Topics: German CSR/ESG legal requirements; EU policy framework (CSR Strategy, Non-Financial Reporting Directive & promotion of long-term and sustainable investment); fiduciary duties of company directors and institutional investors. Presentation for the symposium on Sustainability and Innovation - Opportunities and Challenges: Perspectives from Japan and Germany. Held at the Graduate School of East Asian Studies (GEAS), Freie Universität Berlin on 12 February 2016.

1. 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

2. 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

3. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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

4. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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

5. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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)

6. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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

7. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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

8. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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)

9. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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”

10. LEGAL ASPECTS OF CSR & SUSTAINABLE INNOVATION
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)

11. www.frankbold.org
Paige.Morrow@frankbold.org
@PaigeMorrowLaw