While Environmental, Social and Governance (ESG) standards for measuring businesses’ impact on society and the environment is not an entirely new concept, there is no denying that this idea has grown exponentially in the past three years. Furthermore, it has already resulted in tangible steps evident in legislation imposing binding obligations on corporate actors regarding human rights and environmental standards, which have already been adopted in the United Kingdom, Australia, France, the Netherlands, Germany, and Norway. The future of business is embedded in ESG standards, and it is high time that Western Balkans takes notice. Greater awareness and engagement concerning these standards will be essential to increase trade, reduce unemployment, and enable participation in the global and European Union (EU) economies.

This article covers crucial information that businesses in the Western Balkans need to be aware of, including why investors care about ESG standards, how main economic partners of Western Balkans are already applying them when conducting business and examples of good and bad practices in this region. There is an urgent need to examine how ESG standards are operationalised in the Western Balkans. These jurisdictions face ongoing pressure to harmonise their respective legislation with the EU acquis. In addition, the recently adopted Green Agenda for the Western Balkans and the Carbon Border Adjustment Mechanism will significantly impact businesses in the region.

Due to high unemployment levels, attracting foreign investment has been prioritised as a matter of state policy. As a result, firms in the region stand to gain a lot from incorporating ESG standards into their commercial planning. Finally, the numerous examples of public scandals and challenges made on environmental and human rights grounds in the region serve as a stark reminder that insufficient attention to the potential negative impacts of business endeavours can result in social upheaval and political instability. At the same time, the presence of major multinational investors in the region who voluntarily subscribe to best practices and further EU-conditioned investment in the region opens the space for broader integration and implementation of sustainability principles.

Why do investors care about ESG factors?

More and more investors are considering non-financial, socially-conscious factors when screening potential investments in order to put their money where their values are. They are aware that by investing in a business, they also endorse its practices — for instance, how they treat their workers or use natural resources. In fact, multiple surveys show that more than 80% of investors are looking into the ESG standards of a company when considering potential investments. Furthermore, a growing body of research shows that sustainable investment funds, on average, over the long term, achieve comparable or even better financial returns than conventional investments. In short ― ESG Investing is here to stay.

“Stakeholder capitalism is all about delivering long-term, durable returns for shareholders. And transparency around your company’s planning for a net zero world is an important element of that. But it’s just one of many disclosures we and other investors ask companies to make. As stewards of our clients’ capital, we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies,” said Larry Fink, chairman and CEO of BlackRock.

Furthermore, the resemblance of the ESG factors to the United Nations’ Sustainable Development Goals (SDG), a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity, is no coincidence. Indeed, ESG is an integral part of SDGs ― that is, SDGs identify the objectives and ESG offers the methods and processes for achieving them. In other words, ESG promotes businesses’ role in overall global sustainable development and identifies contributing practices that companies can incorporate into their operations, products, and services.

Why are the EU’s regulatory activities important for the Western Balkans?

Time and time again, the European Union has proven to be the leading economic partner of the Western Balkans, considering both trade in goods and foreign direct investment. In 2021, the EU accounted for almost 70% of the region’s trade in goods and 61% of foreign direct investment stock in the Western Balkans. So, there is no doubt that all EU legislations are of considerable importance for Western Balkans, as they apply extraterritorially across value chains. This is an increasingly significant driver towards improved standards for firms in the Western Balkans that provide goods and services to EU consumers and commercial customers and their downstream supply chains. Furthermore, failure to stay up-to-speed with the demands of the regulatory environment may expose firms to regulatory enforcement risk as well as competition risk – being dropped as an EU firm’s regional supplier of choice in favour of a direct competitor.

On the 5th of January 2023, the EU’s Corporate Sustainability Reporting Directive came into force, further reiterating the EU’s stance concerning ESG standards. Member States will have 18 months to transpose the Directive into the national law requiring companies to publish detailed information on sustainability issues.

“”U law requires all large companies and all listed companies (except listed micro-enterprises) to disclose information on their risks and opportunities arising from social and environmental issues and on the impacts of their activities on people and the environment. This helps investors, civil society organisations, consumers and other stakeholders to evaluate the sustainability performance of companies, as part of the European green deal”” it was reported on their official website.

This Directive is undoubtedly relevant to companies based in Western Balkans. The Directive applies to companies registered in third countries whose turnover was generated in the EU. Although small and medium-sized enterprises are not in the direct scope of the Directive, they will nevertheless be covered by its scope if they do business with the companies it covers. As it is the duty of large companies to pass due diligence requirements through their value chain, small and medium-sized enterprises will certainly feel the burden and pressure to adapt and build their operational and financial capacity.

Socially (un)conscious business in Western Balkans

Attracting investment into Western Balkans is not the only factor making a case for the importance of ESG standards. Companies in this region also have an interest in improving their human rights performance for reputational reasons. There is considerable evidence of government policy prioritising investment over human rights and environmental standards, which has led to public scandals, such as at the Yura factory in Serbia, the Kruščica River hydroelectric dams in Bosnia and Herzegovina, the Buk Bijela dam on the river Drina in Bosnia and Herzegovina, violation of human rights by Teleperformance in Albania, informal and child labour in waste management industry in Kosovo and Geox factory in North Macedonia, which is accused of poor and exploitative labour conditions.

Despite these negative examples, it is important to note that several major companies in the region, including Telenor, Coca-Cola, Delhaize, Ball Packaging, Henkel, Michelin, and multiple regional banks, appear to subscribe to best practices in human rights standards in their policies. Their presence in the Western Balkans opens the space for a more comprehensive integration and implementation of human rights and environmental standards throughout the region and a shift of long-term priorities towards emphasising the importance and sustainability of investments.

Although regional governments still need to fully address the impact of business operations on human rights and the environment, recent initiatives illustrate their sharper focus on the area. Numerous reform processes are underway in the region, aimed at adapting legal frameworks per EU standards in this area. For example, the region has started engaging with this issue by introducing non-financial corporate reporting and considering social and environmental criteria when conducting public procurement exercises. Still, significantly more must be done to achieve a business and investment environment in which ‘do no significant harm’ will be a baseline standard. This will, in part, involve focusing on spheres of legal regulation traditionally perceived as neutral in matters of human rights protection, like public procurement, investment, tax law and corporate/company law.

Need more information?

In 2021, Sustineri Partners published the report Business, Human Rights, and the Environment ― The Future of Sustainable Business in the Western Balkans to help Western Balkans navigate an intricate and fast-emerging legal and regulatory field, explore strategic partnerships, and reap the available benefits. This report provides a broad overview of the business and human rights regulatory landscape – on an international, national, and Western Balkans regional level – and presents the business case for better compliance with corporate actors’actors’rights and environmental standards. It aims to broach this important subject with governments, businesses, and civil society in the Western Balkans region, considering the pressing need to engage with international sustainable business standards.

Furthermore, from 26th to 28th of April 2023, Western Balkans ESG Summit will take place in Montenegro. This is the first major regional event dedicated to Environmental, Social, and Governance topics, which will bring together regional and global government and business leaders and sustainability experts for a deep dive into the worldwide paradigm shift set to disrupt markets in South-East Europe.

Find out how you can join the Summit at: https://www.esgwesternbalkans.com/en/