Currently, there are no regulations that impose ESG implementation and reporting obligations directly on small and medium-sized enterprises (SMEs). Why, despite this, is it already worth implementing ESG tools in the SME sector? This article will help you find the answer to this question.
The European Union and its member states are facing an unprecedented challenge. Europe is to become climate-neutral by 2050. To make this possible, fundamental changes are needed, including decarbonization, development of RES and abandonment of emission-intensive modes of transportation, among others. EU regulations are being introduced that impose new obligations on businesses, including ESG reporting, which will first cover the largest companies and listed companies, but on average will also include smaller companies operating in supply chains.
Financing and development of businesses
ESG refers to three key areas for measuring the sustainability and social impact of companies: Environmental, Social and Governance. These criteria are used by investors to assess the responsibility and future risk of companies. This assessment has a direct bearing not only on investors’ decisions, but also on obtaining financing from financial market institutions.
Regulation (EU) 2020/852 of the European Parliament and of the Council, on establishing a framework to facilitate sustainable investments, commonly referred to as the Taxonomy, establishes criteria for determining whether an economic activity qualifies as environmentally sustainable. Among other things, the Taxonomy applies to financial market participants that provide financial products, such as banks. When providing financing for a particular investment, banks are required to examine how environmentally sustainable that investment is, and to condition the financing or the terms of their offer on this assessment. In this context, the effects of this regulation affect many companies, including those in the SME sector. The EU legislature aims to redirect capital toward sustainable investments, so if our company does not change its direction, it may have limited opportunities to finance this development.
Supply chain requirements
According to the legal definition in Article 3 of the CSDD (Directive of the European Parliament and of the Council on the Due Diligence of Undertakings for Sustainable Development), a value chain means the activities related to the production of goods or the provision of services by an enterprise, including the development of a product or service and the use and disposal of a product, as well as the related activities of an enterprise’s ongoing upstream and downstream business relationships. Increasingly, post-sale service and product returns and service are also included in the value chain. Value chain analysis helps find ways to reduce costs, optimize inputs, eliminate losses and increase profitability.
Companies subject to ESG reporting will verify their entire supply chain, and thus will require detailed information from their contractors and suppliers regarding the origin of the product or carbon footprint. In this way, regulations on ESG reporting obligations will indirectly cover the SME sector, despite the lack of regulations in this area. Requirements in this area have already been introduced by the largest players in the market, such as PKN Orlen.
“Green” public procurement
The introduction and fulfillment of ESG factors will also be crucial for companies seeking to implement public contracts, especially in construction and transportation. „Green” public procurement is intended to ensure protection of the environment, use of environmentally friendly technologies and adherence to social factors, while ensuring proper spending of public funds. Failure to implement the required standards, or failure to adhere to them, may result in the exclusion of a contractor from participation in the procurement procedure or a negative evaluation of its bid. More and more procurers are introducing „green” and „sustainable” requirements in their procurement terms and conditions. It is therefore in the interest of SME companies to comply with these requirements, as this is the only thing that will allow them to continue participating in public procurement.
ESG in your company
The implementation of ESG standards in a company should not be viewed as an unpleasant obligation and cost. On the contrary, it’s a huge opportunity to increase competitiveness, attract financing and counterparties, and grow in business. At ESG Compliance, we comprehensively implement sustainability and ESG standards in SME companies, and help identify the benefits of doing so, as well as the risks and dangers in failing to bring a company’s operations in line with these standards.
Katarzyna Hiller, Joanna Boroń
ESG Compliance
Expert team of the Chamber of Commerce and Industry in Katowice, composed of specialists from KBZ Żuradzki Barczyk & Wspólnicy and Żyglicka & Wspólnicy Law Firm.
The article appeared in the December issue of Business HUB magazine.
Downloadable online version of the latest issue (in polish version): HERE.