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The ESG challenge is a drive towards innovation

This interview with Agnieszka Skorupinska first appeared in the Future of Emerging Europe: Sustainability Report 2022.  A copy of the full report is also available to access here.

The ESG challenge is a drive towards innovation

Due to a variety of historical factors, sustainability issues have constituted a significant challenge for the emerging Europe region. After the fall of the Berlin wall, the situation with respect to foremost environmental and social issues was difficult. The foregoing was especially apparent with respect to environmental matters as the preservation of the environment and its possible impact on human health was not a priority for the relevant authorities and business during the communist period. While there were many industrial plants in CEE at that time, their equipment was outdated and they were never seriously required to cut down their environmental impact. 

The situation in the region started to change rapidly in the 1990s when foreign investors entered CEE on a significant scale. This influx of funds provided opportunities that that would have been financially unfeasible during the communist era and promoted more sustainable and monitored industrial development. The changes were further accelerated after CEE countries were granted entry into the European Union, which had demanded laws relating to environmental, social and governance issues. The improvements were significant and in many cases completely new projects were initiated. As a result of these circumstances, the industrial sector within the CEE region is in many cases considered to be “state of the art”. 

In my opinion, the CEE region is noticeably serious about its sustainable future, as can be seen, for example, in the huge progress it has made with regard to ESG issues in recent years. A continuation of this current trend would certainly lend itself towards promoting this already encouraging track record. 

Furthermore, many businesses in the CEE region understand that developing and implementing sustainable practices in their organisational and operational model may help to bring them more work as well as make them more competitive in the global economy (especially through necessary innovation). An additional motivator for the adoption of commercially sustainable practices is that it is increasingly becoming a requirement with regards to participating in public tenders. In many cases, CEE countries host production plants for international corporations, which set very strict requirements with respect to sustainability. Consequently, these production plants are obliged to comply with, and attain these sustainability expectations. Thus, the concept that ESG is here to stay is increasingly noticeable and has become a presumption for many businesses in the CEE region. 

Environmental performance has been improved significantly since the 1990s. In many CEE countries energy issues have been managed in a more sustainable manner, including increased use of renewables, which is particularly true for businesses (e.g. though CPPAs). Likewise, on the social front, employment conditions have visibly improved over the years. Specifically, health and safety issues are generally much better organised and regulated. For larger enterprises, the application of regulated and supervised corporate governance rules is an obvious issue. 

Despite these encouraging advances, we need to remain aware of the fact that there are still many challenges on the road towards lasting and reliable sustainability. Challenges such as effective waste management and water management appear to still be a hurdle throughout CEE. Minimising and eventually eliminating the carbon footprint is also a significant challenge, especially in the context of ESG reporting requirements. Scope 3 emissions constitute a huge problem as the value chain is fragmented into smaller businesses that do not have the resources to deal with carbon calculations. 

Similarly, some sectors of businesses still lag behind on important health and safety issues (e.g. construction). Diversity and inclusion in the workplace and, in particular, at the management level is a considerable problem as is reflected by concerningly low diversity statistics. The percentage of women on management boards is particularly low. Significant change is necessary on this front and there is certainly room for improvement. Although the need to involve stakeholders results from EU legislation, CEE companies still have a great deal to do in this respect. 

The balance of sustainable practices with unavoidable social ramifications is an important feature of ESG that is particularly painful for the CEE region. The post-communist transformation, which in many ways mirrored the current ESG challenges, illustrated this point to the CEE countries very clearly. The efforts towards ESG transformation are certain to present similar challenges and concerns. The challenges associated with securing necessary energy resources are particularly apparent. 

For example, the EU Taxonomy did not initially recognise gas and nuclear as sustainable energy sources. We can understand the reasoning behind this, but the effect was to slow down the possibility of planning and implementing these transition projects in CEE countries. The foregoing issue can lead to lack of energy security in the region. 

However, ESG also brings opportunities. In particular, opportunities include the possibility of using EU funds for green transformation, which provides a chance to minimise associated negative impacts. Additionally, the ESG challenge is a drive towards innovation which is a great opportunity for the CEE region to develop further.

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