Relevance of ESG criteria for management decisions

Corporate sustainability and ESG are of great importance for management decisions. First, it is expected that observing these criteria will generate higher profits for the company in the long term. Second, investors are increasingly working with internal guidelines that require companies to be managed sustainably or encourage investors to exercise their voting rights in a company in compliance with ESG aspects. Having an appropriate ESG strategy may thus result in a major competitive advantage and should be at the top of every company's list of priorities.

Corporate sustainability is also increasingly a focus of the EU. The European Commission recently published a proposal for a new directive on corporate sustainability due diligence which holds directors directly accountable for setting up and overseeing corporate sustainability due diligence. The proposal further defines the scope of the director's duty of care regarding sustainability matters when fulfilling their duty to act in the company's best interest.

The German Corporate Governance Code also emphasises the stakeholder value approach: Directors must take environmental factors into account when exercising their respective roles in the company's best interests. In addition to long-term economic objectives, the corporate strategy must also give appropriate consideration to ecological and social objectives.

Austrian law also provides for such an approach. Under Section 70 (1) of the Austrian Stock Corporation Act, the management board must not only consider the best interests of the company, but also those of shareholders and employees as well as public interests. In case of a conflict between these objectives, the company's best interests prevail.

Risks and rewards

Therefore, the management board of an Austrian stock corporation may realise ESG goals within its management discretion, though these must be in the company's best interest. A company's public image and thus its turnover and opportunities on the labour market can be increased the more it is committed to social responsibility and sustainable business management. Expenses for environmental protection, sponsoring of cultural events and donations contribute to the company's social acceptance as a "good corporate citizen". Consequently, the management board should consider sustainability aspects in its decisions if these have a positive impact on the company's image, sales and/or profits.

That is why ESG criteria should be also taken into account in M&A transactions as business decisions: Neglecting ESG criteria may not only result in sustainability risks, but may also entail reputational risks. Therefore, investors are increasingly conducting comprehensive due diligence with respect to ESG criteria before entering a transaction. During due diligence, ESG-related risks should be assessed, and any identified instances of non-compliance should be rectified before completion of the transaction. ESG compliance and/or the remediation of high risks based on non-compliance may also be a condition precedent to completion. To the extent that remediation is not possible, the relevant risks need to be appropriately reflected in the valuation of the target entity or the transaction documents (e.g. as an indemnity).

From soft law to hard law

Although Austrian stock corporation law does not explicitly require board members to comply with ESG criteria, a transformation of ESG criteria from soft law to hard law can be observed in the EU. In France, Article 1833 (2) of the Code Civil regulates that all companies must be managed with consideration for the social and environmental impacts of their business activities. In Germany, the Sustainable Finance Advisory Board has recently recommended amending Section 93 (1) of the Stock Corporation Act. The BJR will only apply after appropriate identification and assessment of all relevant risks, including environmental and social sustainability risks.

Taking into account these legal developments as well as investors' increasing penchant for investing in companies that act in accordance with ESG criteria, not to mention the fact that focusing on ESG goals may be in the company's best interest, it is recommendable for board members of major corporations to consider ESG criteria in their business decisions.

authors: Sascha Hödl, Zurab Simonishvili