ESG measures: hidden effects

Will we save the Earth through ESG ( Еnvironmental, Social and Governance) legislation, measures and reporting, will the EU and Bulgarian business be competitive and is there a threat to turn the good intentions behind the green transition into a mass destruction tool that may hit the real sector – these questions are answered by Ass Prof Dr Milena Angelova:

ESG is quite well known to the Business community – also in its earlier form of corporate social responsibility. Following the rapid climate change development, three pillars have been established – environmental, sustainable and governance, as to cover and safeguard the relevant policy and action towards climate neutrality.

Many people keep questioning how real the climate changes are. Studies confirm, that since 1850, the Earth’s temperature has increased by 1,5 °C. But scientists also have registered that such a warming process is currently going on many planets within our galaxy. All these elements question if the human activities alone are the reason for climate changes, and how efficient the human responses to this crisis can be. The answers will be known for sure in the distant future, when we all will only be a distant past. But it is crystal clear that

The Mankind leaves its footprint on Earth

and it must prevent any harm. We shall not return into the caves, yet the big question is how the human beings can maintain their way of life while the same time takes due care for the environment. This is an unconditional necessity, but shall not come at the expense of losing competitiveness in Europe, as EU accounts for only 7 % of the worlds’ CO2 emissions. Therefore, it is high time that Europe engages in climate diplomacy and negotiates common commitments and measures at global scale. The European Green Deal gave rise to a trend of installing more and more solar panels, of buying more and more electro mobiles with batteries that are difficult to reuse and recycle. This generates serious problems for the future, while at the same time generates growth for third-countries’ economies – like the Chinese one. That means in practice that

Europe exports its CO2 footprint

to other countries at the expense of European’s producers’ competitiveness.

Europe has adopted Carbon Border Adjustment Mechanism (CBAM), but its enforcement entails many practical problems and creates risks of economic wars. New legislation establishes a detailed system of indicators, which aim at helping the companies become sustainable, by adopting measures for preventing the negative effects of the business activities on nature and for effective use of resources following the circular economy principles. All these elements are covered in a great detail by the Directive 2022/2464 for

non-financial reporting

Being in force as of this year for the largest companies, it will become obligatory gradually as of 2025 also for the listed companies, than for the midcaps and SMEs can opt-out until 2028. Nevertheless, in spite of this gradual approach, the value chain leaders have already started to request from their sub-contractors – irrespective of their size, to report on their sustainability. Many SMEs are receiving lately quite lengthy questionnaires that assess their sustainability even for the past year and request proof to be presented. On this basis, their performance is ranked and if the score is not high enough according to the value chain leader’s evaluation, the respective SME is called either to take corrective measures within certain period or to leave the value chain. That means that the lack of preparedness for ESG reporting is being punished with

being cast out of the market

The EU and member states institutions are regulating the ESG process and they shall base their decisions and actions in that regard on a sound and comprehensive impact assessment, which was missing in the CSRD. The EC estimates that in order to deliver on 2030 sustainable transition goals, the EC shall provide additional investments amounting at 700 billion of euro per year – for reporting, goals setting, employing additional experts, including in 24,3 million SMEs. This amount is comparable to the cumulative size of the French and Belgium annual bond markets. These needs still are funded in the case of SMEs mainly by own-resources or credits. That is why, we - the Bulgarian and European employers insist

The Green Deal to be recalibrated

In order to make possible its implementation without endangering the competitiveness. The public bodies shall make available simple, accessible, easy to implement tools that will allow every company to monitor and optimize it energy consumption and carbon and water footprint.

The standards for non-financial reporting require information on 1 100 indicators, accompanied by proofing documents. All European companies shall report twice – according to the requirements of the non-financial reporting standards and of the international accounting standards. In order to report, enterprises must first actually undertake respective actions – and before that they need to plan those actions and to provide them with the necessary resources, while at the same time keep performing their core business. The stakes are high – if they fail, they will be threaten by bankruptcy.

Some people are enthusiastically recognize ESG as

the new modern

and in most of the cases those are consultants, perhaps expecting increase of their market share. I have not met even one company that is enthusiastic for the excessive reporting burden. The sound logic suggests that enterprises shall focus their main efforts in investing in new technologies and preserving the nature, instead in excessive, burdensome and repetitive reporting. The latter may motivate ‘green washing’ practices, that run the risk of covering harms done to nature with glamourous public and advertisements campaigns and demonstrative, but not really effective actions. Currently we lack effective strategies to counteract this dangerous trend, nor we have clarity on how the standards are to be implemented based on guidelines and good practices that only can come as a result of mass implementation. The EU is ran by huge, faceless administration, with whom it is difficult to connect and provide feedback on practical cases related to enforcement. Solutions are found too slow, and meanwhile the business is left alone to handle crisis and growing number of challenges.

The Brussels bubble keeps blowing. Europe keeps lagging behind - also because the recent regulatory inflation, which is caused by the unprecedented amount of legislative acts produced in the current mandate – quite often without extensive impact assessment, without competitive and SME test. This shall not be allowed to happen in the future.