Transforming Business and the Financial Markets
Sustainability and economic success are by no means mutually exclusive. In fact, the two go hand in hand: transforming business and the financial markets will safeguard future viability in the face of major global environmental and social hurdles. Should the economy fail to focus on sustainability, it will prove impossible to achieve common goals such as the United Nations’ 17 Sustainable Development Goals (SDGs) or the EU climate targets under the European Green Deal.
The economy and the financial sector must be overhauled to ensure an improvement in responsible natural resource usage in business, the protection of human rights in complex supply networks and the promotion of innovative solutions. For this transformation to succeed, sustainability must be anchored in the core business of all companies. As such, civil society, politics, academia and business must work together to advance sustainable development, while a coordinated combination of legal requirements and voluntary commitment is needed to achieve the agreed goals. Here, SDG 17, “Partnerships for the goals”, is of particular relevance. For its part, the RNE brings together a wide range of stakeholders from diverse sectors at regional, national, European and international level for the joint development and varied implementation of solutions.
The role of the financial sector
The financial markets have a central role to play in the transition to greater sustainability. Article 2 of the Paris Agreement, for instance, states that financial flows must be aligned with “a pathway towards low greenhouse gas emissions and climate-resilient development”. The United Nations Conference on Trade and Development (UNCTAD) estimates that between 5 and 7 trillion dollars must be given over to sustainable development every year in order to achieve the UN’s SDGs. This requires a radical refocusing of expenditure, both public and private, as well as the creation of a new financial culture that centres around sustainability. An important step on this journey is to ensure transparency around company sustainability performance. For sustainable economic actors to access key financial flows, corresponding information on sustainability must be available to and comparable for investors, ensuring investments can be targeted towards environmentally and socially sustainable options instead of being directed at fossil fuels or labour conditions that violate human rights.
Sustainable finance in Germany and Europe
Adopted in 2018 and expanded in 2021, the EU’s “Sustainable Finance Action Plan” sets out its strategy to bolster sustainable investments within Europe. Among other measures, the Plan stipulates the adoption of the EU taxonomy, a classification system that defines just what constitutes a “sustainable investment”. In future, companies will also have to report on sustainability criteria in greater detail to allow investors to factor such key information into any investment decisions. The aim behind these measures is to help improve financing for the transition to a sustainable economy in an attempt to meet the EU’s sustainability targets, in particular the climate and emission reduction targets for 2030 and 2050.
The German Strategy for Sustainable Development anchors sustainable finance as a central lever in the transformation in line with the 2030 Agenda. Between 2017 and 2019, the RNE organised the Hub for Sustainable Finance Germany (H4SF) as an open platform for stakeholders. Since the convocation of the Sustainable Finance Committee of 2019 as an institutionalised platform for stakeholder dialogue, the RNE has acted as an observer for the work of the Committee. In the final report of the first Sustainable Finance Committee, “Shifting the Trillions – A Sustainable Finance System for the Great Transformation” from 2021, the experts state that “Germany needs to implement flagship projects and make extensive adjustments to the legislative frameworks (…) and must base its actions on reliable benchmarks and guidelines” in order to systematically embed sustainability criteria in the financial system. The federal government has, at least in part, adopted the 31 recommendations for a sustainable financial system set out in the report in its German Sustainable Finance Strategy from May 2021. The strategy aims to further promote Germany as a flagship location for sustainable finance. For its part, the RNE has increasingly entered the public arena with a number of statements, for example on the development of a German strategy or the interim report of the Sustainable Finance Committee. Chaired by Silke Stremlau, the Committee for the 20th legislative term commenced its work in June 2022, with the RNE once again observing the Committee’s work.
Sustainability reporting for greater transparency
Since the financial year 2017, large companies in the EU have been obliged to report on how their activities impact the environment and society. In Germany, the EU directive has been implemented as part of the CSR Directive Implementation Act (CSR-RUG), which requires around 550 companies in Germany to report. Around a third of these companies make use of the user-friendly, process-oriented form from the Germany Sustainability Code (DNK) to disclose their sustainability performance to stakeholders. But the DNK is more than just a reporting standard. For the more than 850 user companies, it is a helpful management tool to structure sustainability activities and develop targets for the future. Many small and medium-sized enterprises (SMEs) in particular leverage the DNK to ensure compliance with expanding legal requirements. Furthermore, the Code can also be used as a basis for valuation within the scope of portfolio management, for corporate bonds and in lending, as all finalised DNK statements are uploaded to the open access DNK database. Here, interested stakeholders can easily use filters to view and compare information on the sustainability performance of a range of companies. As such, the DNK and the associated database help to invigorate competition for sustainable business practices and foster public debate on real-world corporate practices.
The Corporate Sustainability Reporting Directive (CSRD) has been under development at EU level since 2021 in an attempt to bring about more coherent and effective sustainability reporting. The CSRD takes over from the Non-Financial Reporting Directive (NFRD), which also serves as the basis for the German CSR-RUG. The new directive, which sets out uniform standards across the EU and which was drafted with the help of RNE member Professor Alexander Bassen, provides for a boom in sustainability reporting within the EU, with far more detailed and comprehensive reporting requirements than those set out in the NFRD. Furthermore, a far greater number of companies are now subject to reporting requirements. Moving forward, instead of approx. 12,000 companies, around 50,000 EU companies will now have to report on sustainability criteria. The CSRD also ties in with other international reporting standards for greater uniformity across sustainability reporting. As such, it is a vital step in the sustainable transition of the European economy.
Responsible supply chains
Sustainable business includes not only environmental factors but social responsibility, too. Not least in the context of the globalisation of valuation creation processes and supply networks, particular attention must be paid to ensuring compliance with fundamental environmental and human rights standards, such as the ban on child and forced labour. In June 2021, the German Bundestag passed the Act on Corporate Due Diligence to Avoid Human Rights Violations in Supply Chains in an attempt to do justice to the risk and see that corporate responsibility is borne for individual value chains. From 2023 onwards, the act will require companies with more than 3000 employees (from 2024 with more than 1000 employees) to conduct due diligence along their value chains to identify, address and rectify any negative impact on human rights or the environment caused by their business operations. At EU level, a similar project has been underway since early 2022, where the planned Corporate Sustainability Due Diligence Directive (CSDDD) aims to require large firms throughout Europe to follow uniform environmental and human rights due diligence requirements by law along the entire value chain.
The circular economy
As part of its focus on “Resource Conservation and the Circular Economy”, the RNE advocates sustainable action that saves resources – both at political level and in real-world practice. In its statement “Circular Economy: Leveraging a Sustainable Transformation”, the RNE calls for a cross-ministerial strategic approach to the circular economy and sets out 13 specific recommended action points.