Sustainable business: it's a bit of a buzzword. You can't -and won't- ignore it these days. But just 10 years ago you could get away with a sentence under your email: 'think about the environment before you print this email', nowadays sustainable business has become a serious and heavy obligation for companies.
Legislation in the making
Legislation is rapidly being drafted in various countries and at the EU, all with the aim of promoting sustainability in a variety of areas Germany is leading the way with the Lieferkettengesetz, which came into force on Jan. 1, 2023. This law has already been updated : since Jan. 1, 2024, the law applies to all companies with a (branch) office in Germany and more than 1,000 employees. From Jan. 1, 2025, that limit may go even lower.
CSRD
Also in January 2023, the Corporate Sustainability Reporting Directive (CSRD) went into effect. Under this regulation, companies subject to reporting requirements must account for the achievement of their sustainability goals in their annual report. On Dec. 14, 2023, the European Council and Parliament agreed on the Corporate Sustainability Due Diligence Directive (CSDDD), the European version of the Lieferkettengesetz. The directive is intended to apply to large companies, but by requiring them to monitor their entire value chain, it thus indirectly applies to the entire business community.
With this, sustainability becomes more than just a marketing term, it becomes a serious aspect of business that has an impact in many areas. Also and especially for the SME entrepreneur. How and in what way is explained in this article, and we also give you tips on how to respond properly to this trend and what you can do legally to become ESG compliant.
What is ESG?
ESG stands for Environmental, Social and Governance. It is also summarized under the term "sustainability. In business terms, it means the sustainability of a company in all areas, from its impact on the environment to its dealings with people throughout the supply chain.
ESG legislation includes all laws and regulations on the topics of environment, people and governance, which is very broad . Basically, it covers everything about how companies treat their employees, the impact they have on the environment and how they set up their organization and run their business. As a society, we believe that this can be done more sustainably and better, and our ethical standards about this are also changing. Just think of the discussions on social media about the abuses in the fashion industry, intensive livestock farming and dumping of waste in poor countries.
The importance of ESG for SMEs
You might think, as an SME entrepreneur, that this is a faraway show. That this mainly affects large companies, companies with factories in low-wage countries, who dump their waste directly into the river, make their employees work 18 hours a day and are rapidly deforesting. Nothing could be further from the truth. Because precisely as an SME entrepreneur, you have control over which supplier you order your components from and who you have your components assembled by. You are in control of how you treat your employees and how you handle available energy and resources. Companies with a mission have an edge these days, just think of the successes of Tony's Chocolonely and Ben and Jerry's.
Obstacles
However, you cannot control how your customers deal with ESG issues while at the same time you also have to keep costs under control. Switching to another supplier that may perform better in terms of ESG but may also be considerably more expensive sounds noble, but may also just cost you customers in the short term. So what is wise? And then there is that supplier, which imposes a mandatory annual audit with all sorts of questionnaires. If you filled them all out, all your procurement channels would be on the street and that supplier wouldn't need you at all. Should you just accept that?
Audits of customers
Those who supply German companies since 2023 may have already had their first audit on ESG aspects. Or you have received an additional set of conditions on ESG compliance that you had to agree to. If you want to know more about this, be sure to read our article on the Lieferkettengesetz.
Some questionnaires or audits go pretty far: questions are asked about your entire supply chain including names and turnovers. This is business-sensitive information that should certainly not normally be shared. The question, then, is how to handle this both commercially and legally. Of course you don't want to lose the customer, but on the other hand, giving access to your trade secrets is also a risk. The customer might get information that he himself can use to request competitive quotes, or you might violate your duty of confidentiality to your own suppliers.
It's good to realize that everyone is new to this ESG legislation, some of which is even in the works. No judge has yet addressed it. At this point, many companies (and their advisers) are still taking the safe approach, preferring to overask rather than forget.
It is therefore important to know which legal obligation these companies have and which do not, so you can estimate for yourself, which part of the audit questions do not need to be answered. We at LAW/FIRM are happy to help you with that. Would you like to know more about this or are you struggling with an audit? Then contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267).