Business that considers environmental and social aspects alongside economic results and is managed in a transparent manner – this is the goal of the ESG framework, which has recently gained much attention. A survey carried out by the prestigious Czech research agency Ipsos for our law firm indicates that this is an issue that is currently being addressed by more than 75% of Czech companies and businesses. Although for the time being ESG obligations apply mainly to companies in the banking and financial sector, it is envisaged that these obligations will be extended to all large, and selected medium-sized, companies in the future. We have discovered that seemingly over half of the companies in the Czech Republic would be inclined to use the services of professionals from law firms or consultancies to implement successful ESG solutions in such a case.
The survey also revealed that companies that are relatively new to the market – roughly one to five years old – are placing the greatest emphasis on implementing ESG solutions. For about 30% of companies, the social benefits of their activities are the most important, and the same proportion of companies are implementing ESG to make their management and corporate governance more efficient. For 23% of companies, environmental protection is the most important factor. Only 16% of respondents stated that all three areas are equally important to them.
The results also show that Czech companies are beginning to realize that the wider context of their business is very important for success. The obligation to address ESG is currently primarily on banking and credit institutions, insurance companies and securities issuers, but will soon fall on virtually all larger companies. Therefore, many of them are already taking an active interest in ESG. In practice, this has various forms – for example, they are introducing compliance programs to ensure legal compliance in key areas of their business, anti-corruption programs including training, internal channels for confidential reporting of illegal or unethical conduct, or measures to ensure gender equality. We see this as a positive trend which will make things much easier for companies once the new legislation no longer gives them a choice.
Indeed, many of the surveyed entities are confused about how to effectively incorporate ESG into their operations. This is evidenced by their willingness and openness to the possibility of hiring an external supplier like our legal firm or other consultants to create a tailored ESG transition strategy for them. Such a solution is seen as acceptable to more than half of the companies surveyed and is preferred mainly by medium-sized companies with 250 to 499 employees. Among these, around 67% of survey participants would welcome such an option. In contrast, just under 10% of respondents strictly rule out this option.
Companies are dedicated to ESG, even though they are not yet obliged to be
The ESG concept itself is based on three pillars, as the acronym suggests (Environment, Social and Governance). The first pillar is the environmental approach – in this respect, the main topics include energy efficiency, reducing emissions and other forms of pollution, the circular economy and the protection of biodiversity. The second pillar is the social approach, with themes such as human rights, occupational health and safety, gender equality, inclusion, diversity and support for community and non-profit projects. The final pillar is corporate governance, for which active anti-corruption, whistleblower protection, prevention of conflicts of interest and the composition of corporate management are important.
The introduction of ESG elements into corporate governance brings with it many opportunities, but it also has its risks. On the one hand, companies can improve their internal corporate culture, make savings and strengthen customer relations. Meeting ESG goals can also be a good opportunity for companies to reach out to new employees and younger customers that pay greater attention to these issues. On the other hand, the implementation of ESG can be complicated by a poorly set-up project; there is a significant risk when internal company practices deviate from the values presented. In this case, companies face serious reputational risk or even sanctions (if they are guilty of misleading consumers or investors about the extent to which the company's products and services comply with the principles of sustainability). A prerequisite for proactively embracing ESG, including appropriate marketing, is therefore clear agreement on the parameters of a particular project and a general willingness to make time-consuming and logistically challenging changes. But fortune favors those who are prepared – companies that are already active in this direction create good marketing conditions in terms of public relations and human resources management. In the market, we have already observed that completely new products and sectors are being created that are based directly on the ESG framework. These include, for example, the areas of sustainable finance, social investments, responsible procurement and ESG crisis management.
By Michal Nulicek, Partner, Rowan Legal