What does ESG have to do with Human Resources?
At first glance, not much – but far from it! For years, not only global companies have been dealing with issues that are now on everyone's lips with buzzwords like ESG, sustainability, and green compliance. "Human Capital" is more than ever the focal point of successful management in a firm. Under the generic term "compliance", executive boards, PR and public policy teams, HR departments and works councils (in co-determined companies) are working on increasingly complex Codes of Conduct. This did not just start with the recent ESG hype.
What are the labor law issues?
Today's pandemic has brought topics like health and safety at work, work time rules, employee data protection but also factors such as diversity, gender equality and employee satisfaction to the forefront. The EU Commission recently codified reporting obligations on some of these issues. The Corporate Sustainability Reporting Directive (CSRD) is scheduled for adoption in the second quarter of 2022 and will become effective from 2023. It provides for far-reaching regulations and broad reporting requirements for large companies with a focus on health protection, workplace safety, social responsibilities, and gender equality. These reporting obligations will affect all matters that are material to business performance or have an impact on environmental and social issues. They will cover working conditions under health and safety aspects, from work-life balance and diversity to human rights standards. The latter will be of particular importance in the area of global supply chains. The EU recently announced a Supply Chain Act which is expected to contain even stricter regulations on due diligence and reporting obligations than the German LkSG: Bonus payments to executives, for example, will be directly linked to complying with due diligence.
ESG has found its way into the daily routine of management boards and HR departments. In addition, companies are faced with a constantly rejuvenating workforce which demands more in terms of workplace attractiveness and satisfaction, social environment, and an employer's clear commitment to environmental issues and climate protection. Generation Z (birth cohorts from the late 1990s to the early 2010s) will already make up more than 70% of the workforce in the next five years: In the often-cited "war for talent", companies will no longer be competitive without a sustainable and credible ESG record.
No sustainability without compliance
Not only since the bribery and corruption cases involving big names in German industry and business has the issue of "compliance" been a central component of any corporate management with integrity. Any illegal behavior or accusations of corruption or bribery do immense damage to a company's reputation and corporate culture. In order to meet the ever-increasing regulatory requirements in the 21st century, however, clear rules and unwavering adherence to strict guidelines are essential.
Compliance departments have sprouted everywhere in the last few years and compliance officers are now appointed to executive boards. Legal and HR departments do well to continuously sensitize their own management teams as well as the entire workforce to the issues of compliance. Internal (and external) processes are laid down in binding codes of conduct and comprehensive guidelines of behavioral measures. Corporate and leadership cultures are defined or created where they do not exist. But all of this will only be successful if compliance is also exemplified and practiced in everyday life by the top management, from the C-suite "top to bottom" to minimize risks, optimize business relationships with customers, and ensure a concern for social issues within the framework of sustainable HR management.
Globally active companies have long-standing – and financially burdensome – compliance experiences, not least in the area of employee data protection. Data protection violations have led to considerable fines and the General Data Protection Regulation (GDPR), also based on an EU directive, has clearly standardized requirements in this area, which has led to a large number of costly technical and organizational measures in company practice.
The CSRD must be transposed into German national law by December 2022 and companies are well advised to initiate internal due diligence proceedings to prepare for a timely implementation. In the event of co-determined companies, be aware that consultation requirements with local works councils are time consuming and will require extra attention. In the first step, the CSRD will apply to large public interest companies, i.e., companies with a workforce of more than 500 employees, and thus it will affect all listed companies including banks, financial institutions, and insurance companies. If the schedule remains as is, sustainability reporting obligations will then also be expanded to small and medium-sized companies of public interest as of 2026.
Familiar topics which are discussed in the context of whistleblowing regulations will also raise comparable questions here: Will, for example, separate reports be necessary in group structures, or may subsidiaries rely on group reports? In international contexts, this will no doubt cause headaches for global companies.
Diversity and more flexible working hours
Diversity is another buzzword of our time. What does diversity have to do with sustainability and what does the tiresome topic of the outdated German Working Hours Act (ArbZG) have to do with ESG?
In more and more companies today, people of different backgrounds and cultural affiliations make up the workforce. Age, sexual orientation, ethnic origin, religion, and ideology pose great challenges for every HR department and all levels of management. At the same time, diversity offers clear advantages: Problems approached from different angles in diverse teams are usually solved more quickly and, above all, more creatively. In dealing with customers and global tenders, companies without actual lived diversity will no longer be competitive. In this context, top young talents look very closely at the social environment of an employer and well-educated and trained employees require multi-layered support programmes and initiatives to lure and keep them.
The coronavirus marks the beginning of a new era that will see working time completely rethought – in Germany and elsewhere. There is no way around this, even if Hubertus Heil, the German Secretary of Labor, stubbornly opposes change and clings to the ArbZG despite persistent appeals from labor law experts. The Working Hours Act is not 100 years old, as is our Works Constitution Act (BetrVG) which has recently undergone a more than questionable modernization by the new German Traffic Light Coalition. The strict "Nine to Five", five-day week no longer reflects today's reality and Gen Z will be demanding even more flexible working time models, be they mobile, agile, or hybrid working.
A creative and flexible approach to the topic of working time will drastically promote sustainability in companies. In the end, only those companies that do not shrug their shoulders and leave things as they are will be competitive.
Conclusion
Sustainability has long been a part of German labor law but – true to the motto of the coalition agreement, "dare to progress" – there is much yet to be done.
In line with EU-driven topics like data protection, whistleblowing and supply chain regulations, sustainability reporting obligations will add substantially to the already complex set-up of existing compliance guidelines. Companies and their management teams must be wary of greenwashing activities which will constitute important reputational risks for companies and HR departments will feel the pressure of ESG-related requirements and duties landing at the center of their responsibilities.
Banks and other providers of capital are putting business relationships with their customers to the test with regard to sustainability. Large enterprises as well as small and medium-sized companies will soon risk having to pay more for financing and other banking services if they have not integrated clear sustainability strategies. It is advisable to take measures to incorporate diverse sustainability action plans at an early stage in order to remain competitive with regard to the increased requirements of banks and one's own product or service sales and also to remain attractive for employees and applicants.
Originally published in Labor Law Magazine 2/2022, p. 7-9
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