ESG and Board Duties in German Companies

ESG and board duties in Germany: the short answer

German company law does not contain a general statutory duty to pursue environmental, social and governance (ESG) goals. But ESG and board duties are closely linked in practice. Management boards must manage the company with the care of a diligent and conscientious manager (§ 93(1) of the Stock Corporation Act, Aktiengesetz, AktG) and must take into account all risks and opportunities relevant to the company's long-term success, including climate, supply chain and governance risks. The business judgment rule protects sustainability-related decisions taken on an informed basis for the benefit of the company. Supervisory boards must monitor management, including its handling of sustainability risks and reporting, and in listed companies must align management board remuneration with the sustainable and long-term development of the company (§ 87(1) AktG).

On top of these general duties, specific laws create concrete obligations: sustainability reporting, supply chain due diligence, climate-related advertising rules and sector regulation. This article explains how ESG and board duties interact in German stock corporations (AG) and limited liability companies (GmbH), what the German Corporate Governance Code recommends, and how boards can manage personal liability risk.

The legal framework for ESG and board duties

Under § 76(1) AktG, the management board manages the company under its own responsibility. The prevailing view in German law is that the board must act in the interest of the company, which includes the interests of shareholders, employees and the public, and that it has broad discretion in balancing these interests as long as it pursues the company's long-term profitability. Sustainability considerations are therefore permissible and, where they affect long-term value, required.

Sustainability and the business judgment rule

The business judgment rule in § 93(1) sentence 2 AktG provides that there is no breach of duty if a board member, when taking an entrepreneurial decision, could reasonably assume that he or she was acting on the basis of adequate information for the benefit of the company. It applies by analogy to GmbH managing directors. For ESG decisions, this has three consequences.

• Entrepreneurial decisions only. Decisions on decarbonisation strategy, investments in renewable energy or exits from high-risk supply regions are entrepreneurial and protected. Compliance with mandatory law, such as the LkSG, reporting duties or emissions trading obligations, is not a matter of discretion.
• Adequate information. Boards must gather information proportionate to the significance of the decision, including scenario analyses on climate and regulatory risk, and document it.
• Benefit of the company. Sustainability measures must be justifiable by reference to the company's long-term interest, including reputation, access to capital, employee retention and regulatory resilience. Pure altruism without any link to the company's interest is problematic, although modest charitable activities are generally accepted.

ESG risks in risk management and compliance

Under § 91(2) AktG, the management board must establish a monitoring system to detect developments that endanger the company's continued existence at an early stage. For listed companies, § 91(3) AktG requires an appropriate and effective internal control and risk management system. Climate-related physical and transition risks, supply chain risks and regulatory risks are part of these systems where material. The legality principle also requires boards to ensure compliance with ESG-related laws, from the LkSG and the EU Deforestation Regulation to the UWG rules on environmental claims.

A failure to organise compliance can lead to personal liability for damages to the company under § 93(2) AktG and to administrative fines for the company and individuals under §§ 30 and 130 of the Administrative Offences Act (OWiG). German courts have recognised that board members are responsible for an adequate compliance organisation; the scope depends on the company's size, sector and risk profile.

The supervisory board's role

The supervisory board monitors the management board (§ 111(1) AktG), including the legality, regularity, expediency and economic efficiency of its conduct. In ESG matters, this covers the sustainability strategy, the risk management system's coverage of ESG risks, compliance with reporting and due diligence obligations and the integrity of sustainability information. The audit committee, where established, deals in particular with the internal control system, the risk management system, internal audit and the audit (§ 107(3) AktG), and in practice also oversees sustainability reporting and its assurance.

The German Corporate Governance Code, in its 2022 version, recommends that the management board systematically identifies and assesses risks and opportunities associated with social and environmental factors and the ecological and social impact of the company's activities, that corporate strategy appropriately takes into account ecological and social objectives, and that the composition of the supervisory board includes expertise on sustainability issues relevant to the company. Listed companies must declare annually whether they comply with these recommendations or explain deviations (§ 161 AktG).

ESG targets in board remuneration

In listed companies, § 87(1) AktG requires that the remuneration structure be aligned with the sustainable and long-term development of the company, and that variable components generally have a multi-year assessment basis. The remuneration system adopted by the supervisory board and presented to the general meeting must describe the performance criteria for variable remuneration and explain how they contribute to the company's strategy and long-term development (§ 87a AktG).

Many German listed companies have introduced ESG targets into short-term and long-term incentives, for example emission reductions, employee engagement, safety or diversity targets. Legally, such targets must be measurable, linked to strategy and verifiable, and they must not dilute financial performance criteria to the point where pay becomes decoupled from performance. Investors and proxy advisers scrutinise whether ESG targets are ambitious and transparently assessed. Poorly designed targets can lead to say-on-pay rejections and reputational damage.

ESG and board duties in sustainability disclosure

Sustainability reporting turns ESG and board duties into a disclosure question. The management report, including the non-financial statement and, once the CSRD is transposed, the sustainability statement, is the responsibility of the management board and is examined by the supervisory board. Misstatements can have consequences under accounting and capital markets law, can support unfair competition claims if repeated in advertising, and can expose the company to investor claims. Boards should therefore ensure that the processes behind sustainability data, including materiality assessments, data collection and controls, are as robust as those for financial reporting.

Even after Omnibus I narrowed the CSRD scope, many German companies continue to publish sustainability information voluntarily or at the request of banks and customers. Voluntary statements are not exempt from liability. The same standards of accuracy apply, and boards should avoid publishing targets or claims that the company cannot substantiate.

Practical governance measures

• Allocation of responsibility. Assign responsibility for sustainability strategy, supply chain due diligence and reporting to named board members in the rules of procedure, while keeping overall responsibility with the full board.
• Reporting lines. Ensure that sustainability, compliance and risk functions report regularly to the management board and, where relevant, directly to the supervisory board or its committees.
• Expertise. Provide board training on climate risk, human rights due diligence and sustainability reporting, and consider expertise when nominating supervisory board members.
• Integration. Integrate ESG risks into enterprise risk management, investment decisions and M&A due diligence rather than treating them as a separate topic.
• Review. Have internal audit or external advisers review ESG processes periodically, and follow up on findings at board level.

ESG and board duties in the GmbH

For GmbH managing directors, § 43 GmbHG sets the standard of care, and the business judgment rule applies by analogy. A key difference from the AG is that shareholders can instruct managing directors (§ 37 GmbHG), including on sustainability matters, within the limits of the law. Shareholders can therefore set ESG objectives directly, for example in the articles of association, a family charter or shareholder resolutions. Managing directors who follow lawful instructions are generally protected from liability towards the company. Family-owned and Mittelstand companies often use this flexibility to anchor long-term values and sustainability goals in their governance.

Liability exposure and protection

Board members can face claims from the company for damage caused by breaches of duty, typically enforced by the supervisory board against management board members (or by shareholders in limited cases). ESG-related exposure arises mainly from compliance failures, misleading sustainability disclosures, inadequate risk management or decisions taken without adequate information. Protection measures include clear allocation of responsibilities within the board, documented information gathering, effective compliance and reporting systems, independent assurance and adequate D&O insurance without broad ESG exclusions.

Where a company has suffered loss through an ESG-related breach, the supervisory board must examine whether to pursue claims against management board members. Under established German case law, it may refrain from doing so only for weighty reasons in the company's interest. Supervisory board members who fail to examine claims properly may themselves become liable to the company.

Illustration: a hypothetical German listed chemicals company decides to invest heavily in electrification of its plants, accepting lower short-term returns. The management board commissions scenario analyses on carbon prices and customer demand, discusses alternatives with the supervisory board and documents why the investment secures the company's long-term competitiveness. Even if carbon prices later fall, the decision is protected by the business judgment rule because it was taken on adequate information in the company's interest.

How TRW & Co helps with ESG and board duties

We advise management and supervisory boards on ESG and board duties. We review governance structures, allocation of responsibilities and decision processes for sustainability matters, design documentation that supports the business judgment rule, advise on ESG targets in remuneration systems and on declarations of conformity with the Corporate Governance Code, and represent board members in liability disputes. Our work connects with our corporate governance and compliance and ESG practices. See also the business judgment rule and supervisory board duties. To discuss your board's approach, contact us.