Environmental, Social and Governance (ESG)
Goals of environmental protection, social responsibility and good corporate governance (Environment, Social and Governance/ESG) already gained noticeably in importance before the pandemic and are increasingly becoming a decisive cross-cutting issue in our business life as well as business law.
This has increased noticeably in the last few months. It is likely that doing business economically without considering these goals is hardly conceivable in the future. The new US administration, headed by President Biden, sent a very clear signal in this direction immediately after taking office.
ESG goals are also effective in all other leading industrial nations and beyond. The background to this is the Paris Climate Agreement of 2015 and the UN Agenda 2013 for Sustainable Development. Business enterprises cannot and do not want to shut themselves off from this shift in consciousness and values; thus, they have to face the challenge.
ESG does not only include topics that were previously subsumed under corporate responsibility and compliance, that is, observing legal regulations, no child labor or no other "exploitative" structures, no corruption, etc.; this goes far beyond that. It's about sustainability, resource conservation, considering the ESG footprint of a product or service.
We assume this topic will be of central importance in all practice groups over the next few years. We are happy to fully support our clients in all matters relating to ESG. Below are some suggestions from the practice groups.
Banking & Finance (Sustainable Finance)
There is broad consensus that political or legislative measures alone are not enough to achieve climate protection goals. Therefore, public and private investors play a central role. Only if financial products that promote sustainability are developed and used and private financial flows are controlled accordingly can the technical and organizational adjustment of economic structures in the sense of CO2 reduction and sustainability be successful. The financial sector has a key role to play in the development towards sustainability.
In Banking & Finance, we support our clients on sustainability issues as follows:
- Advising credit institutions and borrowers on project financing for renewable energies (onshore wind parks, offshore wind parks, solar parks),
- Advising project developers and investors on developing and managing renewable energy projects (onshore wind parks, solar parks),
- Advising credit institutions and borrowers on financing fiber optic projects and companies,
- Advising credit institutions on sustainability linked loans, and
- Advising credit institutions on financing sustainable real estate.
(b) Capital Market Products (Debt Capital Markets)
- Advising issuers and arrangers on green bonds, social bonds and sustainability bonds, and
- Advising originators and issuers on green and sustainable securitizations.
(c) Investment Products
- Developing investment products (in particular investment funds and investments) in relation to sustainable assets (wind farms, micro finance, green financing and real estate, financing models for CO2 reduction),
- Developing ESG policies and guidelines as well as adjustments, e.g. within the framework of benchmarks,
- Advice on implementing ESG principles in the investment and risk management process,
- Advice on implementing the sustainability taxonomy: Framework for defining, classifying and labeling sustainable activities and financial products
- Advice in connection with the transparency regulation: Disclosure requirements to ensure the transparency of certain financial market participants, insurance intermediaries and investment firms with regard to considering sustainability risks in investment decision-making, investment advisory processes and financial products geared towards sustainable investments, and
- Advice on delegated legal acts on the Markets in Financial Instruments Directive II (MiFID II) and the Insurance Distribution Directive (IDD): Considering sustainability preferences as part of establishing client investment goals.
(d) Banking Regulatory Law
- Advising banks and financial service providers in connection with supervisory sustainability aspects (dealing with sustainability risks, risk-weighted assets).
Corporate / M&A
ESG will play an increasingly important role in traditional corporate law and M&A transactions.
Company managements (board members, supervisory boards, managing directors, administrativei boards, etc.) will align daily business with ESG principles and must ensure the principles are also observed across the group. Establishing a suitable documentation and monitoring system is primarily required for this. In the event that the - more and more codified - ESG principles are not adhered to, specific liability questions will arise, with which company management will then have to deal.
In the case of M&A transactions, the question arises as to whether and to what extent the target company has established and observed ESG principles. This must be checked and documented in particular as part of due diligence. Compliance with ESG principles in corporate transactions also play a role in the context of the company valuation and subsequent purchase price negotiations. The latter is also because rating agencies are now collecting data on a company's ESG principles and these so-called ESG scores can be used in company evaluations and purchase price negotiations.
Companies that consistently rely on the ESG principle combined with sustainability and credibility have competitive advantages in the short and long term. This will shape other areas such as IPOs in the future. A good example of this is the discussion about the Victoria's Secret IPO Victoria´s Secret. The high rating of the eco-classic Birkenstock Birkenstock represent this development.
Because we understand this, we support our clients in the area of corporate M&A also at the interface to banking & finance and capital markets in all ESG issues.
- Developing and implementing ESG principles (guidelines, codes of conduct, etc.) in company law documentation as well as establishing a corresponding group-wide monitoring system;
- Advice and support for company management in daily business on issues relating to ESG principles;
- Advice and support for company management members in connection with ESG liability issues;
- Considering ESG issues in connection with legal due diligence, in particular evaluating the target company's current ESG governance status quo as well as identifying any risks;
- Advice and implementation of ESG aspects as early as the company start-up as part of its documentation
- Advice on changes to the corporate structure and reporting
- Advice on implementing a sustainable business strategy
- Advice in connection with ESG compliant/dependent management remuneration;
- Advice and support with sustainability reports etc. and/or in connection with disclosure obligations.
Automotive & Co
People responsible for corporate governance in automotive medium-sized companies with a global focus have long been aware of the challenges posed by an environmentally friendly and socially responsible business policy and its growing importance in the context of corporate social responsibility (CSR). Ecologically and socially sustainable corporate management with a positive "outward impact" is increasingly not only a requirement of OEMs for the entire supply chain, but a real value driver for companies in the automotive and vehicle industry as well as an essential criterion for financing or transaction decisions by strategic and institutional investors.
In Automotive & Co., Schalast supports its clients on the following sustainability issues, among others:
- Advice in connection with transforming and converting the transport and mobility sector to emission-free driving,
- Advice on ESG due diligence reviews that go beyond mere environmental or compliance risks in the context of transactions or financings,
- Implementing a CSR or ESG minimum standard for legal and contractual behavior in environmental, labor and social law; developing and expanding individual ESG standards for leadership governance; legal support for ESG rating processes and certifications.
Electronics & Machine Engineering
The growing importance and challenge of an environmentally friendly and socially acceptable corporate policy within the framework of Corporate Social Responsibility (CSR) has long been recognized by people responsible for governance in internationally active medium-sized companies. Ecologically and socially sustainable corporate management with a positive "outward impact" increasingly not only creates an image gain or a requirement for all market participants, but a real value driver for companies in the electrical and mechanical engineering industries as well as an essential criterion for strategic or institutional financing and transaction decision investors.
In the field of electronics and mechanical engineering, Schalast supports its clients in the following sustainability issues, among others:
- Advice on ESG due diligence reviews that go beyond mere environmental or compliance risks in the context of transactions or financings,
- Implementing a CSR or ESG minimum standard for legal and contractual behavior in environmental, labor and social law,
- Developing and expanding individual ESG standards for leadership governance,
- Legal support for ESG rating processes and certifications.
Restructuring / bankruptcy
Environmental, social and good corporate governance (Environmental, Social and Governance / ESG) in crisis, restructuring and bankruptcy. ESG criteria are relevant in this advisory and legal sector in three ways:
- ESG through restructuring / bankruptcy proceedings: A crisis company that does not currently meet ESG criteria can achieve its restructuring goal and result, whether out of court or in bankruptcy proceedings, to continue operating in accordance with ESG criteria. It depends on whether new investors support this ESG goal and the previous stakeholders, especially shareholders and employees, “get involved.” In particular, companies that come from a sector of the economy that may have little to do with environmental protection in its concrete form so far, be it in the automotive industry or energy generation, could, if they are already in crisis anyway, use restructuring instruments and insolvency law to better meet ESG criteria. Developing the business model in the direction of ESG (e.g. transforming the transport and mobility sector to emission-free driving) can be an important reorganization approach in the context of operational restructuring. It is important that the procedures available have different effects in terms of the ESG criteria. For example, in a pre-bankrupt restructuring procedure ("StaRUG procedure"), it is not possible to intervene in employee rights, so that from the point of view of the ESG criteria such a procedure presents itself as possibly more social than ordinary insolvency proceedings, which can also intervene in workers' rights.
- Is ESG bankruptcy-proof? In bankruptcy, an insolvency administrator takes the bankruptcy estate, i.e. the company, into custody and has power over it, can and should exploit it. If a company has so far been operating in accordance with ESG criteria, it is possible that an insolvency administrator, since his legal goal is the best possible satisfaction of creditors and not compliance with ESG goals, exploits the company as an insolvency estate at the end of which ESG targets are no longer met. This can be, for example, by discontinuing parts of a company that previously ensured compliance with ESG goals, or by taking up new business lines that do not meet ESG criteria. It may also be that the insolvency administrator realizes / liquidates a company in such a way that the purchaser of an ESG asset (e.g. a newly planted forest or an electricity supply contract for green electricity) is legally and actually able to destroy it (e.g. to cut down the planted forest again, sell the wood and cultivate the property or obtain cheaper electricity from fossil energy sources again).
- • Threats to ESG from restructuring / insolvency proceedings: As already indicated, both restructuring and insolvency proceedings in Germany are primarily geared towards achieving the best possible satisfaction for the creditors, or another solution that the creditors determine and adopt with a majority through a restructuring / bankkruptcy plan. In purely legal terms, neither the debtor nor the creditors are obliged to comply with any ESG criteria in this process. Inasmuch as “necessity knows no law,” it may be that a company that previously met ESG criteria is changed or exploited in a crisis in order to save financial assets at all so that compliance with the ESG targets is or is no longer at risk. Such is the legal situation at the moment. In our opinion, it is extremely difficult to make compliance with ESG criteria “bankruptcy-proof” through legal regulations, agreements or in any other way. In order to save ESG, a crisis should be recognized and averted even earlier and better. Thus, if companies and investors are committed to ensuring that a company adheres to ESG goals, they must always bear in mind this is no longer guaranteed in a company's crisis. It is therefore necessary to ensure early on to avert an emerging crisis in order to ensure compliance with ESG criteria. ESG goals can also be promoted by creditors making restructuring contributions to a company's crisis management that has committed itself to ESG goals.
Communications & Infrastructure / Energy
(a) In the telecommunications and infrastructure sector, Schalast supports its clients regarding the following sustainability issues:
- Fiber optic expansion contributes to sustainability in a variety of ways: Broadband expansion prevents rural depopulation and overdevelopment. The need for travel and transportation is reduced. Cable networks use less power than conventional data cables..
- Schalast advises project developers, credit institutions and borrowers on fiber optic projects and their financing.
(b) In the energy sector, Schalast supports its clients regarding the following sustainability issues:
- Advising project developers and investors on developing and managing renewable energies projects (onshore wind parks, solar parks), in particular concerning EEG issues,
- Advising credit institutions on renewable energy project financing (lender due diligence in the regulatory area),
- Advice in connection with Sustainability Advisory.
Our law firm also takes the sustainability goal very seriously for itself.
We are proud that Schalast was certified as a climate-neutral company in March 2020. The previous audit showed that good to very good values were achieved, particularly in the areas of electricity consumption, commuting and business trips.
Climate Extender's recommendations for introducing a job bike and converting the vehicle fleet to more e-mobility are already being implemented.
Schalast supports the following UN Goals for Sustainable Development as part of the certification: Affordable and clean energy, dissent work and economic growth, sustainable cities as well as community and climate action.
Schalast is determined to continue its sustainability initiative.
The law firm also receives support from Multilaw, its tier 1 network (www.multilaw.com), which announced a sustainability award for members for the first time in 2020 and which is itself striving to become the leading “Green Law Firm Network.”
Das nSchalast's next goal on this path to becoming a sustainable company is certification according to: ISO 26000:2010.
Here you can download the certificate for climate neutrality.