The Corporate Governance Code – a code of conduct for listed companies – introduced the chapter ‘long-term value creation’ in 2016.
This included rules on sustainability strategy, identifying and managing associated risks, the designation and role of regulators, etc. At the time, this chapter consisted of ‘only’ five pages.
In the current version of the year 2022, the size of the chapter has more than doubled; the relevance of sustainability for companies is clearly increasing. Environmental, social and governance (ESG) are important pillars here. In this blog, we discuss the correlation between ESG and corporate governance.
Relevance for non-listed companies
First of all, it is important to mention that the Code is intended for listed companies, but in practice it certainly plays a major role for non-listed companies as well: for example, by using the Code, they can keep abreast of relevant EU regulations and draw inspiration from the implementation. In addition, the Enterprise Division of the Amsterdam Court of Appeal also regularly refers to the Code’s principles and best practices in its rulings, showing that they can indeed be seen as general guidelines.
Back to ESG: today’s investor increasingly asks about the level of sustainability of a company and a potential investment in it. After all, apart from a growing need for sustainability among consumers, sustainable business also provides various benefits for the company: investing in green energy yields lower energy bills in the long run and favourable working conditions lead to lower absenteeism. The ESG factors can provide guidance here.
Environmental tests the extent to which a company contributes to combating environmental problems. Social then tests how a company treats its employees, as well as diversity and working conditions. Finally, governance assesses what a company’s internal policies look like. This then produces an ESG score: the higher the score, the more sustainable the company, the greater its potential for investors and growth in its customer base.
ESG in the Corporate Governance Code
Back in 2020, the European Parliament issued a report on sustainable corporate governance. It stated, among other things, that companies should be required to inform and consult with stakeholders when defining and monitoring their sustainability strategy.
This was to be done through advisory committees chaired by non-executive directors. Where they have reasonable cause for doubt about the implementation of the sustainability strategy, they would also have the right to request an independent audit.
An elaboration of this is clearly reflected in the Corporate Governance Code: the company should establish a policy for effective dialogue with its stakeholders. This policy addresses how this dialogue takes place and what the relationship is between the input of stakeholders, the management board and the supervisory board.
The correlation between ESG and corporate governance is also well reflected in the requirements for a company’s sustainability strategy.
Under the Code, companies must formulate concrete objectives, engage with stakeholders – as discussed in the previous paragraph – and account for them in the management report. This report should include the following topics: the vision, the realisation of the strategy, the objectives and the results already achieved, the effects of the company on people and the environment and the stakeholders’ interests. The Supervisory Board oversees this.
The role of directors and supervisory directors in the field of ESG is therefore quite substantial. Companies are therefore increasingly choosing to anchor ESG competences in the articles of association, by adding them to the profile or job description of directors and supervisory directors. This can take the form of concrete requirements such as having knowledge of ESG regulations or requiring sustainability as an agenda item for the Supervisory Board. Broader competences such as creativity, dedication or cooperation are also imaginable.
The Corporate Governance Code also refers to various developments in sustainability legislation for companies, for example the Corporate Sustainability Reporting Directive (CSRD). This directive is part of the European Green Deal and regulates corporate sustainability reporting.
The Code prescribes that it is up to the board not only to monitor developments in such directives and other relevant regulations, but to also take them into account when amending sustainability policies. We therefore advise you to be proactive about your company’s sustainability policy and keep an eye on our blog for relevant ESG regulatory developments.