ESG – a concept that we hear more and more often, combines three specific factors – Eecological, WITHofficial GCONTROL and create a set of standards should beintegrated into the strategy of companies to help them increase their value by developing sustainable long-term activities, conducive to the development of human relations.

• Environment considers the impact of the company’s activities on the environment;
• Social deals with the company’s relations with employees, customers and the community in which the company operates;
• Management seeks to uphold morality, law, and justice in the way society operates.

In this article, we talk about the importance of understanding and implementing ESG, as well as the legal framework currently in place at national and European levels.

Why is ESG important to management and society in general?

In the short to medium term, ESG is important for any business to consider for three main reasons:

i) attracting financing or reducing the cost of financing;

ii. improvement of the company’s brand image, resulting in customer loyalty and, therefore, increased sales and profitability; as well as

iii. reduction of operational risks, in particular costs.

In the long term, the benefits are strategic: a good level of ESG and the evolution of concrete factors will ensure business resilience against an increasing number of disruptive external factors and help create an organizational culture based on creativity and engagement. ESG is likely to become the new morality of business.

In short, the advantages listed above are as follows:

• from a financial point of view, a certain level of ESG of the company allows credit and non-financial institutions to grant it loans on more favorable terms; this criterion will probably be used in the future also to obtain access to EU funds and state aid;
• in terms of reputation, more and more companies (the criterion was extended under the CSRD to companies with 250 employees and which are listed compared to the criterion originally set by the NFRD, which only applied to companies with more than 500 employees) have an obligation to report on their ESG status , filling out a rather complicated statement attached to the financial statements. This application is verified by persons who have special training in this regard. It is likely that more and more companies will require or prefer to work with trading partners who have fully and accurately reported their level of ESG, and that is a high level; the same behavior is likely to be adopted by consumers;
• a periodic review of the ESG level (at least once a year during the completion of the non-financial report) and its improvement will also lead to a high degree of compliance of the respective company, following at least the rules in the field of environmental protection, labor relations, consumer relations and corporate governance. This fact leads to a reduction in the risks of fines, closure or suspension of activities by order of the authorities, accordingly, the occurrence of disputes and compensation for damages to employees, consumers or commercial partners. The positive development in reducing financial risk can be quantified later.

What does it take to be ESG compliant?

We can divide ESG obligations into two categories: i) information obligations; and ii) compliance obligations. We will touch on information obligations next, but not before saying a few words about compliance obligations.

Thus, compliance obligations are extensive, covering the entire spectrum of the company’s obligations regarding environmental protection, labor relations, relations with consumers and the communities where they operate. This fact can create a significant spillover effect that can compound and create a domino effect affecting the entire activity.

For example, a possible breach of environmental permit obligations may lead, in addition to fines and other forms of liability, to an impact on the ESG rating and, therefore, to a decrease in the share price or difficulties in raising financing. Other events that are generally considered less harmful to society can have the same indirect effect, for example, a case of aggressive actions punished by competent institutions, an error in the payment of social contributions, or a case of a conflict of interest that is not detected or sanctioned. in time.

ESG Disclosure Obligations. European regulatory framework

At the European level, the 3 most important normative acts are: Regulation on taxonomy (“Regulation of taxonomy“), Regulations on Disclosure of Information on Sustainable Development in the Financial Services Sector (“DFRR“) and the Directive on non-financial reporting (“NFRD“).

The taxonomy statement aims to identify activities that are or are not sustainable and how sustainable the company’s goals are, lato sensuoffering investors the visibility of sustainable activity, in connection with this, a system of classification of sustainable economic activity is provided.

The SFRD obliges credit institutions and financial market participants to consider aspects of sustainability in their investment decisions, defining sustainability-related risk as an environmental, social or governance event or condition that, if it occurs, could cause a material adverse effect, actual or potential, on the value of the investment.

The NFRD imposes non-financial reporting obligations on ESG factors for companies with more than 500 employees. An amending Directive is being developed, namely the Directive on reporting on sustainable development information (“CSRD») regarding expanding the scope of reporting requirements provided for by the NFRR to all companies with 250 or more employees and companies registered on the stock exchange. The CSRD also provides for a number of mandatory sustainability reporting standards by relevant companies that require the inclusion of data from the Taxonomy Regulation. The CSRD Directive was adopted this month by the European Parliament and will soon appear in the Official Journal of the European Union.

The CSRD will introduce a series of measures aimed at combating the climate crisis by transforming the European Union into a modern, resource-efficient and competitive economy with no net greenhouse gas emissions by 2050, making the ESG concept even more important. significant In short, the ratio of NFRD to CSRD will be the transition from the fringes to the mainstream, in ESG and sustainability factors. Hence the need for these concepts to be analyzed and implemented by society as soon as possible.

ESG Disclosure Obligations. Rules in Romania

At the national level, the main legislative framework consists of Order No. 1938/2016 on amendments and additions to certain accounting provisions and Order No. 3456/2018 on amendments and additions to certain accounting provisions issued by the Ministry of Finance of Romania, after transposition into national NFRD legislation.

These two regulations concern the obligation of companies with an average of more than 500 employees and with total assets of more than EUR 20 million or a net turnover of more than EUR 40 million to submit in their annual report a range of information that falls under the scope of ESG factors ( the non-financial report must contain, in relation to environmental issues, details of the current and anticipated impact of the entity’s activities on the environment and, where applicable, on health or safety, use of renewable and non-renewable energy, greenhouse gas emissions, water use and air pollution ).

In April 2022, the Bucharest Stock Exchange published the ESG Reporting Guide, which is a useful document that supports companies in the process of aligning with the wishes of investors and their partners regarding ESG reporting. Companies are therefore expected to adapt to NFRD requirements and also anticipate CSRD requirements, an aspect that once again underlines the importance of preparing for the implementation of these concepts.

Moreover, there are steps for implementation in Romania Code of sustainable development and National circular economy strategy. The Sustainability Code is a reporting tool for companies based on the German model that allows organizations to make their sustainability statement much simpler and more applicable by referring to a series of performance indicators defined by the code and expected to be usable by the end of 2022 year On the other hand, the National Circular Economy Strategy, recently adopted by the government, has as its main objective the transition of Romania from a linear economic model to a circular one for greater efficiency of resources and their good management.

At the national level, the legal framework is constantly evolving. Thus, also from a legislative perspective, ESG reporting and ESG improvement is a long-term and continuous process.

From the above, we can conclude that the influence of ESG will manifest itself in all departments and activities of the company and will become increasingly important in the equation of costs and revenues, development opportunities and ways of structuring and implementing any business strategy.

In summary, ESG aspects, especially the quantification of ESG factors important to a particular business, the manner of reporting and auditing, and the opportunities to improve ESG, will become increasingly important in the lives of companies, as it is time for companies to dedicate resources to this topic.

Authors – Ioan Dumitrashku (partner), Iryna Oprya (associate), Oleksandra Dunerianu (associate), Eliza Kristea (associate)