legal aspects of csr and sustainable innovation

PAIGE MORROW, BA, JD, LLM HEAD OF BRUSSELS OPERATIONS, FRANK BOLD VISITING LAW LECTURER, UNIVERSITY OF KENT BSIS

12 FEBRUARY 2016, BERLIN

LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION


OVERVIEW

▸ German CSR/ESG legal requirements

▸ EU policy framework

1. CSR Strategy

2. Non-Financial Reporting Directive

3. Promoting long-term & sustainable investment

▸ Obligations of company directors & institutional investors to consider ESG risks & opportunities


GERMAN LEGAL CSR/ESG REQUIREMENTS

▸ Large companies & groups must include extra-financial KPIs in status or group management report as relevant to understand business performance (Commercial Code, ss. 315 & 289)

▸ Sustainability Code creates voluntary comply-or-explain framework for reporting compliance with sustainability (s. 161 AktG doesn’t apply)

▸ BaFin considers reputational risks in its Minimum Requirements for Risk Management

▸ Obligation to report on ESG matters for pensions & direct insurers

▸ BVI Guidelines on responsible investment include voluntary commitment to take measures to consider sustainability


EU POLICY FRAMEWORK - LACK OF POLICY COHERENCE

▸ EU 2020 Strategy, Roadmap to Resource Efficient Europe & 7th Environment Action Programme + Circular Economy Package

▸ SDGs (universally applicable)

▸ BUT Capital Markets Union fails to integrate sustainability

▸ BUT CSR Strategy lacks robust implementation, needs update


EU CSR STRATEGY (2011, TO BE UPDATED IN 2016)

▸ Builds upon UN GC, ILO Declaration, OECD Guidelines for MNEs, ISO 26000 & UNGP on B&HRs

▸ ‘Smart mix’ (?) of regulatory & voluntary mechanisms —> transparency, market incentives & corporate accountability

▸ Key outstanding issues:

▸ (1) human rights due diligence (see French & Swiss draft laws)

▸ (2) access to justice (revise Rome II)


NON-FINANCIAL REPORTING DIRECTIVE (2014/95/EU)

▸ Amends Accounting Directive (2013/34/EU)

▸ Will require large firms to report on environmental, social & employee matters, human rights impacts, anti-corruption

▸ Commission preparing non-binding guidelines: will cover all sectors, general principles, methodology & key KPIs; will not advocate specific reporting framework (eg GRI, <IR>, Shift)

▸ Key outstanding issues: (1) reporting on due diligence; (2) clear definition of materiality

▸ Consultation closes 15 April; Transposition by end of 2016

http://ec.europa.eu/finance/consultations/2016/non-financial-reporting-guidelines/index_en.htm


LONG-TERM & SUSTAINABLE INVESTMENT

▸ Revision of Shareholder Rights Directive: Engagement policy

▸ IORPs: Draft amendments would clarify ‘prudent person’ rule; require consideration of ESG risks & stakeholder consult

▸ DG Justice consultation: closes March 25

▸ BUT Capital Markets Union: aims to integrate EU markets without addressing sustainability (except green bonds)

▸ BUT lack of clarity of scope of fiduciary duties of investors & directors to consider ESG risk & opportunity

http://ec.europa.eu/justice/newsroom/civil/opinion/151211_en.htm


FIDUCIARY DUTIES

▸ Analogous concepts of duty of loyalty & prudence exist in EU & national laws across Europe

▸ Often (wrongly) interpreted as duty to maximise short-term financial returns to exclusion of long-term & ESG factors

▸ Importance: Difficult for boards & CEOs to prioritise long-term, sustainable returns when facing ST market pressure

▸ Possible exception: German parity form of co-determination (Davies & Hopt 2013)


FIDUCIARY DUTIES OF INSTITUTIONAL INVESTORS

▸ Trustees/directors must consider duties of loyalty & care when creating investment policies or making investment decisions

▸ Positive duties to integrate ESG, mitigate risk & ID investment opportunities (UN PRI 2015)

▸ Germany: non-binding guidance that profit must be “sustainable”

▸ 2015 US Dept of Labor & IRS statements: US fiduciaries may consider material ESG factors

▸ 2015 Commission study (DG ENVI): “consideration of ESG issues can be seen as being prudent both from a financial & legal perspective”


OPTIONS FOR CLARIFICATION

▸ Legal requirement to consider ESG matters - process-oriented, not outcome-driven

▸ Guidance on interpretation of fiduciary duties to consider ESG (from Commission & Member States)

▸ Mandatory disclosure of sustainable & responsible investment policy (draft Shareholder Rights Directive)

www.frankbold.org

[email protected]@PaigeMorrowLaw