Requirements for the sustainability expertise of German supervisory boards

At the top of the agenda is the collective term “​sustainable corporate governance”. The Code reform and CSRD Directive lead to an expansion of the competence profile and monitoring tasks of supervisory boards. Since the reform in April 2022, the monitoring and advice provided by the Supervisory Board should now explicitly include sustainability issues (Principle 6 GCGC) and the competence profile of the Supervisory Board should also include expertise on sustainability issues of importance to the company (cf. recommendation C.1 GCGC). It is known that at least one member of the Supervisory Board must have expertise in the areas of auditing and accounting. The requirement has been supplemented to the effect that accounting and auditing should also include sustainability reporting and its audit (recommendation D.4 sentence 2 GCGC). 

 

In future, the CSRD will require companies to disclose specific information on their own sustainability strategy. The same applies to the roles of management boards and supervisory boards regarding their sustainability orientation. Supervisory boards must therefore now be able to reliably assess companies’ sustainability activities.

Sustainability and sustainable management are not brand-new topics per se, but the regulation is. Until now, companies have been able to deal with it at their own discretion and decide for themselves to what extent sustainability is or should be part of corporate management. Things are now handled differently. The mandatory disclosures mean that management bodies must and will be forced to deal more with ESG issues. Knowledge in this regard must be built up and expanded quickly, and the company's own working methods must be adapted to the regulations. 

 

Looking purely at the DAX 40 supervisory boards, it is striking that 37 companies have included “sustainability” as a competence in their competence profile of the supervisory board and also assign themselves correspon­ding expertise. At this point, it must be mentioned that the “expertise” is purely a self-assessment that is not subject to any generally applicable regulation or correctness. Of the 37 groups, only 19 actually have extra committees for sustainability, many of which were only recently established in the last two years. Unsurprisingly, the focus of their work is on monitoring, advising and assessing the achievement of the sustainability targets set by the Executive Board, as well as discussions regarding the sustainability strategy. 

Conversely, the absence of a sustainability committee does not mean that the other companies do not pay sufficient attention to the topic, but merely that the topic is treated differently. ESG issues can be found across the entire breadth of an organization and do not necessarily have to be dealt with specifically in a committee. 

Since the CSRD's own standards for the implementation of the directive (ESRS) also require disclosure of, among other things, the expertise and ability of the supervisory bodies regarding sustainability aspects and access to the necessary expertise and skills, this underlines the need for further training on the topic. With respect to roles and responsibilities, the annual sustainability reports must in future include information on how the administrative, management and supervisory bodies monitor the setting of targets in relation to material topics and the progress of target achievement. The extent to which sustainability-related performance is included in the variable remuneration components must also be disclosed.

In addition to the above-mentioned disclosure requirements, the ESRS and the CSRD contain further mandatory disclosures. Nevertheless, the few examples provided show the extent to which the supervisory bodies' requirements will be extended to include sustainability issues. 

When you hear the word “sustainability”, many people often “only” think of environmental and climate issues. However, the term encompasses much more and covers many specialist areas. Therefore, it is complicated to find a tangible and universally applicable definition for the sustainability expertise, which is required by the GCGC. Although some providers already offer qualification courses for sustainability managers, these are not on a par with other recognized professional examinations. 

To gain the necessary expertise, supervisory board members must regularly undergo training and further education measures in which their knowledge is refreshed and adapted to current developments. According to Principle 19 and Recommendation D.11 of the GCGC, the organization must and should support its board members in this. Ultimately, it is a matter of interpretation when the necessary ESG knowledge is available and the Supervisory Board member has expertise on “sustainability issues of importance to the company” (see recommendation C.1, sentence 3, GCGC).  

The new version of Section 87 I 2 German stock corporation Act (AktG) will ultimately give German management boards and supervisory boards the final push to bring sustainability to the table as an issue to be taken seriously. Accordingly, the remuneration structure of the management boards of listed companies must be geared towards the sustainable and long-term development of the company. In future, ESG targets will therefore attest further rele​vance to the topic as a variable remuneration component. 

 

With an eye on the future, the new tasks and requirements for supervisory boards will lead to a paradigm shift for those holding office and bring about a continuous change in attitude and perception of sustainability. It is and will be challenging for organizations to meet the new obligations. It’s exciting to see which companies position themselves quickly and soundly and see regulation not as an additional task, but as an opportunity to dominate the competition.