Positive Practices for Modern Business

Observing and monitoring the global ESG landscape from the Czech Republic, it is evident that ESG integration and commercial ESG commitment have a certain time-lag in the Czech Republic compared to, say, the UK, US, or key Western European economies. The reasons for this are multi-fold. Nevertheless, the ESG development lag is not uniform across the Czech business sector, there are examples of star “early ESG adopters”, and, in many cases, particularly for those companies not yet faced with mandatory reporting under the Corporate Sustainability Reporting Directive (CSRD), sustainability has been enthusiastically embraced, whilst the full spectrum of ESG is not yet always fully understood.

Historical context and contemporary developments

The Czech Republic has historically been a centre of heavy industry and in the initial years of the transition from a state-run economy to a market economy, over three decades ago, this continued, along with a reliance on fossil fuels, whilst the country went through an extensive privatisation process. Nevertheless, in recent years environmental issues and a green sustainability agenda have become common parlance within government and in industry and business, even if it, collectively, has not had an ESG label attached to it. Ironically, perhaps a “positive” legacy of the former regime in ESG terms may be the fact that labour law and workplace, anti-discrimination regulatory matters in the Czech Republic are very pro-employee, supported by numerous court rulings, and there is a long tradition of women in leadership roles. Thus, one could say that the “social” aspect of ESG is already well taken care of to a large extent. One exception to this, however, is the “Diversity and Inclusion” aspect, which is a relatively new concept for not just the Czech Republic, but likely other Central European countries also. In a more or less culturally homogenous environment, the issue of how to deal with so-called diversity targets (which are sometimes expected of clients by their global business partners) is something for which a solution and strategy still needs to be worked out.

Understanding ESG in a Czech business context

There is a general historical Czech tendency to be sceptical about imposed changes, with EU legislation often perceived as a burden. Nevertheless, many companies are unaware that in many respects, they may already be addressing various ESG requirements, particularly if they have previously been active in green/recycling issues, CSR community involvement, and fostering a positive workplace culture. However, there is a growing realisation that early adoption of ESG and alignment with global standards of business partners will bring new opportunities (not just risk or compliance) to Czech industrial exporters. With the potential for decline in certain Eastern markets due to geopolitical events, companies whose products and processes do not meet global ESG standards will face problems in trying to shift their exports to more developed countries that demand ESG compliance.

In many contexts, ESG principles are already embedded within Czech business and the legal framework, they are just not labelled as ESG and it is often enlightening to point this out to clients who may otherwise feel overwhelmed by “yet another compliance issue”. As a key example, the concept of sustainability is a desired principle and frequently used term in not just global but also Czech business. Pursuant to Czech corporate law, a business manager or company director is required to base their decisions on the standard of care of “a prudent business person”, using all available information and always acting in the company’s interest. In 21st century Europe, it cannot be disputed that sustainability would be a core issue for such a prudent business person. Corporate decision making that does not factor in ESG is not consistent with this principle.

Differing perceptions and the role of big players

Within the Czech business community, views on ESG can often be divided along the lines of small or medium-sized owner-operated companies and large Czech companies with a global outreach.

Leaders in sustainability and ESG on the Czech market are generally so far mainly large companies that can dedicate entire teams of people to this sector and either already face mandatory reporting or will do so in the near future. For example, the energy giant CEZ Group’s Sustainability Report 2022 is a detailed overview of activities and monitored parameters in the areas of environmental protection, social and employment issues, respect for human rights, and the fight against corruption. In total, the report contains over 200 different data points and more than 100 people across the CEZ Group worked on it.

Smaller companies with fewer human resources can easily feel overwhelmed by what they feel is an impending tsunami of additional compliance issues, yet, as noted above, many smaller businesses already follow ESG principles without knowing it, in terms of waste minimisation, recycling, gender balance, etc. Attitudes to ESG on a corporate level may well be determined by whether business leaders can identify business opportunities and competitive advantages in a pro-ESG approach or merely delegate it to an unhappy and already over-worked compliance officer.

Nevertheless, in a recent survey conducted by the Czech Confederation of Industry and Transport, 87% of Czech SMEs confirmed they are addressing the issue of sustainability within their companies and more than half of the companies perceive sustainability to be very important in terms of competitiveness. The most important sustainability goals for Czech businesses were seen as being the reduction of energy consumption, introducing renewable energy sources, and reducing carbon footprints.

Motivation to adopt ESG principles on a voluntary basis

If we leave aside large Czech industrial giants or Czech subsidiaries of global corporate groups who are compelled to implement ESG programmes as part of the global group strategy, there are a variety of factors that currently motivate Czech companies, particularly SMEs, to embrace ESG on a voluntary/self-regulatory basis.

The survey noted above additionally asked Czech SMEs what motivated them to focus on sustainability-related topics. The findings were as follows:

• 61% of SMEs stated their motivation was the company’s own sustainability convictions;
• 41% wanted to increase their attractiveness to customers and business partners;
• 41% saw sustainability as a way to improve competitiveness and cost containment;
• for 41% parent company policy was a factor;
• 41% were motivated by new EU and other regulations;
• 30% wanted to take a bet on new business opportunities;
• 20% considered their supply chain involvement to be a motivating factor;
• another 18% felt pressure from investors and financial institutions to be sustainable; and
• 7% felt sustainability pressure from employees.

Thus we can see that although many companies have yet to fall within mandatory reporting requirements in accordance with the requirements of CSRD, companies are increasingly confronting ESG requirements or expectations from clients, business partners, or the younger generation of employees and graduates. This in itself demonstrates the unique nature of ESG, in that companies are encountering requirements stemming firstly from the market and only later from the regulatory arm of the EU.

A specific example is green financing, where loan applicants are already required to demonstrate their ESG credentials, even if they may not be legally obligated to do so on a domestic or EU level. Banks, financial institutions, and funds require sustainability information from clients because they have to comply with financial regulation requirements in the area of sustainable financing. Additionally, with Germany being the largest trading partner of the Czech Republic, we expect to see increasing demands from German business partners to their Czech suppliers to provide evidence of ESG verification of their supply chain and carbon footprint. This is particularly relevant with German business partners as Germany’s supply chain due diligence act is already in force since January 2023 and thus through potential contractual requirements with business partners, this will impact Czech suppliers even if they are not directly subject to governance by the German legislation.

One motivation for self-regulation in ESG in the Czech Republic is for employers seeking to recruit young graduates and ensure their workplace remains appealing to long-term employees as a means of retention. It has been perhaps even a surprise to what extent young Czech graduates and students now vigorously engage in an evaluation of future employers on the basis of “Would I actually want to work there, on an ethical level?”.

In addition, we anticipate an increase in focus and demand for specific ESG operational due diligence both within supply chains of which Czech producers are a part, due to the impact of the draft Corporate Sustainability Due Diligence Directive, but also within Czech companies themselves, as a means of orienting themselves on an ESG pathway, as a first step to preparation for reporting.

Comparative analysis – Czech views vs global business views on climate change

Czech companies are considerably more sceptical about climate change efforts compared to global firms. This view may be influenced by the fact that Czech industry is among the EU’s most energy intensive sectors and has a historical reliance on cheap energy. According to the 2023 EY Global Sustainability Value survey, Czech companies have only reduced emissions by 19%, whereas global companies have managed 28%. The primary driver for Czech companies in reducing emissions is the need to comply with regulations (69%) as opposed to just 47% for global counterparts.

Only 12% of Czech companies believe in limiting global temperature rise to 1.5 degrees, and just 6% think the world will achieve zero emissions by 2050. In comparison, 65% and 69% of global companies hold these beliefs respectively. Over half (53%) of Czech companies fear climate measures will impact their operations or financial performance, while only 36% of global companies share this concern. Additionally, only 22% of Czech companies believe their government provides adequate support for climate solutions, contrasting sharply with 67% of global firms.

Legislation and regulatory framework

The slower adoption of ESG in the Czech Republic can also be attributed to the lack of targeted ESG domestic regulation, in comparison to jurisdictions such as Germany or France. Although as we note above, there is strong embrace of addressing sustainability on a corporate level, there is a general feeling that the impact of the various EU directives (many of which are still in mere proposal stage) will not be felt for several years at least, and CSRD is seen as targeted for large companies only in the short to medium term. Even with news reporting and institutional discussion on CSRD and non-financial reporting, the Corporate Sustainability Due Diligence Directive (CSDDD) and the proposed Green Claims directive, just to name a few, from the viewpoint of Czech companies there is often a distinct feeling that these are all future obligations that are really not urgent right now. We can compare, for example, to the situation in France and Germany, with each jurisdiction now having currently active domestic legislation for supply chain/human rights due diligence. Having said that, there are already a number of regulations setting forth the framework for biodiversity protection, circular economy, clean air and creating water resources, employee protection, non-discrimination and gender equality, and protection of whistle-blowers.

Impact of ESG on investment

Although currently many investors are not solely driven by ESG, there has been a discernible shift in sustainable aspects of investments in cross-border deals with international investors, particularly amongst specialised funds. Moreover, with much variation in the adoption of ESG both regionally and globally, private equity fund investors in particular are sensitive to ESG and are making ESG due diligence a strategic desired add-on in order to evaluate mutual compatibility and risk between the target and the acquiring corporate group.

The introduction by the Prague Stock Exchange (PSE) of its first ESG reporting guidelines for Czech companies, developed with the technical assistance of the European Bank for Reconstruction and Development (EBRD), indicates an evolving Czech regulatory landscape and this has further raised awareness in the business community.

The PSE Guidelines are a timely response to the growing global demand for consistent and comparable corporate ESG data. The disclosure of sustainability-related information has become an essential tool for measuring how companies manage sustainability-related risks and opportunities. The PSE Guidelines aim to provide issuers with clarity on how to approach ESG reporting in respect of investors’ growing expectations and emerging regulatory developments in the EU as well as investors’ increasing expectations. The PSE guidelines are the first EBRD-supported guidelines to take into account the latest EU sustainable finance regulatory requirements and the Stock Exchange is also preparing seminars for listed companies to make the implementation of reporting as smooth as possible. European markets are witnessing increasing pressure to implement ESG criteria in investment strategies and the Czech Republic is no exception. To summarise, this document is a tangible ESG implementation tool for Czech companies, as non-financial reporting is a key pathway for all companies to have a roadmap to work towards the Sustainable Development Goals in the UN Global Compact.

Conclusion

In the evolving and divergent landscape of European ESG standards, the Czech Republic presents a unique juxtaposition of historical industrial resilience and a rapidly emerging consciousness towards sustainability in all aspects of business. While there is some apparent time lag in Czech ESG integration compared to Western European counterparts, there is undeniable momentum and evolution in the Czech ESG landscape, not only amongst the major corporate giants, but also amongst companies positioning for competitive advantage in international markets or seeking opportunities to “materialise” sustainability domestically. Specific areas where ESG opportunities might be materialised are innovation, access to capital, risk management, employee engagement, and reputation enhancement.

The challenge for lawyers is to encourage clients to understand that ESG adaptation and the procedural and operational implications of the EU ESG directives, is a massive undertaking, not to be underestimated and requires a possibly yet un-encountered holistic and multidimensional business process. Such adaptation will take considerable time in preparation, due to the broad impact of ESG on a company’s entire business and cannot be left for several years in the future. As some commentators have said, ESG is the new GDPR in terms of scope and need to prepare, but not all companies have yet realised the enormity of the process.