In recent years, the terms "sustainability" and "ESG" have been steadily making their way into the professionally oriented media. But what do they mean and why do they have particular implications for business in the transport sector?
One of the most popular definitions of sustainable development is development that “meets the needs of the present without compromising the ability of future generations to meet their own needs“1. In 2012, the United Nations Conference on Sustainable Development defined a set of seventeen goals to work towards in order to achieve sustainable development for humanity, including: alleviating poverty and hunger, raising education and health standards, achieving gender equality, sustainable economic development, preserving nature through environmental management and consumption.
While the concept of sustainable development has its own history and has been the topic of discussion and focused political debate for 50 years now, "ESG" is a relatively new notion, although it has its roots and foundation in the pursuit of sustainable social development. The acronym is interpreted as Environmental, Social and Corporate Governance and indicates three main areas of non-financial reporting for companies, finding its historical roots in the principles of socially responsible investment. In the past decade, consideration of these factors, along with financial disclosures about companies' performance, has emerged as an ongoing trend for determining business sustainability and justifying responsible investment decisions on both sides of the Atlantic – in the United States and the European Union, albeit pursuing different approaches to enforcing these principles.
Non-financial reporting is not completely unfamiliar to Bulgarian business. Under the provisions of the Public Offering of Securities Act (POSA), companies issuing securities have been obliged since as early as 2007 to report on their compliance with a corporate governance code. Since 2016, the Accountancy Act has extended this obligation by reference to POSA to certain public interest entities, including credit institutions, insurers and reinsurers.
Effective 2017, as a result of implementing the provisions of the Non-Financial Disclosure Directive, the Accountancy Act introduced a requirement for all public interest entities that are also large enterprises within the meaning of the Act and that have more than 500 employees to include in their management report a non-financial statement containing information on the company's policies, development, impact and performance in relation to environmental, social and employee issues, respect for human rights and fight against corruption.
Although the circle of obligated companies seems large because of the broad scope of the definition of a public interest entity, the threshold of 500 employees in the scale of the Bulgarian economy reduces this circle to an extremely small number of companies. However, this will soon change. The draft of the new Corporate Sustainability Reporting Directive, which has been intensively debated by the European Union institutions, is expected to be finally adopted by the end of this year and reporting under the new regime is expected to be launched as early as 2024 for activities in 2023, which means that obliged entities should start planning, monitoring and documenting their activities under the ESG criteria in less than 2 months. The new directive significantly expands the range of obliged entities, with the Institute of Certified Public Accountants in Bulgaria (ICPA) estimating that over 800 Bulgarian companies will be subject to this requirement2.
This additional obligation will obviously increase the administrative burden for a considerable number of companies. However, it is very important not to view ESG as synonymous with yet another compliance requirement and yet another folder on the desk of the compliance manager or the company's chief accountant. The implications are much more far-reaching and neglecting these issues could lead to significant problems for any company, not only those that, under the new directive and the related special regulations, will be required to include non-financial statements in their annual reports.
On the one hand, disclosure of ESG compliance can and increasingly will have an impact on companies' financing options. Some banks are already signaling that their future funding decisions will be heavily influenced by sustainability considerations. EU policies focus on sustainable funding as a means to promote and support the achievement of the Green Deal and the EU's climate and sustainability goals, which means that through policy implementation, ESG criteria will also play a pivotal role in private financing decisions.
Although the stock market in Bulgaria is not yet well developed, the impact that sustainability considerations will have on the decisions of investors in publicly traded companies is also important. At the beginning of August this year, the Bulgarian Stock Exchange announced that it would create an ESG index in which companies will be included on the basis of their sustainability performance rating. The rating will be based on an analysis of company data by a foreign company with experience in this field. However, it is not yet clear what the methodology for this analysis will be. As cited in a release published on the stock exchange website3, its CEO says the new index will be built on solid metrics that are recognized as global expertise and methodology and believes it will help Bulgarian public companies improve their ESG performance in line with global standards and allow them to contribute to Bulgaria's sustainable economic development.
However, it must also be taken into account that global experience and existing methodologies for measuring the sustainability of assets are very diverse and often conflicting. Each of the world's largest ESG rating providers applies its own methodology and algorithms to compile the scores and ratings, using dozens of metrics that include everything from climate change to environmental pollution and from product liability to tax transparency. The weighing of ratios between the E, S and G criteria also varies from rating to rating and does not always coincide with the specific interests of investors. This problem is acknowledged, and the International Organization of Securities Commissions recently published a report calling for greater transparency regarding the methodologies used in the ratings process.4 Therefore, both investors and evaluated companies need to be aware of these differences and variations in evaluation and keep in mind that not every element of ESG can be objectively measured and universally evaluated.
Furthermore, while even after the CSRD comes into force, by no means all companies will be directly obligated under the new regime, the need of those affected, i.e., larger companies, to address the associated risks will affect their smaller suppliers, service providers and all types of business partners with whose interactions obligated companies' disclosures may be impacted. This may and will influence obligated companies' decisions in selecting business partners, suppliers and subcontractors, and will result in additional requirements for all companies in the supply chain, regardless of their size and whether they have a non-financial reporting obligation.
The transport and logistics companies in Bulgaria that will be directly affected by the legal obligation for non-financial disclosure will not be a huge number, but they will not be few. More importantly, due to the nature of their business, which places them firmly in the supply chain of all industrial and consumer products, all transport and logistics companies will be at least indirectly affected, as contractors, sub-contractors and service providers to directly affected companies, resulting in pressure on them to comply with sustainability criteria.
This pressure will be in addition to the regulatory and institutional pressures the sector will face in the context of the Green Deal and the so-called "Fit for 55" package – a package of legislative measures to reduce greenhouse gas emissions by at least 55% by 2030. Among the European Union's sustainable transport policies are5:
- Reviewing the rules on road tolls for heavy goods vehicles and including a new scheme to tackle CO2 emissions to help reduce the sector's carbon footprint
- Introducing rules to curb CO2 emissions from passenger cars and light commercial vehicles, with the European Commission proposing to reduce emissions to 55% for cars and 50% for light commercial vehicles compared to 2021 levels, and to set a target of 100% for 2035 for both categories
- Emphasizing railway transport and promoting its further development, as well as a modal shift from high-carbon transport to railway transport, as an effective means to decarbonize transport
- Taking measures to reduce the environmental footprint of aviation through the use of different types of fuel, including sustainable ones, and through different levels of fuel consumption in the years to come. A proposal to review the EU Emissions Trading Scheme, including for aviation, is also under consideration.
- European Commission proposal on the use of renewable and low-carbon fuels in maritime transport, aiming to reduce the greenhouse gas intensity of energy used on board the ships by up to 75% by 2050 while promoting the use of cleaner fuels by vessels docking at EU ports
These ambitious goals of the European Union may prove even more ambitious from the point of view of Bulgarian business. The published National Recovery and Sustainability Plan points out that "the carbon intensity of the transport sector in the country is 3.5 times higher than the EU average, reaching 2.8 kg of greenhouse gases per €1 of gross value added in 2019" and that "the sector is one of the major greenhouse gas emitters and is associated with 26% of their total amount", making it necessary to intensify investment in sustainable transport to lower the sector's carbon footprint. The measures taken by the companies in the sector, respectively the lack of active measures in the direction of compliance with the mentioned policies and regulations, will certainly be a factor in assessing their sustainable development and compliance with the ESG criteria.
Lastly, due to the Green Deal and climate considerations most often used as promoters of the notion of 'sustainability', the general perception is that ESG is primarily about the environment, as a kind of 'green' compliance. This interpretation, apparently, has its grounds in relation to the transport sector, given its substantial "carbon footprint". This, however, may lead to underestimating the other two pillars and especially the social considerations, which could be equally challenging, especially in an economy that has been facing many difficulties for years and is heavily affected by the global challenges of the day. These considerations can affect a wide range of diverse aspects of a company's operations, including care for employees and compliance with labor and social security legislation, respect for human rights, relations with customers and consumers of the company's services, personal data protection and information security, impact of business operations on the social footprint and society, etc.
In conclusion, it is of utmost importance for all companies in the sector to undertake, as a matter of priority, a review and analysis of their activities, not only with regard to the thresholds and criteria for the application of non-financial reporting obligations, but also in the broader context of ESG criteria, because these will, in the very immediate future, in one way or another, have a significant impact on their business and their relations with all business partners, especially in the context of the European Union, and in the context of international transport in general.
1 In 1987, the United Nations-sponsored World Commission on Environment and Development, chaired by the Norwegian Prime Minister at the time, Gro Brundtland (known as the "Brundtland Commission"), published a report called "Our Common Future," which examined the causes of negative environmental impacts, the interrelationships between social justice, economic growth and environmental challenges, and proposed political solutions to address all three categories of problems. This report also contains the definition above.
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