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Pavel Prokop | October 31, 2022

Lessons learned from previous ESG projects

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Over the past year, we at Grant Thornton have implemented several projects in the area of sustainable business, referred to as ESG projects for short. These included projects in the energy, water, waste management, land reclamation, real estate development, hotel, automotive manufacturing, and the financial sector. 

Most of this was preparation for the non-financial reporting in ESG areas. In several cases, we addressed the link to the climate plan of the City of Prague, calculation of the carbon footprint and the related carbon neutrality strategy. In the following paragraphs, I will try to share with you what the findings and experiences from these projects are. 

Companies wanted to implement ESG projects most frequently because they belong to a global group that has its own ESG policy and they want to implement its elements in the Czech Republic and report ESG indicators to headquarters. Another reason was the requirement when negotiating financing for investment and other projects, where banking institutions or investment groups and funds require sustainability information because they have to comply with the requirements of financial regulation in the area of sustainable finance. The third most frequent reason was a request from clients from either B2B or B2C environments. In this area, there is a clear trend towards increasing awareness of the environmental impacts associated with the production of a particular product or service.  

The level of ESG reporting is very varied on the Czech market. There are examples of very sophisticated and developed systems for tracking and reporting on a range of non-financial indicators for environmental, social and corporate governance. It is worth noting here the clear link with corporate social responsibility (CSR) programmes. With a little exaggeration, it can be said that companies that already have CSR programs in place and functional need little to formulate an overall business sustainability policy and extend CSR reports to ESG reports. 

However, we have also encountered cases, where ESG is only beginning, and in the project, we worked together with the client on the first paths for collecting non-financial indicators and creating the first formulations of a sustainability policy. In these cases, the approach of the management is crucial, if it sees the project as strategic, bringing new impulses, elements of differentiation, competitive advantage, or just regulatory, ensuring compliance with future EU legislation.  

Our approach to ESG projects is pragmatic. We base our long-term business sustainability policy on a cost benefit analysis, which includes both financial and non-financial benefits of ESG areas. We propose indicators not only with regard to best practice (GRI, SASB, CSRD), but we also recommend that indicators of non-financial areas have a real basis in managerial control.  

Our philosophy is that the basis of long-term sustainability is efficiency, i.e. reducing energy consumption, reducing emissions, immissions and waste, eliminating waste in manufacturing processes and administrative activities and, last but not least, reducing the production of unwanted products and the provision of inadequate services. It is clear that all these measures have a financial effect and being a sustainable and responsible company is economically worthwhile in the long run. It is undeniable that securing investment and operational financing is often a question of existence or non-existence of a company. ESG reporting is gradually becoming part of credit documentation and is beginning to have the same importance that financial statements and financial indicators have today.  

ESG risks and their impact on business are often discussed in connection with ESG. In particular, these are environmental and civilisation risks. Over the last 10 years, we have been through almost everything we can encounter in the Czech Republic. There were floods, flash floods, tornadoes and windstorms, widespread fires, unusual droughts and high temperatures, and water shortages. On top of that, we have experienced the impact of a global pandemic and now we are in the immediate impact of a war in close proximity.  

All risks can have a negative impact on the financial performance of an organisation. This is something that the financial sector is beginning to take more notice of, as it provides funds for investment and normal operational financing. As part of the lending process, our clients are beginning to encounter questions on non-financial areas such as carbon footprint, community engagement, NGO support, ethics and business transparency. A further impact of the risks can be seen in the quantification of the financial impact in the company’s financial statements. Preparation should be made to supplement accounting procedures by quantifying the financial impact of environmental risks on the company’s financial result.  

Large companies have far more resources (human and financial) to deal with this. What they need most is leadership that sees long-term sustainability as an integral part of their business strategy. It is quite a challenge for medium, small and possibly non-profit or public sector organisations to find additional resources for ESG risk management and non-financial reporting.  

We know from the experience of implemented projects that setting up a sustainability policy, calculating the direct carbon footprint, compiling a non-financial sustainability report, preparing initiatives to reduce environmental burdens, increasing employee engagement and meeting legislative requirements for transparent business is a 4-6-month job for 2-4 specialists, who are in close contact with top management. The implementation of individual initiatives then takes place over several years and needs to be managed as a programme to transform the company towards long-term sustainability. 

For small and medium-sized companies where the ESG agenda is not entrenched, this means either hiring new employees to handle ESG issues or working with reputable companies that have specialists, experience and examples from the given industry.  

We see corporate transformation programmes towards long-term sustainability as an opportunity for organisations to achieve long-term, stable and sustainable growth.

Author: Pavel Prokop