Germany

By Daniel Morris | 29. April 2018

1. The State Duty to Protect

1.3 State support [page 22-27]

Subsidies

Subsidies always require special justification and regular effectiveness tracking, because long-term arrangements that benefit one side at the expense of others have adverse effects as a rule. For example, by altering relative prices over a sustained period, subsidies can send the wrong economic signals and lead to inefficient resource allocation. Competitive enterprises may be forced out of the market by subsidised enterprises.

Measures

The Federal Government will examine to what extent the sustainability assessment for which the Subsidy Policy Guidelines provide is consistent with the requirements set out in the UN Guiding Principles and how enterprises receiving significant subsidies can be subjected to a future obligation to apply the elements of due diligence described in chapter III above.

For these reasons, subsidies must not be granted unless they are necessary and reasonable and do not restrict competition. Subsidisation, moreover, must not conflict with other political aims, such as protection of human rights.

The current situation

To increase the transparency of subsidisation, the pressure to justify it and the scope for controlling it, the Federal Government follows Subsidy Policy Guidelines, which constitute a voluntary commitment by the Federal Government in connection with subsidy measures under its remit. In the run-up to the 25th Subsidy Report, the Federal Cabinet reinforced the Subsidy Policy Guidelines in January 2015, adding a sustainability assessment and an evaluation of subsidies, which will normally be conducted on a regular basis. By introducing the sustainability assessment, the Federal Government is underlining its intention to take more account of the sustainability principle in its subsidisation policy. The assessment is essentially based on the goals of the National Sustainability Strategy and focuses on long-term economic, environmental and social impacts.

Export credits, investment guarantees and other instruments for the promotion of external trade

The instruments of external-trade promotion in Germany provide assistance for German enterprises in accessing and safeguarding foreign markets. The range of instruments includes the provision of advice by German diplomatic and consular missions, the network of German Chambers of Commerce Abroad and the Germany Trade & Invest (GTAI) agency. The Federal Government also supports participation in trade fairs abroad, arranges visits by delegations and funds hedging instruments such as export credit guarantees, known as Hermes guarantees, to insure export transactions, federal guarantees for direct investments abroad (DIAs) and untied loan guarantees as insurance for banks against the risk of default.

The current situation

The processing of export credit guarantees, DIA guarantees and untied loan guarantees is undertaken on behalf of the Federal Government by the mandated companies Euler Hermes and PwC. Respect for human rights is already an element in the assessment of applications. Where there is reason to do so, environmental and social aspects as well as human rights considerations are closely examined.

How closely depends on the potential impact of the project. The minimum requirement for the assumption of a guarantee is compliance with the national standards of the target country. Projects with a considerable impact on human rights are subjected to a more thorough examination.

In the case of projects falling within the scope of the OECD Common Approaches and for investment guarantees with far-reaching environmental, social and human rights implications, compliance with international standards such as those of the World Bank Group, particularly its sectoral Environmental, Health and Safety Guidelines, is required in addition. In projects with such implications, compliance with these standards must be checked and confirmed by an independent assessor. The decision to give a guarantee is taken jointly in the competent interdepartmental committees by the Federal Ministry of Economic Affairs and Energy, the Federal Ministry of Finance, the Federal Foreign Office and the Federal Ministry for Economic Cooperation and Development. Depending on the environmental, social and human rights relevance of a given project, enterprises may have to routinely report on the progress of the project as well as on the human-rights situation. If it receives complaints, the

Federal Government may require remedial action.

Measures

The Federal Government will ensure that human rights, which have hitherto been an element of the environmental and social impact assessment, are given more specific consideration and a higher profile in assessment procedures. It will measure the existing assessment procedures against the requirements set out in chapter III above and make adjustments where necessary. One particular priority will be measures for better identification of risks to human rights as part of the assessment process.
Better information and greater transparency will serve to draw corporate attention, as early as during the initiation stage of projects, to the great importance attached to human rights due diligence and to the OECD Guidelines. In particular, the Federal

Government will extend its support for the affected enterprises in the form of information material.

In addition, it is planned to introduce human rights due diligence reports into the assessment procedures of the insurance instruments for foreign trade in cases where there is a high probability of serious implications for human rights.
The National Contact Points for the OECD Guidelines (see subsection 4.2 below) will be upgraded to become the central grievance mechanism for external trade promotion projects.
The detailed procedure for assessing applications for the provision of export credit guarantees, guarantees for direct investments abroad and untied loan guarantees will be further reinforced as regards respect for human rights; this will entail measuring the procedure against the specific requirements set out in the NAP. To this aim, human rights will be treated as a separate point in future project assessments.

The aim is to ensure that enterprises which avail themselves of foreign trade promotion instruments exercise due diligence. In particular, this includes participation in grievance proceedings initiated against them before the German National Contact Point for the OECD Guidelines for Multinational Enterprises.

1.4 Enterprises in public ownership

Enterprises in public ownership or under state control within the meaning of this subsection comprise all enterprises subject to private or public law in which federal, state and/or local authorities hold a direct majority share. If a business enterprise is under state control, in other words if a majority stake is held directly by the public treasury, or if its actions may otherwise be attributed to the state, such an enterprise bears special responsibility under the UN Guiding Principles to respect human rights.

The current situation

The general standard of protection given to human rights by enterprises in which the public treasury holds a stake is already very high, since public-private entities in which the state holds a controlling stake and whose organisational form is governed by private law as well as public companies in sole state ownership which are organised in a form governed by private law are directly bound by the enshrined constitutional fundamental rights. The acquisition of shares in enterprises subject to private or public law is done autonomously at the various tiers of government in the federal system – national, regional and local – on the authorities’ own responsibility. Besides being bound by the constitutional fundamental rights in their economic activity, the three tiers of government are also bound by the provisions of ordinary legislation, such as the Federal Budget Code and municipal instruments.

In addition, there is a federal regulatory instrument known as the Public Corporate Governance Code of the Federation (PCGK Bund), comprising recommendations and suggestions for good corporate governance and addressed to enterprises in which the Federal Government holds a majority stake. The federal administration of shareholdings is organised on a decentralised basis and is the task of whichever federal ministry is responsible for the company’s area of activity. Section 1.4 of the Public Corporate Governance Code states that the federal ministry responsible for the shareholding should ensure that enterprises acknowledge and comply with the Code and embody it in their corporate rules. The Code is part of the Principles of Good Corporate Governance and Management of Federal Holdings, which were adopted by the Federal Government and published by the Federal Ministry of Finance in its role as the lead body in this field. They form the foundations for responsible management of federal stakes in enterprises and provide for standardised performance of this task by the various federal ministries. Several federal states and municipalities have separate management codes for their own holdings.

The annual report on federal holdings lists about 700 enterprises in which the Federal Government has a direct or indirect stake. The Federal Government has direct holdings in 60 companies with business activities (as of 31 December 2014), 41 of these being direct majority holdings. Of the companies in which a direct majority stake is held, 13 have more than 500 employees. Among the matters covered by the report on federal holdings are the implementation of the Public Corporate Governance Code of the Federation, gender equality and the general sustainability of the listed enterprises.

Measures

The Federal Government, in cooperation with the Council for Sustainable Development, will expand the training courses of the federal holding management bodies to include sustainability matters and so focus its attention on responsibility for human rights in the enterprises in which it holds a direct majority share. The scope of the training curriculum of the holding management bodies shall be inserted as part of the next revision into the Public Corporate Governance Code of the Federation. At the annual meeting of the bodies managing federal and state holdings, the states shall be urged to follow this federal practice.
The Federal Government is keen to increase the percentage of enterprises in which it holds a majority share that apply the German Sustainability Code, including its obligation to report on human rights. From the 2018 financial year, the report on federal holdings will list, in its chapter on sustainability, all internationally active enterprises with more than 500 employees in which the Federal Government has a majority shareholding that apply the German Sustainability Code or a comparable framework with compulsory reporting on human rights and those that do not.