Retail and Consumer Goods12.06.2020 Newsletter
More and more companies are using sustainability for advertising purposes, whether in terms of products, working conditions or the standards of their suppliers. But what are legal consequences of such measures or statements for the company’s executive organs? For the liability risks, a distinction has to be made between binding and voluntary statements.
1. Mandatory legal requirements
The only existing statutory obligations to date are those in the form of the implementation of the Non-Financial Reporting Directive (NFRD). The NFRD was adopted at EU level in 2014. Its aim was to increase transparency on environmental and social aspects in large capital market-oriented companies. To this end, extended reporting obligations were introduced.
The NFRD envisages special declarations for listed stock corporations with more than 500 employees, and in principle also for cooperatives, credit institutions, financial service providers and insurance companies. It was implemented in the German Commercial Code [Handelsgesetzbuch, “HGB”] by the German legislator in 2017.
The companies covered by the legislation must submit a so-called non-financial statement. This must publicly state group-wide measures for environmental protection, employee protection, social commitment, respect for human rights and the fight against corruption and bribery. The aim is to show the impact of business activities on the environment and society.
The corporate management is responsible for drafting the non-financial statement. The supervisory board’s duty is to examine the non-financial statement as it does the financial statements and management report. This means that it may not solely rely on the audit committee’s report, rather that the entire board is involved in the process. In terms of content, both the regularity (requirements of the HGB) and the appropriateness (in accordance with the company's objectives) of the reporting must be examined. In contrast to the financial statements and management report, the law does not stipulate a mandatory review of the content of the non-financial statement by the auditor. Incorrect representations in the non-financial statement (§ 331 No. 1 HGB), as well as other violations of the provisions on drafting the non-financial statement (§ 334 (1) No. 3 HGB) may lead to direct sanctions against the respective members of the management and supervisory boards. Furthermore, the company may be fined under § 30 German Administrative Offenses Act [Ordnungswidrigkeitengesetz, "OWiG”].
In accordance with §§ 76 (1), 93 (1) sentence 1 German Stock Corporation Act [Aktiengesetz, “AktG”], the management board and, in accordance with §§ 111, 116 AktG, the supervisory board, must exercise the diligence of a prudent and conscientious businessman in the performance of their duties. In doing so, they are generally bound by the law (so-called duty of legality). Thus, a member of the management acts in breach of duty if he fails to meet statutory CSR requirements. If all prerequisites are met (breach of duty, burden of responsibility and damage caused by the breach of duty), a liability vis-à-vis the company comes into consideration.
2. Voluntary commitments
Companies under no legal obligation to publish a sustainability report can of course also draft one on a voluntary basis. Companies have already been producing environmental reports on a voluntary basis since the early 1990s. More and more companies are taking advantage of the positive external effect on employees, customers and contract partners, in keeping with the motto: do good and talk about it.
In the absence of statutory requirements, however, a violation of the requirements set by the company itself cannot constitute a breach of the duty of legality and thus cannot entail any liability vis-à-vis the company on the part of the management board pursuant to § 93 (1) AktG or on the part of the managing director pursuant to § 43 (1) German Limited Liability Companies Act [Gesetz betreffend die Gesellschaften mit beschränkter Haftung, “GmbHG”]. A violation of internal regulations is conceivable, of course. The consequences of such a violation, whether this can even lead to the dismissal from office of the managing director or board member or the termination of the service agreement, depend on the internal structure.
There are also voluntary commitments in the form of the use of sustainability labels or other public commitments to meet certain environmental standards. We will address the issue of sustainability labels and, in particular, the trademark law aspects associated with them in a separate article.
In terms of liability law, in principle the same rules apply here as in case of the voluntary drafting of a sustainability report. However, cases of so-called “greenwashing”, that is to say where standards are communicated to the outside world that are not being adhered to, can be dangerous. Here, the main risk is that of unfair competition. According to the German Act Against Unfair Competition [Gesetz gegen den unlauteren Wettbewerb, “UWG”], it is an unlawful commercial act if a product is falsely declared as having been approved by a public or private body or if the conditions for the confirmation, approval or authorization are falsely declared as having been met.
Pursuant to § 3 (2) UWG, an unfair commercial act is also deemed to have been committed if it does not conform to entrepreneurial diligence and is likely to significantly influence the commercial conduct of consumers. This can be the case, for example, in case of public statements on sustainability that are untrue.
Possible legal consequences include removal and omission, damages and the skimming-off of extra profits, §§ 8 et seq. UWG. In accordance with § 31 BGB, the company is liable for the actions of its executive organs. Should a board member or managing director himself realize or have initiated the fulfilment of the criterion of § 3 UWG or § 7 UWG, he is regularly personally liable in the external relationship. Of course, a claim for damages can also result from the relationship between the company and the acting body.
If a company commits itself to the topic of sustainability, this ultimately means that it is in the management’s own interests to also consistently adhere to and sustain these standards. Should you have individual questions on this topic, please feel free to contact our experts in the Retail and Consumer Goods Sector Group.