Top ESG trends for CEOs in CEE

Top ESG trends for CEOs in CEE

Just before the war in Ukraine started and the path we were on radically shifted, we published the 25th Annual Global CEO Survey. Its findings showed that leaders across the region are thinking more and more about ESG commitments and catching up with their global counterparts. The latest events are expected to further accelerate the focus on energy transition and responsible business conduct, at least in the mid- to long-term horizon. CEOs already recognise climate change as one of the biggest threats to business growth over the next year but the risks will be even greater going forward as we will need to rapidly reconsider and restructure our energy framework and global interconnectedness.

While there is a clear positive trend, a lot remains to be done to accelerate commitments and turn them into action.So why should CEOs act now and what key trends should be on their radar this year?

Four trends for ESG in 2022

1. Evolving regulations?

An important engine driving ESG transformation is the new or shortly upcoming legislation. A case in point – The EU Green Deal and the objectives to cut emissions by at least 55% by 2030 and achieve climate neutrality by 2050. The EU is implementing new green policies to encourage a switch to cleaner energy, more sustainable industry and greener habits, introducing market measures, carbon pricing, standards, green targets, bans and phase-outs affecting all businesses in the EU.?

New regulations are also coming into play to increase transparency in green action, avoid greenwashing and drive capital towards investments supporting sustainable growth, such as EU Taxonomy, Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation (SFDR) and various amendments to the Delegated Acts, with the first changes already affecting the 2022 reporting period.?

This new regulatory push is likely to spill over the EU borders. Global and regional interconnectedness of the supply chains and economic ties will be the main levers and our 2021 global survey shows that manufacturers are already taking steps to measure ESG elements in their operations.

CEOs across CEE should assess the impacts of the new regulations on their business and prepare for the new requirements - to address threats and opportunities arising with green transition and also to be prepared to present their activities in the sustainability context.

2. Climate: net zero and energy transition?

COP26 already demonstrated that reducing emissions is at the top of the global agenda. 130 countries have now set or are considering setting a target for reducing emissions to net zero by 2050. Together with Race to Zero, a coalition of net zero initiatives including 5,235 businesses, 441 of the biggest investors, they cover nearly 25% of global CO2 emissions and over 50% GDP.??

Following the war in Ukraine and sanctions imposed on Russia, Europe is looking to secure its independence from Russian fossil fuels before 2030. The RePower Europe plan adopted in March aims to strengthen the pan-European energy system, decrease our dependence on Russian gas, oil and hard coal, and ensure affordable, safe and sustainable energy.

Investors are recognizing an opportunity in the climate transition. 2021 has been a record year for green finance, with over $350bn green bonds issued and a first annual trillion expected in 2023. This is also an opportunity to innovate, and investment in climate tech reaching record US$87bn between 2020 and 2021, a 210% increase compared to the previous year. To give scale and perspective: climate tech now accounts for 14 cents of every venture capital dollar.?

Calls for action on decarbonisation are getting louder and the level of scrutiny is increasing and translating into growing expectations from stakeholders - not only from regulators and investors, but also consumers and employees. As our recent survey shows, 80% of consumers think companies should be actively standing up for the environment and 86% of employees prefer to support or work for companies that care about the same issues they do. ?Net zero is effectively becoming a corporate reputational marker, so commitments need to be followed by concrete actions.?

While it is promising that the percentage of CEOs in CEE that have made a carbon-neutral commitment this year exactly matches the global figure, at 26%, still, the numbers are quite low. More needs to be done to raise awareness of the role businesses play in producing emissions, even if their carbon footprint is not obvious at the first glance. Additionally, when we look closer at the businesses who have made a decarbonisation commitment in CEE, leaders were less likely to adapt science-based targets, and they are less likely to link non-financial results to their own reward packages than their global counterparts.?

Decarbonisation efforts are becoming more urgent both from a trust and legislative perspective. As the scrutiny is growing and new regulations are coming into place, this is becoming a matter of protecting their business value. On the upside, the transition presents value creation opportunities - innovating and responding to new demand.

3. The rise of the ‘S’ factor

Previously, the focus on ESG has landed mostly on the environmental factor. But social risk management and supply chain traceability are stepping to the forefront. There are movements towards mandatory human rights due diligence on national level leading a number of companies to identify and act against human rights violations in their supply chains. Recently published European Commission’s proposal for a Directive on Corporate Sustainability Due Diligence aims to foster sustainable and responsible corporate behaviour throughout global value chains, ensuring more effective protection of human rights included in international conventions.

So when it comes to adding social initiatives into a business strategy, how are CEE business leaders faring? In the 25th Annual Global CEO Survey, regional CEOs match or even exceed global counterparts for adding non-financial outcomes like “Customer satisfaction metrics”, “Employee engagement metrics” into their long-term strategy. On the other hand, relatively fewer in CEE reported that their long term company strategy is linked to the emerging non-financial related outcomes of “Gender representation rates”, and “Race and ethnicity representation rates”. The same is true for their global counterparts. This opens up a field of opportunities for improvements. Inclusion of a comprehensive set of S metrics can help CEOs better evaluate and measure the risks while making disclosures more useful and implementable, contributing to both reputational and recruiting attractiveness of their companies.

4. Engagement of the private sector: corporates pushing corporates?

The ESG agenda is gaining momentum and the growing number of commitments from the private sector reflect that. Apart from the Race to Zero campaign mentioned above, more than 2,000 companies worldwide have already set emission reduction targets through the Science Based Targets initiative (SBTi). While the Glasgow Finance Alliance for Net Zero (GFANZ), launched in April last year, has represented over $130 trillion of private capital from 450 private companies across 45 countries to transform the economy for net zero - able to deliver the estimated $100 trillion of finance needed over the next three decades.

And companies do not exist in bubbles. In fact, they are increasingly interdependent. Which means that a company’s commitment to net zero does trigger an emission pressure down its supply chain. At the same time, the investors and financiers need to green their portfolio - preferably not through divestment but by supporting responsible transition for key industries and assets. Our PwC survey shows that 72% of investors screen target companies for ESG risks and opportunities at the pre-acquisition stage. While 82% say that corporate leadership needs to weave ESG into business strategy.

Private sector commitments are therefore translated into pressure on business partners up- and downstream with no sign of abating. For many businesses in CEE, actions on ESG will be crucial to maintain business relationships and secure a place in global supply chains. Firmer steps will need to be taken towards communicating priorities and agendas with stakeholders inside and outside their organisations and working together in translating those into tangible actions.?

The next step

The ESG era is now – yes, the war in Ukraine created additional challenges the businesses are facing but if anything, it has upped the game in net zero transition.? The trends combined make a strong business case for increased action. So where to start?

There are two things to consider from the get-go: where can you make the most impact and how ambitious you want to be. Next you will need to define an ESG baseline - identify and assess ESG maturity and gaps. This will set the foundation for your ESG strategy and KPIs to drive ESG action, leading to real business transformation - make the right impact, for the right people, and create long term value. Of course, just setting a strategy and KPIs is not enough, the key is implementation and progress tracking and then - communication to key stakeholders: a comprehensive and transparent ESG reporting.

With more emphasis on realising their ESG commitments, business leaders in the region will be able to better face global challenges and net zero. But for real and tangible actions it will be necessary to also improve their flexibility and agility when it comes to feeding commitments into their company’s long term strategy.