“The Earth is what we all have in common.”
—Wendell Berry
Environmental Social and Governance (“ESG”) are the three main elements that companies increasingly consider when deciding whether to cooperate with or invest in a company. It is also a term used in capital markets when assessing corporate behavior and a method of linking the performance in these three areas with the – future financial performance of corporations. The term is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing. Nevertheless, once enough data has been obtained, they are integrated into the investment process when deciding what is a good business opportunity and what is not from the standpoint of ESG. Studies have established that fulfilling ESG criteria may also have a material impact on the return profile and long-term risk of investment portfolios. So, what does the E in ESG stand for?
Environmental criteria within the concept of ESG are based on the premise that business activities have the potential to create environmental risks for ecosystems, water, air, and human health. The E in ESG in effect means: “Show us all information on the real impact of the environmental policies you are implementing in your business and this will let us know how much you care for the planet.”
Therefore, aspects of the E include measuring a company’s energy consumption (e.g. does the company use energy efficiently and is it from renewable sources). This can refer to a company’s waste management practices natural resource conservation (such as having responsible practices across the value chain like anti-deforestation policies or even animal welfare), management of toxic emissions, or its compliance with environmental regulations. This also includes the overall efforts to combat global warming.
Of course, the criteria mentioned above are not numerus clausus, and there are many other aspects of E that can be used when measuring a company’s approach to sustainability.
Companies in the EU are aware that COP26 was possibly “the last chance” for member states to commit to decreasing global emissions. This conference marked five years since the Paris Agreement which set historic carbon reduction targets. However, the targets proved insufficient in avoiding the worst-case climate change scenario. It is therefore clear that companies will need to invest more effort in helping the EU to embrace more ambitious GHG reduction targets.
An important step towards this is that the European Commission has adopted a broad set of sustainable finance measures including reporting duties, which, so far, means that ESG reporting for large companies within the EU is mandatory. Not only does this enable investors to focus their activities on more sustainable technology, but also this is helping companies and investors to know whether their investments are truly green. Moreover, the Commission has proposed the development of reporting rules for SMEs.
The package of rules which the Commission has adopted includes the EU Taxonomy Climate Delegated Act that supports sustainable investment and clearly shows which economic activities contribute to meeting the EU’s environmental objectives most. Additionally, the package contains amendments to the rules of investing, fiduciary duties, and product oversight and governance, including companies’ new obligation to discuss sustainable risks on investments with their clients.
Furthermore, the EU proposed “The Corporate Sustainability Reporting Directive“, to expand ESG reporting requirements for all companies operating within the EU. The focus of this proposal is to incorporate the issue of climate change into financial regulations. Those amendments are expected to take effect in 2023.
To sum up, it is clear that by introducing obligatory reporting duties on ESG, the EU is trying to include companies in achieving the targets set by the ‘’Fit for 55’ project and make sure that all the environmental goals are reached.
Companies in Serbia have recognized the importance of engaging in environmental protection activities. However, recognition does not mean implementation. Therefore, very few companies in Serbia are putting in efforts to show that they are willing to be transparent about their business practices and protection of the environment. It is important to know that Serbia has the Environmental Protection Act, but there is a long way to go before full implementation of the environmental practices which are needed for sustainable development in this aspect of the ESG. On the other hand, Serbia is a developing country and therefore there is hope that those few examples will be a great stimulation and potential leaders in the much-needed change in Serbia and the Balkans.
Authors: Ognjen Colić, Teodora Ristić, Milica Novaković
