Green Hub: ESG in the DACH region: from soft topic to hard fact
While ESG concerns climb higher on DACH region companies’ agendas, one of the main challenges continues to be the directive – or rather the lack thereof.
Environmental, social and corporate governance compliance has become a household term for companies, investors and law firms. All across Europe, sustainable investments are booming, and surges in ESG considerations have been widely reported. In the DACH region alone, the market is said to have more than doubled from 2019 to 2020.
The DACH countries Germany, Austria and Switzerland are not only located next to each other in Central Europe, but also have de-facto nation-wide language as well as a strong, stable economy in common. The countries, with a population of just under 100m between them, all have a high density of SMEs as well as significant activity in the industrials and chemicals, IT and telecoms, and consumer goods industries.
While the most common transactions are still purely corporate ones, other forms of investment have increased steadily over the years. With the world’s continuous high interest in the aforementioned sectors, it is no surprise that private equity and venture capital funds as well as other investors often look to the DACH countries for promising and secure business.
Although a focus on the ‘E’ aspect of ESG has been around for some years, it started to have an undeniable influence on the private sector when the Paris Agreement was finalised in 2016. Germany, Austria, and Switzerland all ratified the agreement in October 2016. Since then, various laws have been passed in the countries to reduce or neutralise greenhouse gas emissions. Nonetheless, as the recent elections in Germany have shown, even in 2021 it remains a divisive topic.
Investors, however, have continued to increasingly take a target’s impact on the perceived factors of climate change, as well as sustainability efforts, into account in their investment decisions. While it is too early to have a fully number-backed link between ESG investing and financial returns, the market has had to react to the growing demand from consumers, employees and limited partners.
According to Lucina Berger, who focuses on corporate governance at German full-service firm Hengeler Mueller, society is a key driver: ‘Campaigns such as the Fridays for Future or the Black Lives Matter movement contribute further to making ESG an omnipresent topic.’
In Berger’s opinion, it is also due to the public’s interest that ESG could hold its ground during the last two turbulent years. With Covid-19 spreading across the globe, the demand for transparency and an environmental conscience took centre stage for consumers. This has led to an all-time high in instructions for law firms to advise on ESG-related matters.
Berger sees not only large companies inquiring but also SMEs – or the Mittelstand – seeking advice.
While ESG concerns climb higher on DACH region companies’ agendas, one of the main challenges continues to be the directive – or rather the lack thereof. Austria, Germany and Switzerland all struggle with the sheer volume of guidelines, laws and standards existing at federal, state and international levels.
Mandatory sustainability reporting, as well as incentive structures, seem to be measures that have caught on well in all aforementioned jurisdictions. Nevertheless, ‘due to the lack of a uniform rating and classification systems, the risk of greenwashing cannot be excluded,’ according to Wolf Theiss partner Sarah Wared.
As a corporate and M&A lawyer in Austria, Wared increasingly assists clients with developing their sustainability efforts and ESG compliance. ‘It is a challenge to adhere to all regulations as there has been no real uniformity,’ she states, but is also hopeful about the new EU regulation which intends to address this issue: The EU Taxonomy, a classification system establishing a list of environmentally sustainable economic activities.
A first delegated act was formally adopted in June 2021, with more to follow. These acts aim to provide companies, investors and policymakers with appropriate definitions, protect from greenwashing and subsequently increase sustainable investment. ‘Time will tell how the Taxonomy plays out but it’s a step in the right direction,’ says Wared.
While not a part of the EU, Switzerland also has an eye on the new classification system. ‘We have to make sure that whatever we do here isn’t in a vacuum. Alignment with the EU and other jurisdictions is of massive importance,’ says Christoph Vonlanthen, a partner in Schellenberg Wittmer’s M&A and Capital Markets teams in Switzerland, and an ESG specialist.
‘Climate change is going to have a profound impact on the economy,’ he states, and refers to a tangible example in the form of a study published by the Swiss Sustainable Finance (SSF) association. In its Swiss Sustainable Investment Market Study 2021, data on the funds and mandates reported by banks and asset managers and internally managed asset owner volumes shows that sustainable investment funds overtake conventional funds for the first time.
‘Besides the regulatory changes and the public’s role, climate-related disputes are another key driver for awareness’ says Berger, referring to the recent, prominent Shell litigation. Dutch environmental group Milieudefensie, together with four Nigerian farmers, brought proceedings against the oil giant alleging pollution caused by oil spills that took place in 2004-2007. In early 2021, the Dutch Court of Appeal in The Hague held Shell liable, and the company is now also required to install equipment to prevent damage in the future.
These cases set precedents and serve as a warning sign for those who neglect to keep their house in check. However, by now, most take heed: ‘Wanting to get ESG expectations right is at the forefront of board members’ minds and for that, they seek counsel more than ever,’ says Berger. All three firms report a significant uptick in ESG due diligence mandates.
By implication, clients also expect their law firms to have integrated ESG criteria into their business. ‘Especially if you want to get on a panel, companies will request insight into their providers of legal services’ initiatives; interestingly enough, while this was traditionally more regarding (gender) diversity, sustainability efforts are now equally inquired about,’ says Berger.
In 2021, being involved in ESG matters as well as working on internal sustainability efforts contributes to a law firm’s competitiveness. In conversation with Schellenberg Wittmer, COO and Sustainability task-force member Alexander Rohde mentions, ‘When hiring new talent, you want to be a firm that’s at the forefront of contemporary behaviour.’
As part of the firm’s measures, Schellenberg Wittmer launched a working group to reduce its carbon footprint, and as Rohde states, ‘It is important to engage the full breadth of firm members here; thinking with ESG in mind is in our DNA.’
‘By involving firm members across the board in our initiatives, we can advise on the full spectrum of the matter,’ Sarah Wared agrees. Wolf Theiss, a firm with offices not only in Vienna but in numerous CEE/SEE countries, recently launched a dedicated ESG practice which also recognises that ‘the assistance in drawing up new business models needs to be tailor-made to the industry. A company in oil and gas has to work out a different plan than others.’
Even though ESG is often called upon in connection with finance and litigation expertise, it is a cross-sectional topic both in regard to legal practice areas and industry sectors. Hengeler Mueller therefore also pursues a holistic approach with ESG specialists in the various different practice groups. ‘This way positions you closer to the market requirements as well as being able to provide specific advice,’ according to Berger.
With this rise in ESG practices and internal ESG pledges by various law firms in the market, a sensitive question arises: will it be controversial for them to advise companies that are either environmentally harmful or not genuine in their efforts?
‘So far, I’m not familiar with law firms doing ESG due diligence on their own clients, except for what is statutorily required or needed from a reputational perspective, but I’d be curious to see how this area develops,’ says Berger.
Wared adds, ‘It always depends on which areas of ESG are neglected. It is always important to differentiate.’
Vonlanthen agrees: ‘At the end of the day, there are very few black and white cases. Most companies want to do the right thing, even though they might be in the wrong industry and have to reposition themselves. Our legal assistance would be very valuable here.’
While all three partners share the opinion that the number of guidelines can be challenging at times, they are in good spirits. ‘It is telling how pervasive the whole conversation has become. ESG used to be a soft topic, rather reputational and a lot of commercial consideration would trump it; this is no longer the case in Switzerland. Enormous progress was made in a short amount of time,’ says Vonlanthen.
Berger adds, ‘Even though it comes with hurdles and additional effort, ESG has made it into the German boardrooms. The fact that this topic gained so much significance and attention at the highest levels of companies is a positive signal. In a few years, these efforts will hopefully pay off.’
Wared also highlights that: ‘In Austria, you can even see companies which are not subject to regulatory obligations establishing a dedicated ESG task force. To sum it up, all in all, quite positive developments.’