Note: This article was originally published on Medium on 07 June 2022. The legal situation for municipal utilities may have changed since then.
In February 2022, the European Commission proposed new guidelines requiring liable companies to ensure the sustainability and fairness of their value chains. These Corporate Sustainability Due Diligence guidelines are now awaiting adoption by the European Parliament and Council.
Following approval, affected companies with more than 250 employees and annual global sales of more than 40 million euros have two years to adapt their value chains to the new sustainability standards. According to the German group THÜGA, which includes more than 100 municipal utilities, many municipal utilities are also affected by these new standards.
As discussed in a previous QLab article, many German municipal utilities do not have the knowledge or capacity to deal effectively with such new sustainability requirements. This article informs stakeholders about the likely upcoming EU value chain legislation requirements and discusses how municipal utilities can prepare for them.
Why public utilities are essential players in the energy transition
Read more: How municipal utilities can drive the energy transition and what is preventing them from realizing their full potential.
In Germany, energy is distributed via the networks of municipal utilities. While smaller municipal utilities buy the legally defined energy mix mainly from producers via the European Energy Exchange in Leipzig (DE), the municipal utilities of larger cities only make the grid available for energy that comes directly from various producers.
The EU Directive on Corporate Sustainability Care
The EU Commission specifies its legal requirements as follows: "To fulfill their due diligence obligations, companies must:
- make due diligence an integral part of their corporate policy,
- Identify actual or potential negative impacts on human rights and the environment,
- prevent or mitigate potential impacts,
- turn off actual effects or reduce them to a minimum,
- Establish a grievance procedure,
- Monitor the effectiveness of due diligence strategies and measures; and
- Communicate publicly about how they are performing their due diligence."
In addition, the EU Commission specifies how violations of the above requirements can be detected and penalized:
- Enforcement: directives are to be enforced by national authorities, which may impose financial penalties for violations of the above directives.
- Victims' rights: In the event of violations, victims can take legal action against the responsible company.
- Management responsibility: Business leaders must not only act in the best interests of their company but also make decisions in the best interests of human rights, climate change and the environment.
How should municipal utilities prepare?
The German municipal utility group THÜGA recognizes these upcoming demands. The group wants to act as a hub for other municipal utilities, pool the expertise of supply chain experts, and aims to provide educational certificates for stakeholders in the medium term. To prepare municipal utilities for the EU directives, THÜGA proposes the following:
- Sustainability standards: Based on existing international taxonomies, such as those provided by the OECD and the ILO, municipal utilities should define their sustainability standards clearly and transparently.
- New contracts: All new agreements with suppliers and other partner companies should include these sustainability standards. These standards should also define who is responsible for ensuring human rights and environmental issues.
- Risk assessment: Municipal utilities should conduct thorough risk assessments regarding human rights and the environmental impact of all processes and goods. THÜGA proposes to bear such risk assessments "at least for immediate supply chains".
- Complaint oversight: THÜGA wants to create the possibility of receiving and responding to non-compliance notices with sustainable supply chain standards to make cases of non-compliance visible.
- Communication: All contractors should know the sustainability standards and complaint oversight system.
- Valuing customer interests: According to THÜGA, most customers want sustainable, equitable energy when it is affordable. Municipal utilities, known for their closeness to their customers, are responsible for providing energy from an appropriate source to ensure that they do not lose the trust of their customers.
Take-away and outlook
With the energy transition, European municipal utilities are facing significant challenges. However, knowledge networks are emerging to provide guidance and help municipal utilities identify them and find practical solutions.
QLab is one of these experts. Recently, we completed a consulting project with a German municipal utility. We will publish the results promptly on the QLab website and LinkedIn.Follow us to see them first!
In the following articles, we delve deeper into issues surrounding the potential of municipal utilities. Subscribe to our Medium publication to never miss the latest QLab insights!
Finn Faust, Webdesign & Research at QLab Think Tank GmbH