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21 September 2022

Sustainability report – for large companies a duty, for others a necessity

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By HAVEL & PARTNERS

Carbon footprints, favourable working conditions, anti-corruption rules… Is your company already addressing sustainability and ESG reporting issues? If it is not, it is high time it started. Since last year, you have been able to hear these three letters in a bank when looking for funds for your new projects. Moreover, from next year, non-financial reporting should be mandatory for large companies according to the upcoming EU legislation; the obligation will also indirectly affect companies cooperating with larger corporations.

What does ESG stand for?

ESG issues are very wide-ranging and the individual letters cover multiple areas. E stands for environmental – this includes everything that has an impact on the environment in connection with your company. Therefore, in your reporting, you should, e.g., include all waste management data, the amount of emissions your company generates, the consumed energy sources, etc. – simply, all that affects the carbon footprint of your company and products. S stands for social – here we can include issues such as fair remuneration of employees, diversity in the company, favourable working conditions, etc. And the last letter G refers to corporate governance – which generally means strategic corporate risk management, ownership structure transparency, business ethics within your company, etc.

An ESG report is a general report on where your company stands in all the specified areas. It is therefore a process of measuring, evaluating, and publishing corporate data and strategies connected with the environment, social sustainability and efficient and responsible corporate governance. However, currently there are several methodologies laying down how exactly to report and handle the data. Moreover, the outputs from various companies are difficult to compare. As a result, starting next year, the EU is planning to introduce new harmonised reporting rules (European Sustainability Reporting Standards – ESRS), which will be binding on a large group of companies. Specifically, on those who meet at least two out of three criteria: over 250 employees, assets worth EUR 20 million or turnover in excess of EUR 40 million. In the Czech Republic, this should be up to 1,300 companies, which, according to the current development of legislation, should be obliged to prepare reports as early as for the year 2023.

The reporting obligation will not be imposed on smaller companies yet, but they can be expected to be asked about their ESG criteria by their business partners who are subject to mandatory reporting. Do you know how to get started with ESG reporting? We’ll tell you what to focus on.

What will an investor or a bank require me to do?

Non-financial reporting has become more and more crucial for investments in recent years. According to a global survey carried out by EY in 2020, 91% of investors said that non-financial performance had played a pivotal role in their investment decision-making.

Apart from the forthcoming EU’s Corporate Sustainability Reporting Directive (the CSRD) and the harmonised ESG reporting rules, the EU regulation on the taxonomy of sustainable activities has also been in force since the beginning of this year. The regulation sets forth which activities can be considered environmentally sustainable. Banks want to be green. That is why they request ESG data from their clients and take them into account when providing loans and other products and services.

When you discuss a loan with the bank, it will not only ask you for financial statements and other economic data but also for ESG information. It will, for instance, ask about the share of renewable energy, waste production, greenhouse gas emissions or consumption of water; or, it will require energy certificates for properties and your plans to improve energy efficiency and reduce carbon dioxide emissions. Without such information, banks cannot properly assess loans because ESG criteria are now new mandatory criteria in the approval procedure. Therefore, if you do not have ESG data, the loan granting procedure may drag. In certain cases, your ESG score can result in worse credit terms or, on the contrary, in the event of favourable figures, it can qualify you for better credit terms.

To assist companies, the Czech Banking Association has issued a template ESG questionnaire, in which you will find detailed points about what banks assess. Therefore, if you are applying for a loan or discussing funding for your new projects with a bank, it is a good basis for the preparation of supporting documents. The approach of individual banks can differ in their details. The sample questionnaire, however, can be used as a checklist for your company’s ESG report.

Where, when and how to start?

The sooner you start the better. First, you need to collect the necessary data in your company and find out where you stand in terms of sustainability. Given the range of ESG criteria, definitely don’t expect to find the numbers you need in a neatly wrapped package under the Christmas tree. Quite the opposite, data collection requires quite an intense effort and the participation of employees on multiple fronts because the necessary figures and supporting documents are located in different departments within the company.

You can find what impact your company has on the natural environment, e.g., from its energy consumption, company car business trips, emissions from manufacturing, etc. – this usually requires the engagement of a number of employees who have the necessary data in various systems and forms. This applies analogically to other areas. As for social sustainability, you will be usually able to find the data you need in the HR or marketing departments. For corporate governance information, you will have to ask the compliance staff. The actual collection, consolidation and evaluation of data is, as a rule, the greatest challenge companies face in ESG reporting. What is most time-consuming for companies, on the other hand, is the configuration of processes and uniform format. For instance, the initial set up of the carbon footprint in a company takes at least 3 to 4 months in our experience.

Last but not least, it is also crucial to be able to correctly interpret the data. To ensure company-wide coordination, new positions of ESG coordinators are increasingly being created, or companies allocate persons in charge to the top management position of CSO (Chief Sustainability Officer).

If you are confused or hesitant, it is definitely a good idea to contact experts specialising in non-financial reporting to guide you through the entire process step-by-step. Today, there are also technological solutions that can make this stage much easier for companies and go even further. The systems not only collect and monitor the data, but also evaluate them and can automatically produce entire ESG reports. This, of course, saves staff capacity and overall costs.

How do you calculate a company’s carbon footprint?

In reporting, it is ideal to include data from as many areas falling under the letters ESG as possible. The minimum basis of each sustainability report should definitely be the calculation of the company’s carbon footprint. It is measured in terms of the carbon dioxide equivalent that the company produces in connection with its business activity and thus shows the company’s impact on climate change. The company’s carbon footprint is calculated, as a rule, based on two methodologies, either the GHG protocol (Greenhouse Gas Protocol) or ISO 14064 (the company’s carbon footprint).

The carbon footprint includes emissions from three areas called Scopes. Scope 1 comprises emissions that are produced by the company itself. This includes the volume of greenhouse gases from production, from driving company cars, from the gas used for own heat generation, etc. Therefore, these are direct emissions that the company emits into the air. Scope 2 comprises indirect emissions linked to the production of energy for the company that is produced outside the company for its consumption. That means the generation of power, district heating, or district cooling. Scope 3 comprises emissions of the company and its products and services, the impacts of which are the most complicated to report. These include all emissions linked to the entire production chain, the company’s suppliers and clients, or e.g., to the transport of employees to work and a number of other items. It is clear, merely from the list of criteria in all three Scopes, that the calculation of the carbon footprint is not a simple procedure that could be processed within a couple of days.

And again, experience is invaluable here. If you are unsure, contact someone who understands the processes and has experience with the calculations. They will help you collect necessary data and make the calculation based on a professional methodology. This way, you will arrive at the relevant results that will stand up to investors, banks, new legislation or companies that issue the corporate ESG rating. If you want to be sustainable, and thus attractive for investors, you cannot do without this elementary figure.

What is your strategy and what are your goals?

The Green Deal aims to ensure the carbon neutrality of greenhouse gas emissions in Europe by 2050. That is why non-financial reporting, according to the new EU regulations, should not just be an overview of figures but it should also include a comprehensive strategy and setting of goals that will lead a company to carbon neutrality. Therefore, it is necessary to critically analyse and assess the collected corporate data and set goals that will be realistic for the company. For example, to reduce your company’s greenhouse gas production by 25% in five years.

Then you need to set a strategy regarding which road to take to reach your goal. There can be various scenarios and there is no versatile guide that applies to all companies on the market. For some it will be enough to save energy within their buildings or change the sources of energy used, while other companies might have to completely rebuild their production chains to achieve their goal. Above all, we should keep in mind that companies from various fields cannot be compared against one another. An organic farm has a different impact on the environment than a power plant. Therefore, it is advisable to compare your company against others in your industry. If your competitor has a lower carbon footprint than you, it is definitely worth considering how to do things in a better way.

What is an ESG rating?

In practice, you can also come across ESG ratings. According to a survey carried out by HSBC in 2021, European investors view these ratings as one of the most useful factors in their sustainable investment efforts.

An ESG rating is a company score or mark for your company showing how well you manage to deal with environmental, social or corporate governance risks overall. ESG ratings are issued by rating agencies as an independent assessment and review of a company’s reported data. A good score is a signal for investors that your company is not exposed to risks. A favourable rating will therefore help you attract investors and negotiate more favourable financing terms. A negative rating, on the other hand, may warn investors that there are skeletons in your corporate closet.

There are several such rating agencies, the best-known ones being, for instance, MSCI, Sustainalytics and S&P Global, that each use their own methodology and assessment. You can therefore receive different scores based on the same data from different agencies.

Apple, for instance, got a mediocre BBB rating from MSCI even though it publicly declares that is has been neutral in terms of the carbon footprint of its corporate emissions since 2020. Apple’s rating was reduced particularly due to the criticism from workers in its supply chain and also due to the electronic waste generated in Apple production.  Sustainalytics, on the other hand, rates companies based on how they manage and deal with ESG risks and gives them quantitative scores accordingly. Currently, Apple has a score of 16.4 with this agency, ranking it among low-risk companies; in the benchmarking of all technological companies, Apple is at the end of the top third of the best rated companies. It is also these differences that have driven the EU to draft new harmonised reporting rules.

Useless bureaucracy or a necessity?

If you want to push through a change or introduce new processes in your company, you should always first explain why it is necessary and what your objectives are. Non-financial reporting is no exception. Moreover, the actual fulfilment of set ESG strategies and objectives is a long-term effort; therefore, it is a good idea to motivate your employees and make them ready for the change. Give them an idea of the entire process and explain what your goals are and train your employees so that they do not see data reporting and the transition to sustainable operation as just useless bureaucracy.

Sustainable operating models are not only good for the environment. They are also an advantage because of the reduction of operational savings in today's era of rising energy costs or because of the evaluation by financial institutions, insurance companies and strategic partners. Sustainability is also perceived positively by customers or potential employees. Non-financial reporting will thus be as important for business in the future as financial reporting. With the former, you will get a detailed idea about your company and its readiness for the new challenges the modern world is facing. This will help to make you more strategically adaptable to new conditions and succeed in the market.

Climate & Sustainable Leaders Czech Republic

HAVEL & PARTNERS is a founding member of the Climate & Sustainable Leaders Czech Republic initiative. We have joined our efforts with other leading companies from various industries of the Czech economy to support the reduction of carbon footprint in the Czech Republic and to motivate Czech companies to start projects helping them transition to sustainable models of operation.

The initiative prepares activities in the area of education, awareness and methodological support concerning sustainability and climate objectives and is also the author of the Carbon Tracker project, the first comprehensive overview of how the largest companies in the Czech Republic are coping with carbon dioxide emissions and how they are managing to reduce them.

Key contact persons for sustainability and ESG services:

HAVEL & PARTNERS exclusively cooperates with One Advisory in the area of advisory on sustainable corporate strategies and reporting.

Jan Koval, Partner, HAVEL & PARTNERS

Jan has 18 years of experience in international mergers and acquisitions and long-term experience with transactions and projects in renewable energy sources and sustainable investments. He is also an expert on corporate governance. In compliance, he focuses on sustainable strategies and advises on the set-up of ESG parameters in companies in line with the globally recognised framework.

Jan Topinka, Partner, HAVEL & PARTNERS

Jan leads a specialised HAVEL & PARTNERS team for banking, financing, and capital markets. He focuses on financial services regulation, fintech and capital markets. He also specialises in sustainable finances and green financing, including green bonds.

Karel Půbal, Partner, One Advisory

For many years, Karel worked in one of the leading global consulting companies as a director for services for the public sector and as a bursar of a Czech natural sciences university. He has been involved in the preparation of a number of significant strategic documents and sectoral and other economic analyses. He takes a realistic stance in ESG issues drawing on his knowledge of global and local social and economic trends and also from practical experience in a number of business sectors.

Lukáš Jiříček, Senior Advisor, One Advisory

At One Advisory, Lukáš provides comprehensive advice to private and public sector clients in strategy development, ESG reporting, and corporate risk management. He is an internationally certified project manager. He has long-standing expertise in EU policies and legislation, particularly in relation to the preparation and implementation of EU Green Deal and Structural and Investment Funds.

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