Despite entering the corporate lexicon back in 2004, the concept of ESG (Environmental, Social, Governance) remained relatively obscure for over a decade. However, with the intensification of discussions around global warming, ESG has become a significant part of the conversation and a focal point for today's companies.
The concept of ESG can be viewed as a set of standards that encompass the most critical issues in the implementation of sustainable development principles, such as respecting the criteria that companies use to enhance the ethicality of their operations. National and international regulatory bodies have begun assessing and implementing a range of practices related to sustainable financing, primarily focusing on potential ESG approaches and marketing for investors.
Given the vast and diverse nature of the topic, it is natural that different interests among companies and governments worldwide follow different agendas and, of course, pose challenges to overall efforts. Variations among countries globally will make it difficult for global companies to set their own ESG agenda while complying with different local regulations in the countries where they operate.
The "Environment" aspect of ESG remains a priority as climate differences continue to escalate, and decarbonization criteria at the micro and macro levels drive further economic development. In addition to climate change, another topic of interest within the "E" component to monitor is biodiversity protection.
For this year, it is predicted that the previously overlooked "Social" aspect of ESG will receive the most attention. This encompasses issues of pay equality, labor conditions, and diversity in governance boards.
The "Governance" aspect of ESG refers to governance factors in decision-making processes, ranging from policy creation to the allocation of rights and responsibilities among different corporate stakeholders, including management and interested parties. Investors looking at an ESG-oriented company will want to ensure that its accounting and reporting systems are reliable and transparent. They will also assess how the company deals with its shareholders, including their ability to vote on significant matters, and seek evidence that the corporation engages in lawful practices.
Due to the increasing regulations of the European Union regarding climate change and equivalent legal frameworks among countries, ESG targets emerge as key guidelines that assist businesses in preparing for and implementing standards that positively impact the environment while ensuring socially responsible governance. Therefore, ESG standards can be defined as strategic changes for the successful long-term operation of companies. Bosnia and Herzegovina and Serbia's major trading partners have long incorporated ESG standards into their legislation, so it is time for the Western Balkans to catch up with these processes and ensure regional and global competitiveness for their products and services.
EU regulations are considerably broader, especially concerning sustainability reporting; they support comprehensive climate goals, including achieving climate neutrality by 2050 as part of the
European Green Deal. For instance, Bosnia and Herzegovina and Serbia are yet to adopt their first regulations directly related to ESG. In practice, ESG influence strengthens by aligning domestic regulations with the EU, including participation in the value chains of numerous products and relationships with consumers and creditors. For example, banks with the highest market shares in the Western Balkans, mostly foreign-owned, regularly assess ESG risks when providing loans, although local regulations in these countries do not typically require them to do so. As a result, accessing funding sources will become increasingly challenging for companies in the region unless they comply with ESG standards.
Similarly, EU partners are increasingly demanding that suppliers and subcontractors from the Western Balkans report on their ESG compliance because their EU partners and customers need to assess potential ESG risks and incorporate them into their projects.
Investors are also becoming more interested in ESG as they see opportunities for greater returns on their investments in green or socially responsible projects.
Companies that neglect these areas will find it increasingly difficult to borrow money from lenders, attract investors, sell goods to customers, compete in exports, and attract top talent, ultimately affecting their market success in the future.
In summary, ESG trends to watch this year are related to the further development of ESG regulations and reporting standards, primarily in the national and then international markets. The advancement of this trend will be driven by individual companies that need to be more transparent regarding their actions and final outcomes.
By Marija Plavsic, Business Development Manager, Ibrahimovic & Co