On the pathway to sustainability reporting – Part III: An example of its application in the SME sector

In Part I of this series of articles, we discussed the evolution of non-financial reporting towards sustainability reporting (CSR Directive) in the management report. The practical challenges as well as the opportunities of expanding reporting requirements for small and medium-sized enterprises were the subject of Part II. In the following section, we outline, by way of example, the requirements that one of the world’s largest car manufacturers lays down for its supplier companies and the steps that the suppliers need to implement in order for them to continue to be taken into consideration in the contract award process.

Spillover effects for small and medium-sized enterprises (SMEs)

The further development of sustainability reporting has initially been addressed only to large undertakings and listed companies. Industries with distinctive supply chains – like the automotive industry – can be required to monitor the non-financial aspects of supply chains that relate to the sustainability performance of vehicle manufacturers. In such a case, companies that are neither large nor listed would then also be affected by sustainability reporting.

By carrying out an evaluation of suppliers based on their sustainability performance it will be possible to identify risks in the supplier chain at an early stage and, consequently, to take preventative action in relation to suppliers, thus before any shortcomings appear in the media. One means of early detection is the self-assessment questionnaire (SAQ); this has been standardised for the automotive industry and is intended to give vehicle manufacturers an indication of the sustainability of the operations of the respective suppliers with regard to social, environmental and business ethics aspects. 

Communication – that is, replying to the SAQ and uploading the required documents as well as the validation of the SAQ – is processed via the NQC SupplierAssurance internet platform. Establishing business relationships and qualifying as a supplier or service provider for large car manufacturers will then depend on achieving a positive rating. 

Interim conclusion: Therefore, SMEs could likewise be affected, albeit indirectly, by the German Act to Transpose the CSR Directive.

Checking the rating requirements

The requirements in the SAQ are based on standards relating to management, working conditions and human rights, occupational health and safety, business ethics, the environment and supplier management. The scope of the requirements that have to be satisfied depends to a large extent on the size of the company (in terms of number of employees). The S(ustainability)-Rating is applicable to companies with more than nine employees. Business partners with 10 to 99 employees can already obtain a positive rating if they satisfy the minimum requirements. Tougher requirements apply to companies with 100 or more employees and up to 500 employees respectively. In addition, a distinction is made between manufacturing and service companies. The latter have to satisfy a shorter profile of requirements because they do not have to explain and provide proof of responsible raw material 
procurement.

Example: The present case involved a company that provides services for industrial manufacturing and has less than 100 employees. In view of the fact that this was a service sector company and that the level of compliance was limited to satisfying the minimum requirements, ultimately, the applicable eligibility criteria for the award of contracts were simpler. That is why the efforts were focused on checking that the minimum requirements had been satisfied; these requirements are discussed in more detail below.

Minimum requirements to be complied with

Management – Code of conduct

In the area of management, the minimum requirements provide for the existence of a code of conduct. Clients would only expect supplier companies with 100 or more employees to explicitly appoint senior executives who have overall responsibility for sustainability and compliance. Expectations related to the CSR/sustainability report are oriented towards EU guidelines on the disclosure of non-financial information and would only be relevant for large companies with 500 or more employees.

A code of conduct defines behavioural guidelines that embody a company’s ethical principles. They are intended to provide guidance to employees, but also to business partners on how to deal with the existing company rules. 

Please note: You can use the requisite code of conduct to report on sustainable operations with regard to social, environmental and business ethics aspects. The guidelines referred to below were a constituent part of the code of conduct in the specific case.

Working conditions and human rights

Business partners have to, at least, have a policy on working conditions and human rights that covers the topic areas of child labour and young workers, wages and social security benefits, working hours, modern slavery, freedom of association and collective bargaining as well as harassment and non-discrimination.

In so doing, companies have to undertake to adhere to high standards when respecting human rights and to appropriate working conditions. 

Please note: In Germany, given that human rights and labour standards have already been legally established and accepted, satisfying these criteria should not normally prove difficult for domestic (German) companies. Nevertheless, it should be kept in mind that all the topic areas have to be included in the policy and that the company has to explicitly commit itself to respecting human rights and good working conditions.

Occupational health and safety

Occupational health and safety refers to the recognition, evaluation and control of hazards arising in the workplace that could impair the health and well-being of employees. A business partner will be able to satisfy these requirements by means of an occupational health and safety policy that includes, at least, the topic areas of emergency preparedness and response, accident and failure management, workplace ergonomics as well as fire safety.

Recommendation: The policy should point out the specific measures in the area of occupational health and safety that will be taken in order to a provide a healthy and safe workplace.

Business ethics and the environment

Furthermore, the company needs to have a formal policy covering business ethics. This should address the measures that the company has put in place to specifically prevent corruption, extortion, bribery and data breaches. The requisite policy on environmental protection should moreover demonstrate that the company takes responsibility for the environment by conserving natural resources and striving to keep the ecological footprint of products and services small. 

Conclusion on the implementation in the case in question

All in all, in the specific case in question here, the company was able to comply with the requirements for the different standards by developing a code of conduct that included the various policies. In the case in question, the applicable eligibility criteria for the award of contracts were simpler because the company was small. In view of the fact that the company undergoing the check was moreover German, translating the policies into measures that comply with the contents of the standards proved not difficult. The eligibility criteria for the award of contracts can be tougher; this will depend on the size classification of the company.

Please note: Irrespective of the size classifications, in practice, the difficulty arises in having to interpret the respective data that are provided for evaluative purposes so as to be able, in this way, to identify the relevant requirements and proofs that are necessary for achieving the required degree of compliance.