EU ESG Requirements: Actions HR Managers In Germany Should Take - Corporate Governance

Introduction

Environmental, social and governance (ESG) issues have gained a great deal of popularity. For human resources (HR) management, the question arises as to what role HR can or must play in this context and what contribution practical HR work, and the managers responsible for it, can make to achieve strategic ESG goals within a corporate organisation.

This article, part of a series on ESG requirements for HR managers,¹ outlines the best approach for successful ESG-oriented HR management in Germany.

Sustainability in remuneration and occupational pension systems

Since the Act Implementing the Second Shareholder Rights Directive and the associated amendment to section 87(1)(2) and (3) of the Stock Corporation Act came into force on 1 January 2020, the remuneration structure for management board members of listed companies must be aligned with the "sustainable and long-term" development of the company. Sustainability requirements also play an essential role in remuneration systems subject to the Regulation on the Supervisory Requirements for Institutions' Remuneration Systems.

According to proposals issued by the European Financial Reporting Advisory Group (EFRAG), information is to be provided in particular on:

the evaluation of management and supervisory bodies; and
the criteria for variable remuneration.

However, in view of the increased importance of social sustainability, companies are also focusing on setting sustainability targets in remuneration outside the areas already covered by regulations. Of particular relevance here is the principle of equal pay for equal work or work of equal value, irrespective of gender. An obligation in this regard already exists due to the German Pay Transparency Act and the General Equal Treatment Act (AGG). While the existing regulations have largely affected the individual relationship between employer and employee, the new non-financial reporting requirements will ensure that any violations are made transparent.

Works councils must be involved in matters relating to company wage arrangements, including the design of company pension schemes (section 87(1)(10) of the Works Constitution Act (BetrVG)).

Occupational health and safety

Occupational health and safety is among the most fundamental areas in which companies must ensure sustainability. It is not only a matter of recognising and avoiding dangers to life and limb that arise directly from the occupation, but also of promoting health. An important part of occupational health and safety is federal legislation on working hours, which covers, among other things:

compliance with maximum working hours;
the granting of minimum breaks and rest periods; and
restrictions on night work, and work on Sundays and public holidays.

In Germany, a very high standard already exists in the form of federal occupational health and safety law and the autonomous occupational health and safety law of the statutory accident insurance, compliance with which and monitoring of which are deeply embedded in companies, implemented by various legally mandated officers and also monitored by the authorities.

Works councils have extensive information and monitoring rights in matters relating to occupational health and safety. In addition, there is a mandatory right of co-determination in the introduction and application of regulations on the prevention of accidents at work and occupational diseases as well as in health protection within the framework of statutory regulations and accident prevention regulations (section 87(1)(7) of the BetrVG).

Anti-discrimination, diversity and inclusion

Today, sustainable corporate policies must no longer be limited to the mere prohibition of discrimination on the basis of gender, race, ethnic origin, nationality, religion or ideology, disability, age or sexual orientation. On the contrary, measures must be taken that are positively oriented towards the promotion and equal participation of minorities.

In addition to the provisions of the AGG, German law already contains far-reaching regulations for the protection and promotion of severely disabled persons and others of equal status. Discrimination against certain groups in hiring, training or promotion can lead to a shortage of qualified employees for companies and can significantly damage their reputation. As a result, qualified and skilled employees may turn to other companies. Due to the external perception, it can then become increasingly difficult for affected companies to find qualified employees.

On the other hand, a corporate policy that is sustainably designed to promote equality and minorities can have a positive effect on the qualification and retention of employees and strengthen the company's reputation. Alongside hiring and promotion opportunities, equal participation naturally also refers to equal treatment in matters of remuneration and other working conditions, as well as access to social security systems.

Works councils regularly have a right to information and monitoring with regard to the employer's compliance with the prohibition of discrimination. In addition, there are mandatory rights of participation in the introduction and application of personnel selection guidelines and in connection with individual personnel measures (eg, sections 95 and 99 of the BetrVG).

Personnel development, training and further education, and skills development

The areas of personnel development, training and further education, and qualification are of great importance for sustainable corporate development. For any company, the goal must be to train and develop its own talents in a way that allows the company to pursue its strategic goals in the best possible way. For the employees themselves, this opens up opportunities to develop professionally within the company and the existing working environment, as well as to remain in employment on a permanent basis. Fluctuation-related risks such as the loss of know-how and experience can be significantly reduced in this way.

The areas of training and qualification refer to all corporate initiatives aimed at maintaining and/or improving the personal skills and knowledge of employees and the further development of the company's own workforce. Training can include various methods such as on-site training or online training.

Works councils have far-reaching participation rights in relation to training and further education (sections 96 et seq of the BetrVG).

Employee data protection

From a sustainability perspective, employee data protection firstly entails compliance with the existing far-reaching legal regulations regarding the collection, processing and use of personal data. In addition, monitoring measures should be reduced to a minimum wherever possible. The EFRAG standards also provide for detailed reporting requirements in this regard.

Works councils generally have a right to information and monitoring in data protection matters. In the case of the introduction and use of technical equipment suitable for monitoring the performance or behaviour of employees, a mandatory right of co-determination additionally exists (section 87(1)(6) of the BetrVG).

Work-life balance

Sustainable corporate governance is also characterised by measures designed to enable a balance between work and private life. These include, on the one hand, the opportunity of extended periods of absence (eg, for parental leave or sabbaticals) and, on the other hand, the offer of flexible working time models; for example, enabling employees to raise and care for their children while working.

Works councils have a mandatory right of co-determination both in the structuring of company working time systems and in the structuring of mobile work performed by means of information and communication technology (section 87(1)(2) and (14) of the BetrVG).

Code of conduct

Companies are required to embed their sustainability efforts through appropriate standards of conduct at all levels of the company. This is typically done by implementing ethical guidelines or codes of conduct. However, independent voluntary commitments that solely relate to the sustainability concerns of employees are also possible.

Works councils must be involved in the introduction of codes of conduct insofar as issues relating to the order of the company and the conduct of employees in the company are affected (section 87(1)(1) of the BetrVG).

Monitoring and auditing systems

Many areas already require monitoring and auditing measures by law. This applies, for example, to occupational health protection, where risk assessments must be carried out both regularly and on an ad hoc basis. In recent years, monitoring and auditing obligations in connection with supply chains have also become particularly important. From 1 January 2023, companies with 3,000 or more employees in Germany (and companies with 1,000 or more employees in Germany from 2024) must identify and, if possible, reduce risks relating to human rights and the environment in their supply chain.

Whistle-blowing systems and internal complaints mechanisms are also becoming increasingly important. The Whistle-blower Protection Act, which is currently in the legislative process, is expected to impose the obligation to install a whistle-blower system in all companies with at least 250 employees. From December 2023, this obligation will also apply to companies with at least 50 employees.

Works councils have far-reaching information, monitoring and participation rights in connection with whistle-blowers and other monitoring systems (eg, section 87(1)(1) and (6) of the BetrVG).

Freedom of association, collective bargaining and industrial relations

The validity of collective working conditions (in particular, collective agreements and works agreements) and the close involvement of employees, trade unions and other employee representatives in corporate and operational decision-making are of particular importance in connection with sustainable corporate management. Companies are required to respect the freedom of association and refrain from obstructing efforts by the workforce to organise.

HR management should ensure that the applicable legal requirements (eg, the German Collective Bargaining Act and the German Works Constitution Act, as well as the rules on co-determination of employee representatives in company bodies) are implemented and documented in detail.

Footnote

1. For the first article in the series, see "EU ESG requirements: what HR managers in Germany need to know".

Originally Published by Lexology

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European Union: EU ESG Requirements: Actions HR Managers In Germany Should Take