Companies in Romania are starting to implement ESG strategies, but are only slightly aware of reporting requirements and standards. How can they prevent problems?

Reduced investment and financing opportunities, a reduced ability to successfully close a deal, loss of customers or even management liability are just some of the problems that companies could face without a proper ESG strategy.

According to a survey conducted by PwC Romania in the webinar Taxation, a core component of ESG reporting, only 30% of responding companies say they have ESG policies/sustainability standards in place, and two thirds (63%) say they are familiar with them to a limited extent. Asked whether the organisations they work for will include standards related to fiscal policies in their ESG strategy, 26% of respondents said yes, 5% said no and 68% said they do not/do not have or are not aware of implementing such a strategy.

Anda Rojanschi, Partner D&B David and Baias

The concept of ESG brings a change of vision on the role and purpose of a company. We are moving from a short-term vision of maximum and immediate profit to a medium and long term vision. We are now talking about sustainable profit and about the obligation of a company to consider the medium and long-term impact of its activity on its stakeholders (e.g. employees), the environment and the community in which it operates. Henry Ford said 100 years ago that two of the most important assets of a company, reputation, and people, are not to be found on the balance sheet. Today, ESG standards are here to measure these intangibles. The current trend is towards standardisation and uniformity of ESG rules because it is important to have fair competition, a market in which companies have the same obligations and conditionalities and the same chance of making a sustainable profit.

Ana Maria Iordache, Partner D&B David and Baias

As early as 2017, at the European level and subsequently at the national level, regulations have been adopted obliging large companies, with more than 500 employees, to draw up a non-financial statement. After 3 years of non-financial reporting and a series of analyses on its effectiveness it was concluded that it did not achieve its objective, being understood, and implemented only as a compliance obligation. For this reason, at the European level, the decision was taken to act on two legislative fronts aimed at bringing about a change of mindset in terms of a more transparent and sustainable way of doing business. On the one hand, there is the Taxonomy Regulation, which is already in force and which imposes a number of obligations as of this year. On the other hand, for financial market players there is the regulation on disclosure of information on sustainable finance. Both pieces of legislation are intended to encourage and, above all, to finance sustainable investments. For the other sectors of activity, there is a desire to rethink the non-financial reporting system. In this respect, we have a proposal for a directive - the CSDR (Corporate Social Responsibility Directive) - which introduces two extremely important new elements: the extension of the companies obliged to file a non-financial declaration and auditing based on ESG criteria. Therefore, companies that meet 2 of the 3 criteria set out in the CSDR Directive (as it appears in its current legislative proposal), i.e. have more than 250 employees, more than €40 million turnover, or more than €20 million total assets, will be subject to ESG auditing. Some of the requirements imposed by the Taxonomy Regulation and those proposed by the CSDR Directive have already been implemented at national level through Order 1802/2014 for the approval of the Accounting Regulations on the individual annual financial statements and consolidated annual financial statements, which was amended at the end of last year and which already requires that ESG criteria be taken into account in the non-financial statement. In addition, a new development at national level is that the Romanian Sustainability Code is being drafted and is about to be adopted, which will bring a number of additional obligations and recommendations both on the environmental and social and governance factors. As a result, given the increased interest in this area and the clear intentions of extensive regulation of ESG rules at both European and national level, I believe it is already time to prepare for a change of mindset in the way we run our businesses, to pay more attention to environmental, social and governance factors, to review the strategy, policies and procedures by which the business is run and to update them by including ESG criteria. Only in this way will we be able to keep pace with the new ESG paradigm, based on three essential pillars - transparency, accountability and sustainability, and only by implementing these three pillars in the way we operate will we be able to meet consumer needs, maintain competitive advantages and meet the audit obligation.

Daniela Dinu, Director PwC Romania

Taxation has not been at the centre of discussions on environmental, sustainability and governance policies from the beginning, but this has changed significantly in recent years. This has happened, on the one hand, against the background of increased public spending and deficits generated by the Covid pandemic which has led governments to adopt a multitude of green measures. And on the other hand, there is a great deal of attention being paid to the morality and fairness of the taxes paid by a company. We see that sustainability standards extend into the tax area, and taxes speak to the integrity of a company and how it contributes to the well-being of the economy in which it operates. 

The most obvious warning signals are coming from investors, who are now looking very closely at ESG objectives when basing their financing/investment decisions, but also from consumers, who have begun to penalise behaviour that is not aligned with sustainability policies.

Therefore, the company's executive management must ensure this alignment with ESG standards, not as an obligation to be fulfilled, but as an absolutely necessary step to ensure the fastest possible transition to a green, social and well-governed economy.

Carmen Dan, Manager PwC Romania

The environment is a very important component of the ESG concept, both in terms of environmental protection aspects and the fees owed by economic operators to environmental authorities. Even if the environmental issues that are managed by a company in its daily activity are not a new and recently legislated concept, it is now time to address them in a broader and coherent context - framework, together with the social and governance component.

In short, the letter E as part of the ESG concept refers to the impact that a company's activity can have on the environment and its ability to manage various environmental risks.

General indicators that can be used to quantify environmental impacts could be the following:

●       Greenhouse gas emissions and climate change

●       Percentage reduction in energy use

●       Amount of hazardous waste generated from an activity

●       Ratio of waste generated to waste recycled, etc.

The main environmental areas to be analysed in terms of potential business impact would be greenhouse gas emissions, energy efficiency, waste management, management of toxic and hazardous substances, biodiversity issues, etc. Waste management is one of the core components in a company's ESG strategy. Waste management is constantly evolving in the light of European legislation, the circular economy and the ESG strategy.

Ovidiu Bold, Managing Associate D&B David and Baias

Many companies are part of multinational groups and choose to take over procedures and policies from the parent company. However, it is very important to check, review and adapt the group's policies from the perspective of local rules, because it sometimes happens that Romania transposes various European directives or acts in a slightly particular way. For example, the draft law on the whistle-blower issue brings a somewhat more rigid, formalistic approach, compared to the directive which is much broader and more permissive.

There will be a need for a clear allocation of tasks between the different corporate bodies: AGM, directors or managers, establishment of specialised committees, audit, nomination, remuneration. In more advanced countries there is already talk of ESG committees to monitor the extent to which the company meets its ESG obligations. 

Another principle of sound corporate governance is a sustainable remuneration policy at board and director level, malus or clawback criteria and (as a best practice) performance indicators from an ESG perspective. Another aspect would be to align the internal framework with ESG principles and create a framework for dialogue with external stakeholders: employees, NGOs or local communities.

Also topical is the subject of independent directors, which goes hand in hand with specialised committees and refers to the need for a balanced and critical view of how a company is run. As the legal framework evolves and these ESG issues, and in particular governance, become mandatory, we will see more and more cases of liability, especially at director level. We expect to see more case law on the liability of directors in terms of their generic obligations under company law: duty of care, duty of diligence and duty of loyalty to the company. So we need to plan now how we organise and arrange the corporate governance of the company in order to prevent or at least limit any such cases of liability at management level.

Adina Oprea, Managing Associate D&B David and Baias

The ESG reality also makes its presence felt in transactions, whether we are talking about classic M&A transactions, bank financing or stock exchange listings. It is clear that ESG is becoming a priority on investors' agendas. They are and will increasingly focus on checking how ESG criteria are implemented, they will focus on the ESG scoring that different target companies have and they will want to see proactivity from companies in terms of incorporating ESG criteria into their business strategy. In this context, it becomes essential for companies to demonstrate a balance between societal-economic interest and interest or concern for society at large. Companies that are able to demonstrate this balance and adapt to the ESG reality as quickly as possible will clearly gain a competitive advantage and thus increase their chances of obtaining financing or closing a deal more easily. We are thus talking about specific services that arise in the context of transactions: ESG questionnaires, ESG-specific due diligence analysis, new services that will be tools to reflect ESG risks subsequently identified in transaction documents.