Governance: Insufficient ESG expertise on supervisory boards in the DACH region?

ESG criteria are also playing an increasingly important role within corporate governance, for example through remuneration criteria. However, even though the majority of large corporations in the DACH region have already established corresponding governance structures, there is still some catching up to do, particularly with regard to the competence profiles of supervisory boards and transparent reporting on payment practices and lobbying activities. This is shown by the study “Governance - Reporting on Sustainable Corporate Management” by Kirchhoff Consult GmbH and BDO AG Wirtschaftsprüfungsgesellschaft. As part of the study, the extent to which companies from the top indices DAX40, ATX and SMI already reported on their sustainable corporate governance in accordance with the ESRS in the past financial year 2023 was analyzed with regard to the requirements of the G1 standard of the European Sustainability Reporting Standards (ESRS).

“Aligning strategy with sustainability is of fundamental importance for companies. This is becoming increasingly clear. Supervisory boards should provide impetus and vigilantly support the transformation process. However, it has been shown time and again that this responsibility has not yet been fulfilled sufficiently,” says Dr. Jan-Ole Brandt, Senior Consultant ESG/Sustainability at Kirchhoff Consult and co-author of the study. “One possible reason for this is the lack of ESG-relevant competence profiles and practical sustainability experience on the part of supervisory boards,” explains Brandt.

ESG firmly embedded in governance structures and risk management

At 86%, the topic of ESG is already firmly established at the board level in most companies surveyed. At 83%, the DAX40 companies lag slightly behind those in the ATX (90%) and SMI (90%). The situation is similar for the declaration of due diligence: As part of their reporting for the 2023 financial year, almost all the companies surveyed published this declaration (95%), thus already covering a mandatory point of the future ESRS-based sustainability report. The companies surveyed also appear well positioned in risk management: The majority (91%) report on an ESG-related risk management system and internal controls for sustainability reporting. 

Most Management Board members are remunerated in line with ESG-relevant targets 

”An important driver for the anchoring of sustainability issues at the management level is the linking of parts of management remuneration with ESG-relevant key figures. Common examples include the development of greenhouse gas emissions or employee satisfaction,” says Philipp Schöneberg, Manager Sustainability Services at BDO and co-author of the study. “Our analysis shows that this is already common practice in 91% of the companies surveyed.” The figures have risen further compared to the previous year (88 %). In the DAX40, all companies reported ESG KPIs in Executive Board remuneration for the 2023 financial year (previous year: 98%). In the SMI, the figure remains unchanged at 85% and in the ATX, with an increase of ten percentage points, at 80%.

Majority of DACH companies select suppliers based on ESG aspects

Relationships with suppliers also play a crucial role in sustainable corporate governance. More than three-quarters (76%) of companies selected their suppliers in the 2023 reporting year based at least partially on environmental or social aspects. While as many as 90% of companies in the ATX report such selection criteria, the figure for the DAX 40 companies is 68% and, therefore, significantly lower than in the SMI (80%). In a sector comparison, ESG criteria still play a subordinate role in screening suppliers in the automotive and automotive supplier sectors (57%) and pharmaceuticals, biotechnology and life sciences (63%). “The integration of sustainability principles into supplier relationships is essential for assuming holistic responsibility in the value chain and achieving long-term success,” explains Jan-Ole Brandt from Kirchhoff Consult.

ESRS G1 makes companies more accountable to their suppliers

The new study also shows a significant shift in the disclosure requirements for companies compared to previous sustainability reporting. A central aspect of this change is the increased focus on the responsibility of companies towards their suppliers, especially small and medium-sized enterprises (SMEs). Disclosure requirement G1-6 of ESRS G1 brings payment practices to the fore. “In some respects, this new requirement marks a turning point in sustainability reporting. Of the companies surveyed, only one reported on its average number of days to settle an invoice,” explains Philipp Schöneberg. “The explicit disclosure of payment practices underlines the growing importance of fair business relationships in the context of sustainability.” This development signals a relevant change in reporting practices and sets new standards for transparency in supplier relationships.

About the study

The study “Governance - Reporting on Sustainable Corporate Management” is the third part of a series of studies published jointly by Kirchhoff Consult and BDO. It examines the non-financial reporting of large corporates listed in the top German, Austrian and Swiss indices (DAX40, ATX and SMI). Their annual and sustainability reports published up to the reporting date of March 31, 2024 serve as the data basis. The first sub-study is entitled “Diversity - Reporting on diversity”, while the second sub-study is “Climate protection - Reporting on decarbonization”.

The results of this study can be found here: “Governance - Reporting on sustainable corporate governance”.