Corporate Non-Financial Reporting in Germany
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Copyright © Development International e.V., 2019 ISBN: 978-3-9820398-1-7 Authors: Chris N. Bayer, PhD Gisella Vogel Sarah Kaltenhäuser Katherine Storrs Jiahua (Java) Xu, PhD Juan Ignacio Ibañez, LL.M. Title: A New Responsibility for Sustainability: Corporate Non-Financial Reporting in Germany Date published: May 6, 2019 Funded by: iPoint-systems gmbh www.ipoint-systems.com Executive Summary Germany's economy is the fourth-largest in the world (by nominal GDP), and with 28% of the euro area market, it represents the largest economy in Europe.1 Considering the supply chains leading to its economy, Germany's cumulative environmental, social and governance performance reverberates globally. The EU Non-Financial Reporting Directive (NFRD) is the impetus behind this study – a new regulation that seeks to “increase the relevance, consistency and comparability of information disclosed by certain large undertakings and groups across the Union.”2 Large undertakings in EU member states are not only required to report on their financial basics, now they are also required by Article 1 of the Directive to account for their non- financial footprint, including adverse impacts they have on the environment and supply chains. In accordance with the Directive, the German transposition stipulates that the non-financial declaration must state which reporting framework was used to create it (or explain why no framework was applied), as well as apply non-financial key performance indicators relevant to the particular business. These requirements are our point of departure: We systematically assess the degree of non-financial transparency and performance reporting for 2017 applying an ex-post assessment framework premised on the Global Reporting Initiative (GRI), the German Sustainability Code (Deutscher Nachhaltigkeitskodex, DNK) and the United Nations Global Compact (UNGC). By benchmarking all German companies subject to the EU NFRD-transposed law, on the topics required to be disclosed – environmental, social (human rights), employee, gender, and anti-corruption matters – this study reveals which companies make an effort to demonstrate their degree of responsibility, and to what degree. Of the 516 companies identified to be subject to the law, we located a report pursuant to the law for 422 of them. Each report was subject to rigorous analysis on the basis of 67 key performance indicators. On average, disclosure transparency was higher for select gender, anti-corruption and employee rights issues. In contrast, companies tended to report less on environmental matters and even less on social and human rights issues. However, for most of the select indicators, there are examples of companies that successfully applied the indicator. The highest transparency per matter was offered for the following indicators: environmental: 47% disclosed their energy consumption within organization social / human rights: 31% reported that they had supplier labor practices criteria in place employee: 25% of companies reported on work injuries gender: 68% reported on their percentage of female employees anti-corruption: 62% reported employing a whistleblowing/ethics mechanism Once an indicator enjoys a critical mass of uptake, ESG trends are revealed. 1 Scope 1 emissions were reduced on average by 0.41% between 2016 and 2017: Energy consumption increased by 1.62% between 2016 and 2017: nvironmental e 68.49% of new suppliers were screened using labor practices criteria: human rights human The total was an average 35.99 per company: number of injuries employee 2 The female workforce average was 45.88% female workers: The female members on the Executive Board (“Vorstand”) average was 7.83%: gender The average percentage of employees who received anti-corruption training was 84.34%: corruption - anti If public disclosure is an indispensable step towards corporate responsibility, which is precisely the consensus opinion within civil society and government circles, the degree of individual company transparency is the first gauge of corporate non-financial performance. Thereafter, the question arises what calculation methods and assurance are applied to underpin the reported numbers. Transparency is one thing, performance another. With baseline data, the relative degree of political will within the company for year-over-year improvement furthermore becomes evident. In sum, some – but not all – companies under study are using the EU NFRD as an opportunity to put forward evidence that they deserve a social – not just a financial – license to operate. 3 Foreword The CSR-Richtlinien-Umsetzungsgesetz (CSR-RUG)-premised dialectic is alive and well in corporate Germany. The 2014-issued EU NFR Directive and its national transposition into German law has prompted profound and culture-shaping conversations within the directly and indirectly affected companies: how do financial and non-financial perspectives interact? How should companies handle risks – the term “risk” itself, and the processes behind the big issues? Financial reporting has traditionally focused on the accounting of risks in the sense that “Risk means more things can happen than will happen” (Elroy Dimson) in the context of “The future is a distribution of possibilities” (Howard Marks). It is also rather self-centered, asking how exogenous factors impact the company’s performance, and how such material risks may affect the single bottom line. The duty to report changes a lot. Situation-premised financial reporting is widened to an inclusive, long-term sustainability perspective. Lawmakers consider the company as an agent of change for better or worse. Better, if they take their responsibility in e.g. taking into account conditions in supplier countries, or public goods such as clean air and water and in steering company processes towards long-term profitability and future-fit business cases. Worse, if they neglect this perspective. Increasingly, companies are getting down to business and internally sharing their understanding of risk, materiality, and impact. Reputational risk plays a prominent role. Consumer and civil society stakeholders have been considering non-financial matters for a long time, and especially after the global financial crisis in 2008. Shareholders influence the discussion with their Sustainable Finance perspective. Pension funds that apply environmental, social and governance (ESG) criteria and activist investors bring with them increased scale and force and new metrics for valuation. Concerning impact, conventional reporting on e.g. the number of local employees and an absence of work fatalities and injury is now, for example, being confronted with the proposition of inclusive value creation and socio-economic impact – “How is your business aligned with the Sustainable Development Goals (SDGs)?” The measurement of impact through key performance indicators (KPIs) and the use of appropriate reporting frameworks is a further challenge, and the mastery thereof reflects the extent to which non-financial matters are professionally managed and internationally aligned. In sum, CSR-RUG has served as a clear impetus for internal and external conversations on these matters. The conflict lines run through companies and lobby groups alike. It is this path that good governance and smart co-regulation processes wish to inspire and facilitate. Evaluation and research are necessary to draw the right conclusions. Therefore, I´d like to thank the authors for their valuable work and contribution to the informed discussion. Yvonne Zwick Deputy Secretary General of the German Council for Sustainable Development Head of the Sustainability Code Office (Deutscher Nachhaltigkeitskodex – DNK) 4 Contents Executive Summary ................................................................................................................. 1 Foreword ................................................................................................................................. 4 I. Introduction .......................................................................................................................... 6 A. Novelty of EU NFRD ......................................................................................................... 6 B. Germany’s transposition ................................................................................................. 8 II. Methods ............................................................................................................................. 10 A. Data ................................................................................................................................ 10 B. Evaluation framework.................................................................................................... 11 C. Analyses ......................................................................................................................... 12 D. Scoring and scorecards .................................................................................................. 12 E. Data quality control ....................................................................................................... 12 F. Research team, competing interests statement ............................................................ 13 G. Peer review .................................................................................................................... 13 III. Findings ............................................................................................................................