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April 15, 2024 • Reading time: 7 Min

German Sustainability Code (DNK): a compass for sustainable business practices

The German Sustainability Code, or DNK for short, is a guideline for companies to show how sustainably they operate. This code was created in 2011 and is part of the European CSR Directive. In Germany, companies do not necessarily have to comply with the German Sustainability Code. Although it is voluntary, it is still important for companies to report on their sustainability efforts. This is the only way they can show that they are operating in an environmentally conscious and responsible manner. In this article, we explain what the Sustainability Code is and why it can be useful for companies. The Code is an important tool for companies to prepare for a future in which sustainable business practices will become increasingly important, as it shows how companies can act more sustainably. Our article gives you an overview of how the Code is structured and what is expected of companies.

Abstract: DNK at a glance

The German Sustainability Code (GSC) is a voluntary instrument developed by the German Council for Sustainable Development in 2011 to help companies measure, improve and report on their sustainability progress. It provides a practical guideline for the preparation of sustainability reports in Germany and aims to create transparency regarding the environmental and social responsibility of companies. The Sustainability Code is not only used by companies, but also by organisations, NGOs, foundations, universities and the media.

The Code comprises 20 performance indicators in the areas of strategy, process management, environment and society. These criteria cover various aspects of sustainability and serve as a benchmark for a company's performance. Companies can analyse their ESG performance and identify weaknesses through self-assessment in accordance with the Code. Applying the Code can help companies to improve their ESG performance by setting clear targets and taking concrete action. Transparent reporting in accordance with the Code strengthens stakeholder trust and positions the company as a responsible player in the field of sustainability.

The Code offers numerous advantages such as improved transparency and credibility of the company as well as a competitive advantage in a market that is increasingly characterised by sustainability. The publication of data enables analyses and assessments by research institutions and industry associations. However, there are also points of criticism, such as the high cost of preparing a DNK declaration and the lack of incentives for companies that are not obliged to report. The availability and reliability of data are also called into question.

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What is the German Sustainability Code?

A definition

The German Sustainability Code, or DNK for short, is a tool created by the German Council for Sustainable Development in 2011. It helps companies and organizations to better measure, improve and report on their progress in terms of sustainability. The Code is voluntary, but provides an important basis for the preparation of sustainability reports in Germany. The Code aims to create more clarity about the environmental and social responsibility of companies in the EU. The current version of the German Sustainability Code from 2017 is particularly user-friendly and provides companies with a practical framework for reporting and managing their sustainability efforts.

The German Sustainability Code is a helpful tool that is used by many different groups. In addition to companies, organizations, foundations, NGOs, trade unions, universities, scientific organizations and the media also use the Code as a practical instrument in their daily work environment. The Code is easy to apply and is suitable for any company, regardless of its size or legal form. It sets out clear rules on how to report on sustainability performance in an open and understandable way. It has been revised several times and was last adapted to the requirements of the CSR Directive Implementation Act in 2017. This law is intended to ensure increased transparency with regard to social and environmental factors of companies within the EU. The CSR Directive Implementation Act obliges companies to report on various topics. These include social issues, environmental issues, employee matters, respect for human rights and action against bribery and corruption. In particular, large listed companies with more than 500 employees must now provide more information on these topics under this law.

Objectives of the Sustainability Code

The German Sustainability Code aims to motivate companies to focus on corporate sustainability performance and sustainable business practices. In a globally networked world, companies bear an immense responsibility during supply and production and have the opportunity to exert a significant influence through sustainable measures. The German Council for Sustainable Development, which is behind the Code, wants to encourage all companies - regardless of their size or legal form - to act responsibly. The aim of the Council is to encourage companies to make real improvements in the area of sustainability.

The aim of the Sustainability Code is also to make sustainable business the norm - everywhere in the world. This is the only way to achieve the environmental goals set out in the Paris Climate Agreement and by the United Nations. This requires companies to use business models that protect the environment, conserve resources, save energy and develop technologies with a view to advancing climate change. Respect for human dignity must not be neglected in the process. Sustainability reporting also plays a decisive role in this by enabling companies to document their sustainability efforts transparently and make them public.

Who uses the code and how widespread is it?

In Germany, around 15,000 companies are now obliged to report on their sustainable business practices. However, many more companies are indirectly affected, especially SMEs. As suppliers along the supply chain (find out more about the Supply Chain Act), they must provide information about their own sustainability to the larger companies that are required to report. The German Sustainability Code is regularly updated by the German Council for Sustainable Development to reflect sustainability reporting requirements and the needs of companies. The Code offers companies of all sizes and from all sectors an easy-to-use, proven and free tool. The fact that the German Sustainability Code reached the 1,000 user mark in April 2023 shows that it is becoming increasingly popular.

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The history of the DNK

The Code was first presented in 2010 by the German Council for Sustainable Development (RNE) of the German Federal Government. It emerged from a dialog process with scientists, company representatives, analysts, investors and experts in positive corporate governance. From 2011, it was then tested in practice whether the Code works well for companies, particularly in the service, trade and production sectors, as well as for SMEs. The Code is now linked to the law implementing the EU's CSR Directive, which obliges large companies to submit a report on non-financial aspects. The latest version of the Sustainability Code was published in June 2017. It is based on international guidelines such as the UN Global Compact and the Global Reporting Initiative. It aims to present a company's most important sustainability information briefly and clearly.

The aim of the German Council for Sustainable Development is to motivate companies to think and act more sustainably. The aim is to review the use of energy and resources, involve employees more closely and strive for ethical corporate governance. Implementation is based on certain key indicators. The RNE also proposes aligning managers' salaries with sustainability targets within the company.

Structure, organization and content of the DNK

The German Sustainability Code comprises a total of 20 performance indicators to show how sustainably a company operates. These are divided into four areas: strategy, process management, environment and society. The indicators for the so-called DNK declaration of conformity are selected in such a way that they match the known standards and can be fulfilled, created and applied by companies. These include the German CSR Directive Implementation Act, the UN Global Compact, the guidelines of the Organization for Economic Cooperation and Development (OECD) for large companies and the ISO 26000 guide. Key figures from the Global Reporting Initiative (GRI) and EFFAS, a European association of financial analysts, also play an important role.

The 20 criteria of the Sustainability Code:

  • Strategy
  • Materiality
  • Goals
  • Depth of the value chain
  • Responsibility
  • Rules and processes
  • Control
  • Incentive systems
  • Involvement of stakeholders (suppliers, customers, etc.)
  • Innovation and product management
  • Utilization of natural resources
  • Resource management
  • Climate-relevant emissions
  • Employee rights
  • Equal opportunities
  • Qualification
  • Human rights
  • Community
  • Political influence
  • Conduct in compliance with the law and guidelines

These criteria include, for example, the company's sustainability goals or the degree to which sustainability is integrated into the company's processes. Each of these basic requirements is translated into one or two measurable performance indicators, known as key performance indicators (KPIs). This makes sustainability tangible: the KPIs provide information about the company's CO₂ emissions(find out more about the CO₂ footprint), its ability to innovate, the proportion of recycling, etc. The selection of criteria is kept clear, which should help small and medium-sized companies in particular to find their way into more sustainable business practices and strengthen their interest in them.

The German Sustainability Code is free of charge and is supported by the Federal Chancellery. It deliberately contains only the most important criteria in order to make it easier for small and medium-sized enterprises (SMEs) to get started with sustainable business and their ESG reporting. It is therefore closely linked to the companies' own objectives for environmental, social and good corporate governance, the so-called ESG criteria. Companies and institutions are recommended to carry out a materiality analysis in order to identify the most important ESG measures as part of their sustainability strategy.

The following points are summarized in the Sustainability Code:

  • Strategy (4 criteria): The area of strategy comprises the strategic analysis, development of strategies and the definition of the company's goals with regard to sustainable development.
  • Process management (6 criteria): The area of process management includes rules and processes, incentive systems, stakeholder engagement and innovation and product management.
  • Environment (3 criteria): The use of natural resources, such as water or CO₂, is a central aspect in the environmental area. In particular, the product life cycle and resource consumption are addressed here, and the connection with sustainability management is also highlighted.
  • Society (7 criteria): The issues of employee rights, diversity, human rights, social commitment, political influence and anti-corruption are of great importance to society.

Applying the Sustainability Code in 5 steps

In order to meet the requirements of the German Sustainability Code, companies must submit a special declaration. This is based on 20 defined DNK criteria and specific key figures to measure performance. There are five steps that must be followed to create this declaration. These steps are explained simply and clearly below.

At the beginning, the approval of the management is required. A team should then be put together to cover the various areas of the company. The team is made up of experts and decision-makers. If other employees are also involved in this process, the topic gains importance within the company and becomes more relevant.

The sustainability team should go through all 20 Sustainability Code criteria together. It is important to find out which points already have information and what still needs to be developed. If the company does not yet have a clear sustainability strategy, it should consider which sustainability aspects are important for the future of the company. Care should be taken to ensure that all economic, ecological and social developments are viable. An analysis of stakeholders such as customers, suppliers and employees can be helpful here. The team should also determine who is responsible for which aspects and performance indicators and by when data and texts must be delivered.

To prepare for the declaration, the company should collect all available information. This includes facts and figures as well as descriptions and explanations that go hand in hand with the various parts of the criteria and the associated key figures.

The company creates a company profile for the declaration and transfers all the information collected on the criteria and indicators to the Sustainability Code database. The status can be checked using a checklist. The company receives feedback after two to three weeks. If the review by the German Sustainability Code Office is successful, the declaration is published and the company receives the user signet for the reporting year.

Effective and meaningful use of the Sustainability Code declaration takes place in corporate communications. After the team has carefully reviewed the declaration, the company can use the Sustainability Code logo on the company website, in brochures or in e-mail correspondence. In addition, a press release can be published and information passed on to customers, clients and suppliers. For companies with international business partners, it is recommended that the declaration is also published in English in order to communicate the company's sustainability status to a wider audience.

How companies can use the DNK to improve their ESG performance

The German Sustainability Code can be extremely helpful as a framework and set of rules as well as an instrument for fulfilling the ESG criteria. It helps companies and organizations to find out how well they are positioned in terms of sustainability. The Code also makes it easier to report clearly and openly both internally and externally and to compare one's own performance with that of others. However, it is important to note that the Code is not a system that awards certificates. There is therefore no official body that would carry out such certification.

The German Sustainability Code can help companies improve their ESG performance by following these steps:

  1. DNK self-assessment: Companies can analyze their ESG performance to date and identify weaknesses through a self-assessment in accordance with the Code. The results of this assessment serve as a basis for measures to improve ESG performance.
  2. Setting ESG targets: Based on the results of the self-assessment, companies should set clear and measurable targets to specifically improve their ESG performance.
  3. Implementation of measures: Concrete measures must be taken to increase sustainable performance, such as switching to renewable energy, promoting good working conditions or implementing anti-corruption measures.
  4. Monitoring and reporting on ESG performance (DNK report): The implementation of measures and transparent reporting strengthen the trust of stakeholders and position the company as a responsible player in the area of sustainability both internally and externally.

Advantages and disadvantages of the DNK

Advantages and benefits

The implementation of DNK certification offers companies the opportunity to strengthen their transparency and credibility. By clearly structuring and disclosing relevant information in accordance with the requirements of the German Sustainability Code, companies can build trust with their customers, investors and stakeholders. This not only improves a company's reputation, but also creates a competitive advantage in a market that is increasingly characterized by sustainable action. Certification shows that a company is actively addressing the challenges of sustainability and considers transparent reporting to be an integral part of its corporate strategy. This positions the company as a responsible player that has implemented long-term measures to safeguard ecological and social standards.

The Code can serve as a tool for developing a company's sustainability strategy and provide an introduction to sustainability reporting. Through regular reporting, companies can track their progress in the area of sustainability over the years and identify where there is room for improvement. In this way, a company's processes can be continuously improved.

As part of corporate communications, the Sustainability Code declaration can be used to bind customers and suppliers more closely to the company. Social interest in sustainable aspects of business has increased in the meantime and is becoming an increasingly important factor. Many applicants are now also evaluating the sustainable and social aspects of a company and are looking for employers with whom they can identify. The declaration and the associated increased transparency make the company's sustainability strategy more tangible.

Published data also provides important starting points for scientific analyses, rankings, ratings or competitions. Research institutions use the available data to assess the relevance of certain topics in the sustainability debate. Industry associations can use the data provided to assess the opportunities and challenges of their member companies, develop solutions and support the companies.

Criticism of the German Sustainability Code

The Sustainability Code offers many advantages, but there are also points of criticism regarding its implementation. In particular, there is criticism of the high level of effort required to draw up a declaration. This poses a challenge, especially for smaller companies that do not have sufficient resources. There is a lack of incentives for companies that are not obliged to prepare a report to nevertheless address sustainability. The availability and reliability of data is also called into question, as transparency only makes sense if reliable information is available. In addition, there is no way of quantifying soft factors and comparing them with other companies. Despite these points of criticism, the German Sustainability Code remains an important instrument for promoting sustainability in companies and making them fit for global competition.

Compass for sustainable action

A summary of the German Sustainability Code

More and more companies are recognizing the importance of sustainable business practices and are looking for guidelines to structure their sustainability efforts. The German Sustainability Code offers valuable orientation in this regard and serves as a compass for sustainable action. By reporting transparently in accordance with the Sustainability Code criteria, companies can not only demonstrate their commitment to sustainability, but also strengthen the trust of stakeholders.

The Sustainability Code is a flexible tool that enables companies to present their individual sustainability measures and continuously develop further. With clear guidelines and a structured process, the Sustainability Code supports companies in defining and implementing their sustainability goals.

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