ICLG: Len­ding & Se­cu­red Fi­nan­ce 2024 - Aus­tria

Environmental, Social & Governance Law

2024 Fourth Edition

Contributing Editors:

David M. Silk & Carmen X. W. Lu Wachtell, Lipton, Rosen & Katz

Table of Contents

Expert Analysis Chapters 1

Facing the Energy Transition Challenge: Navigating Complexity, Uncertainty and Opportunity David M. Silk & Carmen X. W. Lu, Watchell, Lipton, Rosen & Katz

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ESG and UK Pension Schemes: A Matter of Governance?

Andy Lewis & Jonathan Gilmour, Travers Smith LLP

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ESG for Asset Managers Brenden Carroll, Katie Carter, Thomas Kim & Tyler Payne, Dechert LLP

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U.S. Legal and Compliance Issues Relating to ESG for Private Fund Advisers Debra Franzese, Nicholas R. Miller, S. John Ryan & Charlie Enberg, Seward & Kissel LLP

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ESG Considerations in Project, Energy, and Infrastructure Finance Matt H. Ahrens, Allan T. Marks, Iliana Ongun & Allison E. Sloto, Milbank LLP

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ESG Reporting, Green Claims and Greenwashing Risk: A UK and EU Perspective Dipika Keen, James Watson & Lars Kutzner, Osborne Clarke LLP

Q&A Chapters 44

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Austria Fellner Wratzfeld & Partners: Florian Kranebitter & Josef Peer Brazil Lima Feigelson Advogados: Jean Marc Weinberg Sasson

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Canada Stikeman Elliott LLP: Vanessa Coiteux, Ramandeep Grewal & Catherine Grygar

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Cayman Islands Maples Group: Tina Meigh, Julian Ashworth & Kerry Ann Phillips

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Denmark Kromann Reumert: Line Berg Madsen, Sofie Jensen & Jacob Høeg Madsen

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France Signature Litigation: Sylvie Gallage-Alwis & Gaëtan de Robillard

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Germany Lindenpartners Part mbB: Dr. Nils Ipsen, Dr. Lars Röh & Dr. Nina Scherber

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Ghana B & P Associates: Adelaide Benneh Prempeh, Maame Barnie Adu Amoah, Bessy Agyeiwaa Crentsil & Christian Konadu Odame Greece Bernitsas Law: Maria Nefeli Bernitsa & Adamantia Karamanou Hong Kong Dentons Hong Kong LLP: Vivien Teu

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India Trilegal: Sanjam Arora, Jagrati Gupta, Rajveer Gurdatta & Akshaya Kapoor Ireland McCann FitzGerald LLP: Éamon Ó Cuív & David O’Keeffe Ioiart Israel Herzog Fox & Neeman: Livnat Ein-Shay Wilder, Janet Levy Pahima, Liat Maidler & Ruth Moatti Kenya Ashitiva Advocates LLP: Caroline Karugu, Jennifer Nduati & Lucy Kinyanjui Korea Yulchon LLC: Yonghee Yoon & Min Ho Lee Mexico Galicia Abogados, SC: Carlos Escoto & Marianela Romero Norway BAHR: Svein Gerhard Simonnæs, Asle Aarbakke & Lene Nygård Portugal PRA – Raposo, Sá Miranda & Associados: Joana de Sá, Leila Grácio, Pedro Braz & Ângela Bento South Africa Bowmans: Ezra Davids, Ryan Kitcat & Charles Douglas Spain RocaJunyent: Iñigo Cisneros, Cristina Eguiraun & Amy Tallulah Jones

Table of Contents

Q&A Chapters Continued 209

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Sweden Mannheimer Swartling Advokatbyrå: Patrik Marcelius, Cecilia Björkwall & Isabel Frick Switzerland Schellenberg Wittmer Ltd: Christoph Vonlanthen, Lorenzo Olgiati, Giulia Marchettini & Fabio Elsener Taiwan Lee and Li, Attorneys-at-Law: Ken-Ying Tseng & Helen Hai-Ning Huang

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United Kingdom Travers Smith LLP: Carys Clipper, Sarah-Jane Denton, Michael Raymond & Laura Smith USA Wachtell, Lipton, Rosen & Katz: David M. Silk & Carmen X. W. Lu Zambia Mulenga Mundashi Legal Practitioners: Mulenga Chiteba, Mike Chilufya, Chimwemwe Mulenga Bwalya & Emmanuel Mwansa

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Chapter 7

Austria

Austria Florian Kranebitter

Fellner Wratzfeld & Partners

12 Setting the Scene – Sources and Overview 1.1 What are the main substantive ESG-related regulations?

In Austria, there are several regulations in place with respect to the disclosure of Environmental, Social, and Governance (ESG) criteria. In particular, the relevant disclosure regulations are mainly contained in the substantive ESG-related EU regulations and directive applicable in Austria, due to the implementation of the European ESG legislation. The following provisions can be mentioned as core provisions: Transparency on non-financial matters Pursuant to Section 243b and Section 267a Austrian Commercial Code (Unternehmensgesetzbuch – UGB) Austrian corporations must add a non-financial report to their annual management report, if the following three requirements are met cumulatively: 1) the company must qualify as a “large corporation” within the meaning of Section 221 paragraph 3UGB, i.e., at least two of the following characteristics have to be met: ■ balance sheet total of more than EUR 20 Mio; ■ turnover of more than EUR 40 Mio within the last 12 months before balance sheet date; or ■ annual average of more than 250 employees; 2) corporations with public interest within the meaning of Section 189 a paragraph 1 UGB including insurance companies, banks, and capital market-oriented companies; and 3) corporations with more than 500 employees on an annual average.

Companies also have the option of preparing a so-called non-financial report in addition to the annual management report, which must at least comply with the requirements of Section 243b paragraphs 2 to 5 UGB. Consolidated subsidiaries are exempt from submitting a non-financial report pursuant to Section 243b paragraph 7 UGB, if they and their subsidiaries are included in the group management report or separate consolidated non-financial report of another (also foreign) EU/EEA company that complies with the requirements for submitting a non-financial report.

According to the Non-Financial Reporting Directive (NFRD) the affected corporations must publish information related to: ■ environmental matters; ■ social matters and treatment of employees; ■ respect for human rights; ■ anti-corruption and bribery; and ■ diversity on company boards (in terms of age, gender, educational and professional background).

Josef Peer

In addition to the NFDR, section 243b UGB also requires environmental, social, human rights and anti-corruption impacts to be disclosed in its non-financial report. The term “non-financial reporting” means that the information must be assigned to the area of sustainability, but not that it has no financial significance. Corporations are required to disclose their “business model”, their “concepts”, the “due diligence processes” and the “material risks” of the company’s activities for society as a whole and the environment, including how the corporation deals with these risks.

The board of directors must submit, and the supervisory board must approve the annual management report, which usually also includes the non-financial statement. Pursuant to Section 243b paragraph 6 UGB, the competence and obligation for the approval by the board of directors and the supervisory board also applies in the event that the non-financial report is not included in the annual management report. A review of the non-financial statement by an independent auditor is not required yet, however will become necessary due to the amendment of the CSRD. The non-financial report must be disclosed within nine months of the balance sheet date, together with the annual financial statements, the management report and (if available) the corporate governance report, by filing them with the Commercial Register Court. According to the amendments of the CSRD, the publication of the sustainability report should be published in a “uniform electronic reporting format”.

An intentionally inaccurate or incomplete presentation of non-financial information may constitute a criminal offence under Section 163a paragraph 1 litera 1 of the Austrian Criminal Code (Strafgesetzbuch – StGB).

Amendment of the EU Corporate Sustainability Reporting Directive (CSRD) The CSRD replaces the previous CSR Directive (Directive 2014/95/EU), which the EU member states must transpose into national law by July 2024 at the latest and amends the current Non-Financial Reporting Directive (NFRD). The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

The scope of the directive is considerably extended and applies to more European and non-European companies listed and operating in the EU regulated markets. Non-European companies with substantial activity in the EU market (net turnover of more than EUR 150 million in the EU at consolidated level) and which have at least one subsidiary (large or listed) or branch (net turnover of more than €40 million) in the EU are required to draft a sustainability report at the consolidated level of the ultimate third-country undertaking.

The CSRD follows a “double materiality perspective”. This means that companies must record the effect of sustainability Environmental, Social & Governance Law 2024

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aspects on the economic situation of the company, and must clarify the impact of operations on sustainability aspects. The CSRD requires reporting to include information on: ■ sustainability goals; ■ the role of the management board and supervisory board; ■ the company´s most significant adverse impact; and ■ on intangible resources not yet recognised in the balance sheet.

The CSRD provides the specifications, while the European Sustainability Reporting Standards (ESRS) define the content.

EU Taxonomy Regulation The EU Taxonomy Regulation 2020/852, which has been in force since January 1, 2022, provides an additional level of transparency to financial market participants by recognising and outlining the following six specific environmental objectives: ■ climate change mitigation; ■ climate change adaptation; ■ sustainable use and protection of water and marine resources; ■ transition to a circular economy; ■ pollution prevention and control; or ■ protection and restoration of biodiversity and ecosystems.

It supports the EU’s goal of promoting the flow of capital into sustainable finance and green projects by providing an EU classification system for environmentally sustainable economic activities in the context of the European Green Deal. It translates the EU’s environmental objectives into a clear framework for investment purposes. The EU Taxonomy Regulation creates a common, standardised language, criteria, and due diligence (quality assurance) process related to identifying economic activities that align to recognised environmental objectives. These classifications are to be used by corporations that are subject to the above-mentioned reporting obligations. If an economic activity meets the requirements of the EU taxonomy, it can be certified in the non-financial report as environmentally sustainable within the meaning of the taxonomy.

An economic activity must fulfil the following requirements, to be certified taxonomy-oriented: ■ the economic activity must make a substantial contribution to at least one of the above-mentioned environmental objectives; ■ the economic activity must not significantly harm any other of the above-mentioned environmental objectives; ■ the economic activity must comply with minimum social safeguards; and ■ the economic activity must comply with the technical screening criteria.

Non-financial companies are required to provide their management report, and financial companies are required to disclose additional information (e.g., strategies for dealing with sustainability risks).

Sustainability-Related Disclosures Regulation The Sustainability-Related Disclosures Regulation (EU) 2019/2088 represents the third pillar for promoting sustainability. The amendments are primarily aimed at broadening the scope of non-financial reporting and making external verification of its content mandatory, as well as developing the company’s own European standards for sustainability reporting.

Corporate Sustainability Due Diligence Directive (CSDD) While the German Supply Chain Act is already in force, negotiations at the European Supply Chain Directive 2021/0104 (COD)

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(CSDD) are still ongoing, which is scheduled to come in force in 2024. The CSSD consists of two approaches, one related to corporate law and the other to supply chain regulation. The first approach requires corporate management to integrate sustainability considerations when performing their duty, and the second approach now provides for vertical engagement with due diligence obligations along the corporate value chain, in relation to respect for human rights and the environment. The precise content of a future “Austrian Supply Chain Act” remains to be seen, which subsequently still has to be transposed into national law, will place greater responsibility on companies in the fight against climate change, for environmental protection and for human rights, and sanction violations of these values along the value chain. The German Supply Chain Act already offers a good basis for what this could look like, wherein German companies must take specific corporate due diligence measures throughout their supply chains in order to prevent human rights and major environmental violations.

Environmental Impact Assessment Act (UVP-G) Among several ESG-related regulations, one of the most significant regulations is the Environmental Impact Assessment Act (UVP-G). The environmental impact assessment (EIA) is an instrument for examining the environmental impact of environmentally relevant projects (“plans”) when certain threshold values ​​are reached. Both new and existing projects can meet the respective threshold values and ​​ thus trigger an EIA obligation.

The decision-making power for approval rests with the respective provincial government. The last amendment also led to the introduction of a soil protection concept. The so-called BEAT map shows those areas in Austria that are particularly fertile and should therefore enjoy special protection.

Renewable Energy Sources Act (EAG) The Renewable Energy Sources Act (EAG) is a new law that aims to increase the share of renewable energies in Austrian electricity production to 100% by 2030 and to achieve climate neutrality in the country by 2040. The EAG regulates the central issues of the promotion of renewable energies and replaces the Green Electricity Act (ÖSG). Key elements of the EAG are, for example: ■ photovoltaic funding-wind power promotion; ■ hydropower promotion; ■ biomass promotion; and ■ implementation of energy communities.

Regarding other relevant regulations, among others, the Waste Management Act, the Environmental Information Act and the individual nature conservation laws of the federal states also play a significant role within the Austrian Environmental law.

1.2

What are the main ESG disclosure regulations?

Sustainability-Related Disclosures Regulation The Sustainability-Related Disclosures Regulation (EU) 2019/2088 represents the third pillar for promoting sustainability. The amendments are primarily aimed at broadening the scope of non-financial reporting and making external verification of its content mandatory, as well as developing the company’s own European standards for sustainability reporting.

EU-Taxonomy-Regulation Already mentioned under question 1.1.

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1.3 What voluntary ESG disclosures, beyond those required by law or regulation, are customary?

Austrian companies use different voluntary ESG disclosures when preparing the sustainability report. Therefore, companies use various frameworks to show their commitment and longterm view according to ESG and to demonstrate their company-strategy with respect to sustainability risks consistent to international standards. They disclose ESG-relevant information on their website or through other marketing tools. An analysis shows that 97% of Austrian prime market companies set up a sustainability report.

Companies often use ESG ratings to “certify” their sustainability report. These ESG ratings are provided by a wide range of external agencies. More than half of the top domestic companies in Austria have voluntarily used an external audit. In addition to ensuring legal compliance, the expert knowledge brought in and the associated view from the outside, an external audit offers the opportunity to gain new insights and to address current sustainability issues, opportunities, and risks in a timely manner, thus improving the quality of reporting.

Companies often add non-mandatory information to their legally required non-financial report. In some cases, only the non-financial report and not the entire management report is reviewed by an independent audit.

Another incentive for companies to publish a sustainability report is the ASRA (Austrian Sustainability Reporting Award) sustainability prize, which is awarded annually to Austrian companies who publish outstanding sustainability reports.

In December 2022 the EU Commission has already published an FAQ paper regarding the interpretation and implementation of the disclosure requirements under Article 8 of the EU Taxonomy Regulation. In June 2023 the European Commission has also published a Taxonomy User Guide that provides step-by-step guidance on assessing taxonomy compliance based on 12 use cases.

Other voluntary sustainable finance and investment frameworks followed in the Austrian jurisdiction regarding ESG indicators and impact indicators: The FMA published a report on checking the implementation of the FMA Guide for Managing Sustainability Risks in the Austrian financial market. The European Securities and Markets Authority (ESMA) is planning two common supervisory actions on the issue of greenwashing in 2023.

In addition to the statutory regulations, the participants of the Austrian finance sector have created various voluntary sustainable finance and investment frameworks. Individual financial institutions or groups have defined their own frameworks for sustainable management and investment which are generally accessible to everyone. By publishing those frameworks on their websites, the financial institutions or groups will be guided by these frameworks, thus creating a new national standard.

Sustainable investments will play a major role in the future and are also a topic that is also becoming increasingly important for private investors; another important incentive for banks to voluntarily incorporate ESG rules.

1.4 Are there significant laws or regulations currently in the proposal process?

Basel-III-Framework The Basel Committee for Banking Supervision has issued international standards under the name “Basel III” that impose strict capital and liquidity rules aimed at increasing the resiliency of the

banking sector. In 2025 the Basel-III-Framework, which already has been amended, is planned to be implemented into EU-law.

For example, sustainability (“ESG”) risks are to be better taken into account as part of banks’ risk management and the relevance of such risks for banks is to be published, more harmonised regulations are to be created regarding the professional suitability and suitability checks of members of the management and supervisory boards as well as of holders of key functions at banks, and extensive requirements regarding the independence and objectivity of banking supervisors are to be introduced.

Rental price cap and rental price control In order to regulate the rising rental prices in Austria, the introduction of a rental price cap is planned for 2024. For this purpose, the increase in benchmark rents, category rents and rents in public housing should be limited to a maximum of five percent per year, even if the inflation rate exceeds this value.

Renewable Heat Act (EWG) Furthermore, the Renewable Heat Act (EWG) is already being planned in order to limit the burning of fossil fuels such as oil, liquefied petroleum gas or coal for the provision of heat.

Among other things, it consists of a phase-out period for oil, liquefied petroleum gas and coal by the year 2035 as well as gas by the year 2040.

1.5 What significant private sector initiatives relating to ESG are there?

In recent years, there has been a noticeable trend within the private sector towards a heightened commitment to addressing climate change. Companies are increasingly focused on reducing emissions and actively participating in the shift toward a low-carbon economy. It is noteworthy that, irrespective of regulatory mandates, many businesses are striving to adhere to specific ESG criteria.

One prominent example of this commitment is the emphasis on promoting gender diversity. Since 2018, listed companies and certain large corporations have been mandated to ensure diverse supervisory boards, with at least 30% of board members being female.

Additionally, we are witnessing a growing trend among investors to conduct comprehensive due diligence on ESG factors before engaging in transactions or establishing legal relationships with relevant third parties. This reflects an increasing awareness of the significance of ESG considerations in decision-making processes.

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Principal Sources of ESG Pressure

2.1 What are the views and perspectives of investors and asset managers toward ESG, and how do they exert influence in support (or in opposition) of those views?

Sustainable Finance Disclosure Regulation (SFDR) The SFDR set out harmonised rules for financial market participants and financial advisers on transparency in relation to disclosure about the integration of sustainability risks and consideration of adverse sustainability impacts in their processes and in providing information about the sustainability of financial products. These rules have been applied since March 10, 2021.

The SFDR provides comprehensive disclosure requirements on sustainability risks for financial providers and financial advisors. This is intended to provide transparency and ensure that

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both private and institutional investors include ESG factors in their investment decisions. In this context, the creation of a dedicated European ESG benchmark is also planned. The following disclosure obligations arise from the SFDR: (i) Website disclosure: ■ transparency of sustainability risk policies pursuant to Article 3 SFDR; ■ transparency of adverse sustainability impacts at entity level pursuant to Article 4 SFDR; and ■ transparency of remuneration policies in relation to the integration of sustainability risks pursuant to Article 5 SFDR. (ii) Disclosures in pre-contractual documents: ■ transparency of the integration of sustainability risks pursuant to Article 6 SFDR; and ■ transparency of adverse sustainability impacts at financial product level pursuant to Article 7 SFDR. (iii) Disclosures in periodic reports: ■ According to the disclosures in pre-contractual documents financial products are divided into three categories, with different reporting requirements: ■ financial products with environmental or social characteristics – so-called “light green products” (Article 8 SFDR); ■ financial products aiming at sustainable investment – so-called “dark green products” (Article 9 SFDR); and ■ other financial products for which sustainability criteria are not considered.

2.2 What are the views of other stakeholders toward ESG, and how do they exert influence in support (or in opposition) of those views?

Investors and stakeholders are increasingly embracing impact investing, driven by a desire to achieve more than just financial gains from their investments. These discerning investors actively seek opportunities that prioritise ESG considerations, thereby fostering positive societal change. Notably, investors, asset managers, and other stakeholders are placing greater emphasis on conducting thorough ESG due diligence before engaging in transactions or establishing legal partnerships with relevant third parties.

Moreover, certain investors and asset managers have introduced specific long-term strategies aligned with their views on particular ESG factors. Additionally, institutional investors and asset managers are legally obligated to monitor companies in which they have invested, specifically in relation to predetermined ESG criteria. They are also mandated to disclose a corresponding participation policy (Mitwirkungspolitik).

Furthermore, an international corporate governance trend has emerged for publicly listed companies, known as “Say on Climate” resolutions. This initiative, pioneered by a British hedge fund manager, has garnered significant support from institutional investors, voting rights advisors, and non-governmental organisations (NGOs). Its primary objective is to engage corporate management in climate protection efforts.

2.3 What are the principal regulators with respect to ESG issues, and what issues are being pressed by those regulators?

The ESG concept encompasses a wide range of issues, including human rights, equality, diversity, consumer protection, animal welfare, corporate governance, and climate change. In Austria, Environmental, Social & Governance Law 2024

there are several regulatory bodies responsible for overseeing various aspects of ESG: ■ The Ministry of the Interior, primarily tasked with safeguarding human rights within Austria.

■ The Ministry of Economy, Family, and Youth, responsible for family matters and the implementation of the Austrian Trade Act, including the issuance of gas trading permits.

■ The Ministry of Agriculture, Forestry, Environment, and Water Management, which handles general environmental matters, such as air pollution control and environmental protection policies.

■ The Ministry of Transport, Innovation, and Technology, overseeing environmental impact assessment procedures related to federal motorways and railways.

■ Federal Ministry for Social Affairs, Health, Care and Consumer Protection.

■ Various non-governmental organisations dedicated to the protection and promotion of nature, animals, and the environment such as energy (E-Control Austria) and telecommunication (RTR-GmbH).

■ Multiple organisations focused on safeguarding and advancing employees’ rights, such as the Austrian Chamber of Labour.

■ Data protection authority regarding data protection-relevant aspects of information disclosure.

In general, managers of Austrian private equity funds, financial institutions, and publicly listed companies are subject to the ongoing supervision of the Austrian Financial Market Authority (FMA). The FMA has recently released a draft consultation for a guide on managing sustainability risks and expects that relevant companies will adhere to this guide in their operations.

2.4 Have there been material enforcement actions with respect to ESG issues?

Based on the Austrian Unfair Competition Act (Bundesgesetz gegen den unlauteren Wettbewerb – UWG), there have been several cases before the Austrian courts for misleading advertising of financial services and products, which is regulated in more detail in the UWG. In addition to individual administrative offenses in the substantive laws, Austrian criminal law in particular takes environmental protection into account in Sections 169 et seq. and Sections 180 et seq. StGB. Thereby are the requirements of the European Union Directive 2008/99/EC considered at the national level. Also, the unauthorised handling of substances that contribute to the depletion of the ozone layer is regulated in sections 177d and 177e StGB. 2.5 What are the principal ESG-related litigation risks, and has there been material litigation with respect to ESG issues, other than enforcement actions?

It is not surprising that poor ESG standards can have a negative impact on a company’s reputation. Two key reasons for companies to consider ESG factors are therefore the risk of reputational damage and the potential for legal action. The risk of litigation related to ESG factors often arises from shareholder activism.

A notable recent example of this was when an activist shareholder of a well-known Austrian listed company initiated a lawsuit against a resolution to appoint board members due to insufficient gender diversity. Apart from this case, there is no publicly available information on significant ESG-related litigation in Austria.

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2.6 What are current key issues of concern for the proponents of ESG?

In Austria, there is currently no consistent and comparable information on the ESG criteria of Austrian companies. Efforts by Austrian legislators to improve the relevance, consistency, and comparability of ESG-related data face challenges as the quality of this information often needs to be improved.

Currently, there is no uniform regulation for the use of terms such as “ESG-compliant”, “green” or “sustainable” for products or services. However, the European Union (EU) Taxonomy seeks to address this issue at the EU level by introducing binding criteria and framework specifications for a uniform classification system that defines “environmentally sustainable economic activity”. This EU Taxonomy Regulation has recently been complemented with the publication of the new Delegated Acts on the EU Taxonomy for Climate from the European Commission in June 2023, to strengthen the foundations of the EU sustainable finance framework. The Climate Delegated Act and the legal act on reporting obligations under Article 8 of the Taxonomy Regulation have been adapted, provided it is not blocked by the European Parliament. With the publication of the new Delegated Acts on the EU Taxonomy Regulation all environmental objectives, even those four environmental objectives which were not previously included (sustainable use and protection of water and marine resources, transition to a circular economy, prevention and reduction of pollution and protection and restoration of biodiversity and ecosystems), are now covered by the Delegated Acts. To complement this, the Commission has adopted targeted amendments to the EU Taxonomy Climate Delegated Act, which expand on economic activities contributing to climate change mitigation and adaptation not included so far (e.g., activities of suppliers to the automotive and mobility sectors and activities in the field of aviation) and modifies selective existing economic activities (e.g., the adaptation of technical assessment criteria).

In addition, the EU Sustainable Finance Platform has recently published its final report on the application of the minimum guarantees set out in the EU Taxonomy Regulation. These guarantees ensure that companies operating sustainably comply with certain standards relating to human and labour rights, antibribery measures, taxation and fair competition.

The general question remains, whether the ESG trend will ultimately lead to improved information quality and greater transparency regarding ESG factors, regardless of the regulatory framework.

2.7 Have ESG issues attracted shareholder activism, and from whom?

This question is already addressed in question 2.5.

32 Integration of ESG into Strategy, Business Operations and Planning 3.1 Who has principal responsibility for addressing ESG issues? What is the role of the management body in setting and changing the strategy of the corporate entity with respect to these issues?

In Austria, there are no liability provisions for companies or their corporate bodies specifically related to ESG efforts.

Under Austrian company law, the managing board (Vorstand ) in stock corporations, and the managing directors (Geschäftsführer)

in limited liability companies, are responsible for running the operations of the company. While certain measures, including setting the strategy of the company, require the approval of the supervisory board (in stock corporations) or the shareholders (in limited liability companies) the right of initiative also belongs to them.

The Austrian corporate law only statues the liability of these corporate bodies for general breaches of duty. The management must always align its actions with the interests of the company.

In Austria, it is now widely recognised that the interests of the company do not coincide solely with the profit interests of the shareholders. Rather, there is a pluralistic understanding of the interests of the company. The management board is therefore responsible for identifying company issues, where ESG standards are either required under applicable regulations or appropriate under best practice considerations as part of the general obligation, to ensure compliance of the company with laws to thereby pursue the companies’ interests. These appropriate and elaborate measures must be presented to the supervisory board and/or the shareholders’ meeting. Such management decisions must no longer be exclusively profit-oriented. Nonetheless, ESG-oriented business decisions must stay in line with the diligence of a prudent business manager, i.e., the expenditure is unreasonable. This is also based on the fact that in respect to stock corporations under Austrian law pursuant to Section 70 para 1 Stock Corporation Act (Aktiengesetz – AktG), the management of a stock corporation manages the corporation not only in a manner which is in the best interest of the company, the shareholders and the employees, but also in the best interest of the public. In this context, consideration of sustainability and ESG factors is considered to be in the “public interest”, which in turn can serve as a justification for management to take actions that are costly (and thus reduce a company´s returns) but are sustainable and/or benefit ESG factors.

3.2 What governance mechanisms are in place to supervise management of ESG issues? What is the role of the board and board committees vis-à-vis management?

Austrian corporate governance centres around a two-tier board system, comprising a management board and a supervisory board. For limited liability companies, the necessity of a supervisory board depends on factors such as the number of employees, shareholders, and registered capital. In some cases, the shareholders’ meeting can assume the supervisory board’s responsibilities. However, for stock corporations, including listed companies, a supervisory board is mandatory and plays a crucial role in shaping the company’s overall strategy, especially in relation to sustainability criteria and ESG factors.

The supervisory board, or in smaller companies, the shareholders’ meeting, is tasked with overseeing the management’s actions and ensuring alignment with the overall business strategy.

In the case of stock corporations, the supervisory board also approves the annual accounts, unless a decision is made to present them to the shareholders’ meeting for approval, as discussed in question 1.2. This approval process encompasses a review of the management account (Lagebericht ). Furthermore, the supervisory board is obligated to provide an annual report to shareholders detailing its activities and how it has fulfilled its supervisory and monitoring responsibilities over the management board.

For listed companies and others, the supervisory board must establish an audit committee. According to Section 269 paragraph 3 of the UGB, the annual audit includes an assessment of whether the non-financial report has been prepared, where necessary.

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3.3 What compensation or remuneration approaches are used to align incentives with respect to ESG?

Environmentally friendly behaviour is being supported by the government. For example, through statutory regulations such as limits on CO2 emissions or CO2 tax. The CO2 tax is currently EUR 30 per ton CO2, and it will be raised year by year.

Several national funding programmes are intended to support this behaviour.

At the provincial level, there are also housing and energy subsidy opportunities. In the federal capital Vienna, for example, subsidies are available for companies and private photovoltaic systems installed on buildings, structural facilities or company premises.

3.4 What are some common examples of how companies have integrated ESG into their day-to-day operations?

ESG aspects are becoming increasingly important in Austrian companies. As mentioned above, ESG factors are an integral part of the remuneration packages for board members. This ensures that shareholders, whether they are individual or institutional investors, are directly exposed to and scrutinise these aspects.

Investors are increasingly adapting their investment criteria to ESG aspects.

In addition, companies actively participate in global ESG assessments, such as those conducted by Institutional Shareholder Services (ISS) ESG, Sustainalytics or Morgan Stanley Capital International (MSCI) ESG Research. They routinely disclose information on their sustainability and ESG goals.

3.5 How have boards and management adapted to address the need to oversee and manage ESG issues?

More and more Austrian companies are appointing a Chief Sustainability Officer (CSO) or a similar position, such as a Head of ESG, to actively support their ESG goals. This trend is particularly noticeable in sectors that are under increasing pressure from regulators, investors and the public to improve their sustainability practices, with the presence of CSOs in consumeroriented industries with high energy demand being notable.

According to our observations, a significant proportion of CSOs and ESG leaders report directly to the top management, underlining the central role of ESG in Austrian companies. CSOs are expanding their competencies and collaborating across organisations to define and measure compliance with ESG principles in their companies. This development represents a shift for CSOs away from a primary focus on public relations towards the strategic development of ESG frameworks that encompass products and services.

At the supervisory board level, many companies have established ESG committees to engage in the formulation and implementation of ESG strategies and to ensure compliance with relevant ESG regulations. These committees also provide valuable advice to the board on ESG matters and related risks. In addition, they typically oversee ESG risk management and ensure compliance with ESG-related regulatory requirements.

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Finance

4.1 To what extent do providers of debt and equity finance rely on internally or externally developed ESG ratings?

According to our observations, before issuing ESG bonds, especially green bonds, issuers usually need the services of a reputable second opinion provider specialised in ESG research and analysis to prepare ESG rating letters. However, we lack the resources to assess the extent to which debt and equity financiers rely on internally or externally produced ESG ratings for this purpose.

4.2 Do green bonds or social bonds play a significant role in the market?

In the Austrian market (i.e., for Austrian issuers) it can be observed that the issuance of green bonds has been increasing constantly over the past years and that green bonds are playing a significant role in (re)financing. In fact, even the Republic of Austria issued its first green bond in May 2022. In terms of private placements, there are currently 74 green and social bonds listed on the Vienna Stock Exchange. Social bonds do not yet represent a significant volume on the Austrian market.

4.3 Do sustainability-linked bonds play a significant role in the market?

In 2021, the first sustainability bonds were issued in Austria, including offerings from UBM and VERBUND. This is the beginning of what is expected to be a sustained boom for sustainability-linked bonds in Austria. The Sustainability-linked Bond Principles, which offer issuers and investors more guidance and transparency, are expected to further promote the growth of this market. This puts Austria in line with the global trend towards sustainability-oriented financial instruments.

4.4 What are the major factors impacting the use of these types of financial instruments?

Key factors in our view include meeting the growing demands of retail investors, expanding the pool of potential investors, aligning with investor investment guidelines, promoting positive reputational incentives for investors and issuers, introducing price adjustments and other measures to increase attractiveness (e.g., possible legislative changes exempting companies committed to environmental sustainability or climate-neutral initiatives from antitrust regulations). However, we cannot say whether these instruments secure favourable economic conditions compared to conventional debt instruments.

4.5 What is the assurance and verification process for green bonds? To what extent are these processes regulated?

The EU currently lacks regulations governing the assurance and verification processes for green bonds. However, there has

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Austria

been a significant development in this regard. On July 6, 2021, the EU Commission introduced a proposal for the voluntary European Green Bond Standard (EUGBS), which is presently under discussion in the European Parliament. Nevertheless, a specific implementation date has not yet been determined for this standard. The proposed framework encompasses the four following key requirements: ■ The bond proceeds must be entirely dedicated to projects aligned with the EU Taxonomy.

■ There must be complete transparency regarding how the bond proceeds are allocated, with detailed reporting requirements in place.

■ All EU green bonds must undergo scrutiny by an external assessor to ensure compliance with the regulation and alignment with the Taxonomy. Some limited flexibility is intended for sovereign issuers in this regard.

■ External assessors providing services to EU green bond issuers must be registered with and supervised by the European Securities and Markets Authority (ESMA).

This oversight is essential for maintaining the quality and trustworthiness of their services and assessments, safeguarding investors, and upholding market integrity.

Again, there is a degree of limited flexibility for sovereign issuers in this aspect.

The primary objective is to establish a new benchmark, often referred to as the “gold standard”, for green bonds against which other market standards can be evaluated and potentially aligned.

This standard seeks to address concerns related to greenwashing and to safeguard market integrity, ensuring that only genuine environmental projects receive financing.

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Trends What are the material trends related to ESG?

ESG investments have already gained considerable popularity and are continuing to gain further ground. Regulatory trends, both in Austria and at EU level, are reinforcing this trend and increasing the pressure on companies to attach more importance to this topic. International institutional investors and proxy advisors play a central role in this trend. Important investors have started to include the topics of ESG and sustainable investments into their investment strategies, and leading international financial advisors have started to establish or expand research capabilities for equities and therefore encouraging the development of specific ESG products.

Companies therefore need to be very aware, that their governance structures, reporting standards and levels, as well as their overall strategies take ESG issues into account and present them to stakeholders in a way, that enables them to scrutinise and evaluate their company. To our knowledge, “greenwashing” has not yet been observed in the Austrian market but could become an issue as ESG becomes more central and foreign/international regulators also attach increasing importance to corporate compliance in this area.

While we do not yet see a shift from a focus on the “E”, “S” and “G” become more and more important also as part of contractual provisions, even more challenging the legal profession to structure clauses not in a vague but in a clear and enforceable manner.

Environmental, Social & Governance Law 2024

Fellner Wratzfeld & Partners

Florian Kranebitter is a partner at Fellner Wratzfeld & Partners (fwp) specialised in the fields of corporate/M&A (including tech M&A), finance, and insolvency and restructuring. Florian has been advising companies in relation to sustainability and ESG related matters from the very beginning and has also a focus on improving the firm’s own sustainability within fwp’s sustainability committee. Florian’s ESG practice comprises sustainability-related finance products and lending, as well transactions of all kinds supporting companies to define and reach sustainability-related goals.

Fellner Wratzfeld & Partners Schottenring 12 1010 Vienna Austria

Tel: Email: URL:

+43 1 537 703 25 florian.kranebitter@fwp.at www.fwp.at

Josef Peer joined Fellner Wratzfeld & Partners in 2015 and was admitted to the Austrian Bar in 2019. He is specialised in ESG and sustainability, public environmental and planning law, construction and regional planning law, and infrastructure law. He also regularly advises on infrastructure and real estate projects from the approval process to construction. Josef is also a lecturer at the Sigmund Freud University in Vienna.

Fellner Wratzfeld & Partners Schottenring 12 1010 Vienna Austria

Fellner Wratzfeld & Partners is one of Austria’s leading business law firms and is based in Vienna. The firm has a team of more than 70 highly qualified legal practitioners and provides legal advice in all major legal areas, including ESG & sustainability, banking and finance, corporate/M&A, real estate, infrastructure and procurement law, reorganisation and restructuring. Our consulting areas include legal sustainability checks, establishing and constantly adapting reporting frameworks, advice on and structuring of the granting and taking out of ESG-linked funding, support in creating forward-thinking solutions in supply chain management, risk awareness and, above all, in the area of green washing, green procurement, advice on grants and incentives, certifications and labelling, introducing sustainable management and staff plans, as well as supporting transactions and projects with the right focus on ESG and sustainability.

Fellner Wratzfeld & Partners represents Austrian and international private companies as well as clients from the public sector. www.fwp.at

Environmental, Social & Governance Law 2024

Tel: Email: URL:

+43 1 537 704 63 josef.peer@fwp.at www.fwp.at

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The International Comparative Legal Guide (ICLG) series brings key cross-border insights to legal practitioners worldwide, covering 58 practice areas.

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Environmental, Social & Governance Law 2024 features six expert analysis chapters and 26 Q&A jurisdiction chapters covering key issues, including: • Principal Sources of ESG Pressure • Integration of ESG into Strategy, Business Operations and Planning • Finance • Trends • Green and Sustainability-linked Bonds

The International Comparative Legal Guides are published by: