Due to the growing number of requirements of the European Union and other important economic partners of Southeast Europe concerning climate change and human rights, regional lawyers are emerging as key players who are helping businesses prepare for and implement standards that aim to positively impact the environment and society and ensure good governance (ESG). Gecić Law, a renowned law firm widely recognized for its EU law practice, is one of the first in the region to provide companies and other legal entities with legal support and advice for the practical application of ESG principles and is one of the few law firms that have rich experience and expertise needed to advise both the public and private sectors on this very particular and complex group of issues.
We spoke with Hristina Kosec, partner and head of operations of Gecić Law, about what Western Balkan businesses and other actors need to know about ESG standards, including EU and global regulations and upcoming trends.
Why does this region need to pay closer attention to the growing importance of ESG standards?
Kosec: Compliance with ESG principles is increasingly moving into the normative area. What used to be nice to have today is increasingly mandatory. ESG standards are about more than good public relations but the fundamental long-term strategic changes for successful growth and development. While key trading partners are introducing ESG standards into their legislation, it is time for the Western Balkans to catch up with these processes and thus ensure global competitiveness for its goods and services. Implementing ESG criteria is a legal and factual reality, significantly impacting business organizations and society.
What are the key ESG regulations in the EU and how do they affect business in Southeast Europe?
Kosec: I must first emphasize the latest legislative game-changer in the global climate battle and the world’s first Carbon Border Adjustment Mechanism (CBAM), dubbed the EU’s carbon import tax, recently adopted by the EU Parliament along with several other critical pieces of legislation, including the revised EU’s Emissions Trading System (EU ETS) and the new Social Climate Fund (SCF), all a vital part of the EU’s Fit for 55 legislative package, designed to help the bloc cut greenhouse-gas emissions by 55 percent by 2030 against a 1990 baseline. Our firm has been very active in this area from the onset and is helping public and private sector entities navigate through the implications.
The CBAM complements the EU Emissions Trading System (ETS), addressing the phenomenon of “carbon leakage.” Together, these systems aim to foster competition and establish a “polluter pays” principle across the board. The CBAM aims to prevent companies from moving production to countries with less stringent green policies, to help level the playing field and encourage non-EU countries to increase their climate ambition. This legislation will significantly impact businesses and economies across the world, including the Western Balkans, as more than 80% of the region’s exports go to the EU, and the region is exposed in the affected industries, including iron and steel, cement, fertilizers, aluminum, electricity, hydrogen, and precursors. Unless adequate measures are introduced, the levy may affect the competitiveness of Western Balkans businesses and economies in the EU market.
Other key ESG regulations in the EU are the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD), and the EU Taxonomy Regulation. Other directives and regulations are currently in the proposal or implementation phase and are expected to come into force soon. These include the Corporate Sustainability Due Diligence Directive, the Green Claims Directive, and others.
The CSRD requires companies to provide reliable, accurate, and comparable information on sustainability. This directive will replace the current Non-Financial Reporting Directive (NFRD) and aims to improve the quality and comparability of sustainability reporting and ensure investors and stakeholders have access to reliable and transparent information on a company's sustainability performance. The CSRD will be implemented in several stages, starting from January 1, 2024, and will apply to companies in various business sectors depending on their size and whether NFRD already covers them.
SFDR requires financial firms, advisers, and service providers to communicate sustainability risks and data relevant transparently and accurately to investors. SFDR applies to all investment management firms and advisers in the EU, including asset managers, banks, and insurance companies. The mentioned entities are obliged to publish the prescribed information annually. This regulation also includes certain firms outside the EU that operate in the EU single market. The objectives of SFDR are to identify market and sustainability risks and establish whether ESG risks are considered in the investment decision-making process.
The EU Taxonomy Regulation aims to combat climate change and support sustainable financing and innovation. It applies to companies and other entities required to report under the SFDR and CSRD. The taxonomy covers 13 sectors, including environmental protection, production, energy, and transport. This regulation also contains six environmental objectives, including climate change mitigation, adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems.
What are ESG and sustainability regulations in the EU compared to regulations in other regions, and what are some key differences?
Kosec: Compared to other developed markets such as the United States (US), the EU has a broader and more developed scope of regulations addressing ESG issues, especially in sustainability reporting. EU regulations are often stricter regarding the scope and level of detail and transparency required from companies and other organizations. Additionally, EU regulations support overarching climate objectives, including achieving climate neutrality by 2050 as part of the European Green Deal.
However, ESG initiatives around the world are strengthening. As financial markets become increasingly interested, ESG regulations in the United States are rapidly developing at the federal and state levels. The United States is transitioning from voluntary ESG reporting to a regulated system. One such example is the California Climate Corporate Accountability Act, which requires companies to report their emissions and implement measures to reduce their environmental impact. Therefore, adopting new ESG regulations at the state and, especially, federal levels is expected to lead to consistent rules in the United States and contribute to greater consistency in ESG reporting. In addition to legislative processes, various actions taken by the US Securities and Exchange Commission (SEC) are aimed at disclosing relevant ESG information. In March 2022, the SEC released a plan called The Enhancement and Standardization of Climate-Related Disclosures for Investors to introduce mandatory reporting on climate risks for certain organizations, which must comply with new ESG standards. ESG reporting will thus become uniform, consistent, and standardized. Within this month, the SEC is expected to decide which entities must disclose information about climate risks, their management, greenhouse gas emissions, etc.
How do you see ESG and sustainability regulations developing in Southeast Europe/Western Balkans in the near future, and what implications could this have for businesses operating in the region?
Kosec: ESG regulations and policies in Southeast Europe/Western Balkans need to catch up. For example, Serbia has yet to adopt any regulation directly related to ESG. However, non-financial reporting is obligated for certain large public interest entities based on the Serbian Accounting Act, which requires them to report on environmental, social, and personnel issues, anti-corruption efforts, human rights, etc. Therefore, non-financial reporting, as prescribed by this act, can be considered a form of ESG reporting.
Regulation focusing on ESG principles is expected to be adopted soon. However, we should also consider that implementing ESG regulations and standards will be challenging due to a lacking capacity and experience with these issues. Therefore, governments, regulatory bodies, and the business community should work together to build capacity and develop a better understanding of this area.
In practice, this influence occurs through the harmonization of domestic regulations with the EU but also its indirect effects and significant ties between the economies of the Western Balkans and the EU, including being part of the value chains of numerous products, relations with consumers, creditors, and other interested parties. For example, foreign-owned banks regularly assess ESG risks when granting loans, although local regulations may not require them. The result is that businesses in the region will find it increasingly difficult to access sources of finance if they cannot comply with ESG standards. Similarly, suppliers and subcontractors from the Western Balkans who do business with the EU are increasingly required to report on ESG compliance as their partners and customers in the EU must assess potential ESG risks resulting from the relationship that may indirectly affect their businesses. Investors are also increasingly interested in ESG because they see opportunities for greater returns on their investments in, for example, green and socially responsible projects. Indeed, investing in companies and ventures that comply with ESG principles is profitable.
What role do you think the legal profession can play in promoting ESG and sustainability in Southeast Europe, and what initiatives is your law firm involved in?
Kosec: The legal profession already plays a crucial role in promoting ESG and sustainability in Southeast Europe, mainly by providing legal support and advice to businesses on practically implementing ESG principles in their businesses. Lawyers can promote responsible investing by advising clients on ESG factors and providing investors with an in-depth understanding of related risks and opportunities. We also focus on helping shape the regulatory framework that supports sustainable development and encourages responsible business practices. In this regard, we must be on top of the developments in this area and work closely with other relevant stakeholders, including policymakers, non-governmental organizations, academia, and industry experts.
Gecić Law is proud to be one of the few law firms in the region with extensive experience and expertise to advise on this complex group of issues. The launch of a dedicated ESG practice was quite natural for us as it perfectly fits several of our core competencies. We combined our unparalleled expertise on the latest developments in EU law with our know-how in trade policy, finance, environment, and labor to offer comprehensive solutions to our clients. As ESG rose to the top of the agenda across the globe, we realized we could offer comprehensive solutions and significant value in this area. We are proud to be the first independent law firm in the region to provide this service in a field that is already so important and will very soon become vital to all businesses.
The truth is that businesses can no longer afford to remain oblivious to ESG standards and we are here to guide them through the process. This impacts enterprises in the Western Balkans even more than they realize. For companies that are not mindful of these areas, it will become increasingly more difficult to borrow money from creditors, attract investors, sell goods to customers, be competitive in exports, and attract the best employees, as they are all becoming more and more interested in their ESG standing and are acting on it. Therefore, this will undoubtedly affect their market success and their financial results. We aim to address the totality of our clients’ needs in this increasingly important area and help them incorporate ESG considerations in their long-term strategies.
An important part of our work is identifying and anticipating regulatory challenges and building awareness among market participants about the importance of timely implementation. The example of the Carbon Border Adjustment Mechanism (CBAM), a topic we have pioneered in the region, best illustrates how we support private and public sector entities in navigating the new regulation and its challenges through a multidisciplinary and holistic approach.
Our innovative approach to ESG standards has been recognised internationally. Gecić Law has been singled out as one of the firms whose work contributes to sustainability in The Legal 500 Green Guide: EMEA 2023, which makes it one of only two law firms in the Western Balkans that received this prestigious award.
