualified understanding within the board as a whole, possibly through further training, than in favor of singular expert knowledge.
Guest article written by Dr. Udo Zimmermann
Dr. Udo Zimmermann from Esslingen am Neckar is a qualified business economist and has worked for many years in positions of responsibility in trading and service companies, most recently for almost 20 years as managing director, particularly in medium-sized family businesses.
He recently set up his own business and passes on his experience in the form of advisory and supervisory activities. He is a member of the Initiative Beirat-BW e.V. as well as the FEA – Financial Experts Association e.V..
As a certified CSRD specialist, he also advises companies on the preparation and reporting of their sustainability management.
