The year 2024 did not bring any significant changes or new trends with regard to ESG measures in Germany. While two seminal ESG regulations were adopted at the European (EU) level with the EU Deforestation Regulation (EUDR) and the EU Supply Chain Diligence Directive, the push for new ESG legislation has slowed somewhat in Germany compared to previous years in the wake of the overall slowdown in economic growth and the adaptation of the German Supply Chain Diligence Act (see below, Question 3). Germany has not yet implemented the EU Corporate Sustainability Reporting Directive (CSRD) into national law.

Germany has not adopted a formal definition of this term.

EU legislation

As EU regulations, the EU Sustainable Finance Disclosure Regulation (SFDR), the EU Taxonomy Regulation and the EU Deforestation Regulation are directly applicable in Germany. Please refer to Question 3 of the EU chapter for more information on these regulations.

Corporate Sustainability Due Diligence Directive (CSDDD)

On 25 July 2024, the Directive on Corporate Sustainability Due Diligence (CSDDD) entered into force. The CSDDD introduces human rights and environmental due diligence obligations for in-scope companies’ and their subsidiaries’ operations and along their supply and distribution chains. Large EU companies, and non-EU companies that exceed certain revenue thresholds generated from their turnover in the EU, are in scope. The Directive adopts a phased-in approach to implementation, providing Member States with a transposition period of two years after its date of entry into force. It is expected that Germany will amend the German Supply Chain Diligence Act to implement the requirements of the CSDDD. Please refer to Question 3 of the EU chapter for more information on the CSDDD.

EU Sustainable Finance Disclosure Regulation (SFDR)

On 14 May 2024, the European Securities and Markets Authority (ESMA) published its final report on “Guidelines on funds’ names using ESG or sustainability-related terms” (“ESMA Guidelines”). The ESMA Guidelines establish four categories of terms used in fund names: (i) transition-, social-, and governance-related terms; (ii) environmental- or impact-related terms; (iii) sustainability-related terms; and (iv) a combination of the above. The ESMA Guidelines also introduce certain minimum requirements, such as a minimum percentage commitment to promote environmental and/or social characteristics (Article 8 of the SFDR) or to make sustainable investments (Article 9 of the SFDR) and applying a prescribed exclusion list. On 21 August 2024, ESMA published the translations of the ESMA Guidelines in all official EU languages. As a result, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) had until 21 October 2024 to notify ESMA whether or not they intend to apply the ESMA Guidelines on an “explain-or-comply” basis. BaFin issued a notice on 1 October 2024 stating that it agrees with, and will fully comply with, the ESMA Guidelines. The ESMA Guidelines applied to fund managers managing new funds from 21 November 2024 and fund managers of existing funds (including both closed funds and funds currently in fundraising) have until 21 May 2025 to comply with the ESMA Guidelines.

Additionally, in February 2024, the European Council and the European Parliament reached a provisional agreement on the proposal for a regulation on environmental, social and governance (ESG) rating activities. After the European Parliament adopted the final text of the regulation on 24 April 2024, the European Council also adopted the new regulation on 19 November 2024. The ESG rating regulation will start applying in Germany 18 months after its entry into force (which will be 20 days after its publication in the EU’s Official Journal).

EU Corporate Sustainability Reporting Directive (CSRD)

Starting January 2024, the CSRD replaced the Non-Financial Reporting Directive (NFRD). EU Member States including Germany had until 6 July 2024 to transpose the CSRD into national law. Although the German Federal Government adopted the government draft of the German CSRD Implementation Act on 24 July 2024, the government draft has not progressed through the customary legislative process since. As a result, the European Commission decided to initiate infringement procedures by sending a formal notice on 26 September 2024 to 17 Member States including Germany for failing to notify their national measures for transposing the CSRD. Germany will now have two months to respond and complete the transposition of the CSRD.

The European Financial Reporting Advisory Group (EFRAG) published its Implementation Guidance for reporting in line with the Commission Delegated Regulation (EU) 2023/2772 under the CSRD (European Sustainability Reporting Standards; ESRS) on 31 May 2024. The guidance related to materiality assessment, value chain and ESRS datapoints — areas EFRAG widely considers to be the most challenging aspects of ESRS implementation. Although EFRAG’s guidance is non-binding, it is expected to be widely adopted by industry. However, if there is a conflict between the EFRAG guidance and the ESRS, the latter will take precedence.

German law

German Supply Chain Diligence Act

The German Supply Chain Diligence Act (Lieferkettensorgfaltspflichtengesetz) obliges companies (with their head office, principal place of business, administrative headquarters, statutory seat or branch office in Germany) to respect human rights by implementing defined due diligence requirements. It came into force on 1 January and initially provided for a tier application, starting with companies with at least 3,000 employees in Germany. Since the beginning of this year, the act applies to companies with at least 1,000 employees.

The German Supply Chain Diligence Act contains an exhaustive catalogue of 11 internationally recognised human rights conventions. These include, in particular, the prohibition of: child labour, slavery and forced labour; the disregard of occupational health and safety; the withholding of an appropriate wage; the disregard of the right to form trade unions or employee representatives; the denial of access to food and water; and the unlawful deprivation of land and livelihoods.

The law sets out the necessary preventive and remedial measures and obliges complaint procedures and regular reporting. The core elements of the due diligence obligations include the establishment of risk management to identify, prevent or minimise the risks of human rights violations and damage to the environment. Due diligence obligations will apply to a company’s own business operations, to the actions of a contractual partner and to the actions of other (indirect) suppliers. This means that a company’s responsibility no longer ends at their own factory gate but exists along their entire supply chain.

If companies fail to comply with their legal obligations, fines can be imposed. These can amount to up to EUR 8 million or up to 2% of global annual sales. The turnover-based fine framework only applies to companies with annual sales of more than EUR 400 million. In addition, if a fine is imposed above a certain minimum level, it is possible to be excluded from the award of public contracts.

First and Second Leadership Positions Act

On 11 August 2021, the German Second Leadership Positions Act (Zweites Führungspositionengesetz (LPA II)) entered into force. As a continuation of the First Leadership Positions Act of 2015 (LPA I), the LPA II introduced a minimum participation requirement for men and women on management boards of companies within its scope. It extends commercial reporting obligations and requires companies to disclose and justify target quotas for their board appointments.

Under the LPA I, listed companies and companies with equal co-determination were subject to a fixed gender quota of 30% for their supervisory boards and had to define a target size for male and female participation on their supervisory and management boards (so-called “flexible quota”).

The LPA II does not provide for a fixed quota but prescribes a minimum participation requirement for management boards of listed and co-determined companies of at least one woman and one man if the board consists of more than three members. One common feature with the LPA I is that appointments made in violation of this requirement are void (so-called “empty chair”). In practice, this means that only a woman can be appointed as a member of the management board if a board has more than three members, but not yet a female member. This obligation applies to new appointments from 1 August 2022. Existing mandates can be held until their scheduled end but must then be filled in accordance with the requirements of the LPA II.

In addition, listed companies and companies with equal co-determination must now publicly report their target size for appointments to the management board in their annual accounts (part of the management report). The target of zero women on the board must now be justified. Failure to report or inadequate justification are subject to fines. For companies active in capital markets, sanctions can go up to either EUR 10 million, 5% of the total annual turnover or twice the economic benefit derived from the violation, depending on which is the highest punishment.

The LPA II also creates the option for members of the management board to take a “sabbatical” in the event of maternity leave, parental leave, illness or care of a family member. This is structured as a right to revoke the appointment for a certain period, combined with a right to reappointment at the end of the period.

EU Conflict Minerals Regulation

The EU Conflict Minerals Regulation is directly applicable in Germany. Please refer to Question 4 of the EU chapter for more information on this regulation.

Act to Improve the Fight against Trafficking in Human Beings

The German Act to Improve the Fight against Trafficking in Human Beings and to Amend the Federal Central Register Act and the Eighth Book of the Social Code (Gesetz zur Verbesserung der Bekämpfung des Menschenhandels und zur Änderung des Bundeszentralregistergesetzes und des Achten Buches Sozialgesetzbuch (“Act Against Human Trafficking”)), which entered into force on 15 October 2016, implements the EU Directive on preventing and combatting trafficking in human beings and protecting its victims. Please refer to Question 4 of the EU chapter for more information on this directive. The combatting of human trafficking and the support of its victims are strongly supported by the German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz).

In the course of the implementation of the EU directive, the criminal provisions for combatting trafficking of human beings in sections 232 to 233a of the German Criminal Code (Strafgesetzbuch) were fundamentally restructured and expanded. 

The actual trafficking of human beings (section 232 of the German Criminal Code) and the forms of exploitation that follow it (forced prostitution, forced labour and exploitation of labour and exploitation using deprivation of liberty — sections 232a to 233a of the German Criminal Code) constitute serious criminal offences. The fundamental reorganisation and expansion of the relevant criminal provisions was intended to make them more practicable and, in particular, to improve the fight against labour exploitation.

European Shareholder Rights Directive

Following implementation of the second European Shareholder Rights Directive and the revision of the German Corporate Governance Code (Deutscher Corporate Governance Kodex, (GCGC)), German stock corporation law stipulates that in listed companies, the supervisory board must align the management board remuneration structure with the company’s sustainable long-term development.

The increasing density of regulations in the environmental and social sector can give rise to additional costs but also to fines or liability risks. In recent years, the lawsuits filed/announced by Deutsche Umwelthilfe e.V., a German environmental, nature and consumer protection organisation, against, inter alia, automobile manufacturers BMW and Mercedes-Benz and the oil and gas group Wintershall Dea over their CO₂ emissions have made headlines in Germany.

Additionally, international human rights organisations brought the first lawsuits against retail giants Amazon and Ikea as well as car manufacturers Mercedes Benz, BMW and VW in connection with the German Supply Chain Diligence Act. Human rights advocates at the European Centre for Constitutional and Human Rights (ECCHR) and Femnet criticise, among other things, Amazon’s and Ikea’s failure to sign the Bangladesh Accord, an agreement intended to improve safety in the country’s textile factories. In addition, they claim that safety deficiencies and labour law violations have been identified in factories that supply the retailers. 

Complaints against VW, BMW and Mercedes Benz were filed for suspected human rights violations in Xinjiang, China. The companies are accused of having failed to present evidence to show that they are adequately responding to the risk of forced labour in supplier factories in the Xinjiang Uyghur Autonomous Region (Uyghur region). All lawsuits are currently still pending.

Soft non-binding laws

Germany supports various UN instruments that impact businesses, including:

• the UN Guiding Principles on Business and Human Rights;
• the UN’s 2030 Agenda for Sustainable Development; and 
• the Sustainable Development Goals. 

Other soft non-binding laws include:

• The Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises set out recommendations on responsible business conduct for multinational companies that operate in a global context. The Guidelines contain established principles of responsible business conduct in the areas of information policy, human rights, employment policy, environmental protection, anti-corruption, consumer interests, science and technology, competition and taxation. The Guidelines, which form part of the OECD Declaration on International Investment and Multinational Enterprises, are not legally binding but reflect the Federal Government’s expectations towards the business conduct of German enterprises that operate globally. See www.bmwk.de/Redaktion/DE/Downloads/M-O/oecd-leitsaetze-fuer-multinationale-unternehmen-neufassung-2011-englisch.pdf.
• In 2016, the German Government agreed on a so-called National Action Plan on Business and Human Rights, which emphasised the responsibility of German companies to respect human rights. The Supply Chain Act, for example, serves to implement the Action Plan. The Action Plan in turn is based on the 2011 UN Guiding Principles on Business and Human Rights, which are intended to ensure respect for human rights in business relations.
• The German Sustainability Strategy translates the Sustainable Development Goals (SDGs) of the United Nations, the so-called “Agenda 2030”, into a national strategy.
• The German Corporate Governance Code presents essential statutory regulations for the management and supervision of German-listed companies and contains, in the form of recommendations and suggestions, internationally and nationally acknowledged standards for good and responsible corporate governance. In January of 2022, the Government Commission on the German Corporate Governance Code (Regierungskommission Deutscher Corporate Governance Kodex) adopted an updated draft of the GCGC in order to account for the growing importance of ESG aspects and the expansion of reporting requirements as a result of the announced CSRD, as well as the recent amendments to the German Stock Corporation Act (AktG) by the German Financial Market Integrity Strengthening Act (Gesetz zur Stärkung der Integrität der Finanzmärkte) and the LPA II. Pursuant to a current draft of the new GCGC, the management board shall systematically identify and assess the risks and opportunities for the company associated with social and environmental factors, as well as the environmental and social impacts of the company’s activities. Information on the corporate strategy shall provide information on how to implement the economic, ecological and social objectives in a balanced manner.
• The German Federal Financial Supervisory Authority (BaFin) regularly publishes guidelines and Q&As regarding sustainability requirements. In particular, in December 2019, BaFin published its Guidance Notice on Dealing with Sustainability Risks, which BaFin considers as a compendium of non-binding procedures (good practice principles) with respect to the implementation of a proper business organisation and an appropriate risk management system in connection with sustainability risks. In contrast, BaFin put on hold its plan to introduce guidelines for sustainable funds due to the regulatory, energy and geopolitical situation and the concern that the current environment is not sufficiently stable for a permanent regulation.
• The German Sustainability Code (Nachhaltigkeitskodex) was developed in 2010 by the German Council for Sustainable Development (Rat für Nachhaltige Entwicklung (RNE)) in a dialogue process with representatives of politics, the financial market, companies and civil society organisations. The German Sustainability Code provides a framework of an internationally applicable reporting standard for topics relating to sustainability pursuant to which users declare their conformity with 20 criteria and the additional non-financial performance indicators taken from the Global Reporting Initiative (GRI) and the European Federation of Financial Analysts Societies (EFFAS).

Stakeholders

Sustainability encompasses all areas of political responsibility. Due to this cross-cutting nature and the particular importance of the topic, responsibility for the German Sustainability Strategy lies with the Federal Chancellery (Bundeskanzleramt). The State Secretary’s Committee for Sustainable Development (Staatssekretärsausschuss für nachhaltige Entwicklung) is the most important steering body of the government’s sustainability strategy. It is also the government’s highest-ranking body and is tasked with ensuring that the guiding principles of sustainability are applied. State secretaries from all federal ministries take part in its meetings, which are held up to four times a year.

The RNE advises the German Government on sustainability policy. It is independent in its activities and has been appointed by the German Government every three years since 2001. The RNE also carries out its own projects to advance sustainability in practice. In addition, it provides impetus for political and social dialogue. 

In 2004, the German Government decided to establish the Parliamentary Advisory Council for Sustainable Development (Parlamentarische Beirat für nachhaltige Entwicklung). Since then, it has been newly appointed and constituted at the beginning of each legislative period and is to provide parliamentary support and recommendations for the German sustainability strategy of the Federal Government, the European sustainability strategy and the sustainability policy of the German Government at the international level.

Deutsche Umwelthilfe e.V. (DUH), a German environmental, nature and consumer protection organisation, made headlines in Germany in recent years. DUH is committed to climate protection, the preservation of biodiversity, an energy supply based on efficiency and renewable sources, resource conservation and recycling management, clean air, sustainable mobility and consumer protection. Since 2009, DUH has received grants from the U.S. Climate Works Foundation, the EU Commission and the German Federal Government as part of an EU-wide campaign to reduce soot emissions.

National Contact Points (NCPs)

The German Federal Ministry for Economic Affairs and Climate Action (Bundesministerium für Wirtschaft und Klimaschutz) acts as the National Contact Point for the OECD Guidelines in Germany.

EU legislation

Reporting and corporate disclosure make up a significant part of the EU legislation outlined in Question 2, above. Additionally, with the enactment of the CSDDD and the coming into force of the EUDR, corporate due diligence obligations have emerged as a significant duty for German companies and EU market participants. Please refer to Questions 4 and 7 of the EU chapter for more information on the EU instruments applicable in Germany.

Germany

Supply Chain Diligence Act

Under the Supply Chain Diligence Act, companies must submit an annual report to the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) on the implementation of due diligence obligations and publish it online.

The report must provide comprehensible information on:

• whether and which human rights and environmental risks the company has identified;
• what the company has done to fulfil its due diligence obligations;
• how the company assesses the impact and effectiveness of the measures; and
• what conclusions it draws from the assessment for future action.

The report must be made publicly available online no later than four months after the end of the fiscal year and must be available for seven years. Company and business secrets must be duly protected. The reports are submitted to the Federal Office of Economics and Export Control. Work is underway on an electronic procedure to minimise the burden on companies.

First and Second Leadership Positions Act

As outlined in Question 3, above, the LPA I and the LPA II require disclosure and, in case of a zero target, justification of the targeted participation quota as part of the management report in the annual accounts. 

A zero target must be justified in a clear and comprehensible manner; the justification must set out in detail the considerations on which the decision is based. The statement of reasons should take account of the exceptional nature of the zero target. Accordingly, the German Government believes that the statement of reasons must make a conscientious decision plausible to the public. As a guideline for the level of detail, the explanatory memorandum states a length of 100 to 150 words.

EU legislation

Please refer to Question 8 of the EU chapter for more information on impact of the EU instruments applicable in Germany.

Germany

Supply Chain Diligence Act

The German Supply Chain Diligence Act holds companies responsible for breaches in their supply chain, directly and indirectly (e.g., by subcontractors), in Germany and abroad. It is difficult to imagine a sector that will not be influenced by the diligence requirements. The “high-impact sectors” include textiles, food, agriculture, fisheries, forestry, the extraction of mineral resources, the manufacture of base metal products and other non-metallic mineral products and the wholesale of mineral raw materials and base and intermediate minerals.

First and Second Leadership Positions Act

A minimum participation requirement of one woman applies to management boards with more than three members of listed companies and companies with equal co-determination. Pursuant to information published by the competent German Federal Ministry for Family Affairs, Senior Citizens, Women and Youth (Bundesministeriums für Familie, Senioren, Frauen und Jugend) in August of 2021, this law affected 66 companies in total (no indication of sector given), of which 21 currently had no women on their boards.

Germany continues to strive for climate protection and still holds on to the goal of becoming climate neutral as early as 2045 (instead of 2050). To achieve this goal, in 2023, the current German Government adopted 26 measures to mobilise trillions in investment for more climate protection. These include, among other things, an (EU-wide) sustainability traffic light for financial products, an extended sustainability reporting obligation and the reallocation of investment funds from the Federal Government to sustainable investments. However, it should be noted that elections are due to be held in Germany in February 2025, which could potentially bring about a new government and thus a new political direction, particularly in the areas of sustainability and climate protection.

ESG rating agencies

The German Government has developed a sustainability action program and provides an annual account of implementation in a monitoring report. The Federal Statistical Office’s (Statistischen Bundesamtes) indicator report, published every two years, forms the basis for the Federal Government to adjust its measures.

In their 2021 coalition agreement, the German ruling parties agreed to promote European minimum requirements for ESG ratings.

The ESG Ratings Regulation provides, among others, for authorisation and supervision by ESMA of third-party ESG rating providers, management and anticipation of conflicts of interest, minimum transparency requirements and passporting of third-country rating providers. 

Please refer to Question 10 of the EU chapter for more information from a European perspective.

ESG benchmarks

Please refer to Question 10 of the EU chapter for more information on European ESG benchmarks which are relied upon in Germany.

Consumer demands play a major role in driving ESG developments in Germany. Recent events (the COVID-19 pandemic, floods in western Germany, historical temperature highs, the #MeToo and Black Lives Matter movements, Friday for Future demonstrations, the war in Ukraine) have increased awareness for social and environmental matters for the everyday consumer. The pressure on politicians and companies to implement meaningful ESG measures will likely increase further and bring additional regulations for all aspects of the economy and society.

As in other jurisdictions, the major challenges are:

• the collection of reliable ESG data;
• the difficulties in the application of ESG laws due to lack of clarification; and
• the varying timelines for the implementation of relevant ESG regulations.

With respect to EU instruments and their interpretation, the EU Commission is the primary source of information.

With respect to corporate ESG requirements and measures, the GCGC provides valuable guidance.

The EU Taxonomy Regulation is directly applicable in Germany. Please refer to Question 3 of the EU chapter for an outline of the regulation.

It is likely that, as ESG capital flows grow, so will greenwashing. The amount of misleading information about the actual environmental, social and governance performance of companies and their products will likely increase. As a result, the importance of consistent and comparable sustainability reporting based on a single global standard for measuring and communicating ESG performance will increase. For future developments, please see Question 15 of the EU chapter, as the European Union with its Green Deal initiative is a key driver of ESG development.