Over the past few years, the phenomenon of ESG has grown in importance at a breathtaking speed. Originally an instrument in the financial markets allowing investors to better assess the risks in their investments, ESG has further evolved into a major legislative effort of the European Union.
In countries with significant financial markets, ESG has become the market standard in recent years. In Central Europe, where financial markets are less developed and where less emphasis is placed on sustainability by society and politics, the focus has lied elsewhere. In any case, this appears to be changing. Nowadays, we observe a substantially increased interest in ESG matters, be it from our clients, the public, newspapers, or social networks. ESG is the new thing everybody focuses on.
Why has Central Europe been lagging behind? There seems to be no simple answer to this complex question. In the case of the former Eastern Bloc countries with centrally planned economies and state-owned means of production, the adaptation to the so-called “capitalist” economy was certainly a challenge, as privatizations were often executed inefficiently. This single challenge may have put Central European countries behind in all of the ESG categories, perhaps with the exception of social matters – which may be the legacy of socialist labor codes. Other factors that may have delayed ESG development include the reliance on heavy industry, fossil fuels dependency, and inability to conduct reforms. These issues, however, appear to finally have been overcome.
As to the development of ESG in the Czech Republic, there is a significant increase in the number of companies and businesses focusing on the environment. The media coverage of ESG has also increased. Only in July 2022, dozens of ESG seminars and conferences took place. These conferences help explain to Czech businessmen that ESG is not just another piece of legislation. Czech people are generally very skeptical when it comes to change. EU legislation is often understood as a complication to businesses. In our practice, we often hear clients complain that legislation is too complicated and wonder who will benefit from it or how it is going to help them. This last question is the most important one in our view. In the case of ESG, the answer is: “ESG may save your business.”
ESG is often misunderstood. We try to explain to our clients that it is not just a new piece of legislation. Companies do not understand that, in many ways, they already comply with ESG requirements. Industry is the backbone of the Czech economy. Many industrial producers have focused on the eastern markets for their exports. These markets have now collapsed due to the war in Ukraine and the growing skepticism towards China. These companies need to export to more developed countries, which in turn requires a product that is ESG-compatible. Without ESG compatibility in production and a high quality of their products, traditional Czech companies may face difficulties in their business undertakings. Such changes are beneficial and offer new opportunities. And this is particularly true for Czech companies.
Another argument often used in the Czech Republic is that ESG is just another expense to the company. This is simply not correct. Currently, we have seen several studies showing that ESG-compliant companies generate more profit, are healthier in the long term, and investors are keener on providing them with their funds and support. The European Commission also made it very clear that it would provide generous funds to support its carbon-neutral policies and industrial reform.
To conclude, our current experience proves that ESG has arrived in the Czech Republic. The business judgment rule requires decision makers in the companies to base their decisions on all information available and to always decide and act for the benefit of the company. Decisions that do not take ESG into account do not comply with the business judgment rule. ESG is part of the duty of care of a manager towards their company. ESG is already implemented in several pieces of legislation (e.g., the Accounting Act, the Act on Public Procurement). ESG is here to stay – and we are ready for it.
Marek Prochazka, Partner and Head of ESG, and Jaroslav Seborsky, Associate, PRK Partners
This Article was originally published in Issue 9.7 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
