ESG, i.e. Environmental, Social and Corporate Governance, is a set of legal norms that require an ever-growing group of entrepreneurs to create reports on their activities from the point of view of the impact on the environment and society, as well as from the point of view of business management, as part of their annual reports. ESG, however, also serves as an additional point of view for banking houses for the rating evaluation of clients, which has an effect, among other things, on the amount of interest on business loans.
Simply put, the better a company fares in the assessment of its approach to environmental and social issues and the more conscious it is in its management, the better conditions the bank can offer it for lending. In this article, we will explain what is hidden under the acronym ESG, what aspects (not only) the bank can assess and what entrepreneurs should prepare for.
Riskier client = higher interest
To understand where ESG legislation is headed, we need to ask where it is coming from. A strong impetus for the topic of ESG was the Paris Agreement on Climate Protection from 2015 and the subsequent Green Deal from 2019 and the European Climate Act from 2021. Legislation tries to shape the business environment and motivate or directly push it to achieve the goals adopted at international level.
The banking sector monitors the requirements of the legislator for entrepreneurs and projects them into the assessment of the riskiness of the business activities of its clients. The reasoning of the banks is roughly as follows: the less a corporation's business activity is in line with ESG goals, the riskier it is for the bank to provide a loan to such an entity, as it is likely to expect necessary future high investments in modernizing operations, changing business models or state sanctions for "dirty" business. A riskier client means a higher interest rate for the bank. After all, the interest rate is an expression of the risk of loan default.
Banks have already started to require their clients to fill out ESG questionnaires, which are based on the obligation of some entities to report relevant indicators in annual reports. So what do banks find out?
Environmental - environment and climate
In this area, the more demanding a company's business activity is on CO2 emissions, the riskier it is from the bank's point of view. The bank will be interested in what impact your business has on the environment, how green it is, but also how much it is threatened by climate change.
In the case of the construction industry, we can mention the construction process, i.e. how much CO2 construction produces, how much water and non-renewable raw materials it consumes. The subsequent energy demand of the completed building is also important. Passive houses and energy self-sufficient projects will be evaluated positively, not only because they will consume less CO2 in the future, but also because they will be more attractive to clients who will not have to deal with high heating or air conditioning costs.
The threat to the financed project from weather fluctuations - floods or drought at the construction site - will also be important. A very important and already well-known area in practice is the waste management of individual companies and the incorporation of recyclable or already recycled materials into production. All of this will also be evaluated in relation to the main suppliers of the respective company.
Companies in this area of ESG can already prove themselves with EMAS (Eco Management and Audit Scheme) or ISO certificates.
Social – social risks
In the "social" area, the bank's attention will focus mainly on compliance with labor law regulations. In the construction industry, it will be about workplace safety (number of occupational accidents) and illegal employment.
Plus points can be brought by a good reputation of the company among employees, social benefits for employees, the possibility of training and personal growth, promotion of employee health. Conversely, proceedings with the labor inspectorate will be perceived negatively.
Governance – administration and management of business activities
The last area is the most difficult to grasp and the most legal. In it, the bank should examine how the company is run. However, this is not about checking economic aspects, but those such as the transparency of the ownership structure, the implementation of the company's ethical codes, compliance programs, compliance with GDPR rules or honest business practices. The proceedings at the ÚOHS or ÚOOÚ and the ownership structure without the possibility to determine the real owner will thus be perceived negatively.
Some corporations already have to report the above-mentioned aspects of their business activities as part of the annual report (or as separate reports). From 2024, the reporting obligation will be extended to entities that have more than 250 employees and an annual turnover exceeding EUR 40 million, or their annual balance sheet total exceeds EUR 20 million (meeting two of the three criteria).
From 2026, the reports should also cover small and medium-sized enterprises, when the definition of these terms is given in Article 3 Accounting Directive (2013/34/EU).
By small businesses are enterprises that do not exceed at least two of the following three thresholds: a) balance sheet total: EUR 4 million, b) net turnover: EUR 8 million, c) average number of employees during the accounting period: 50.
Medium enterprises are enterprises that do not exceed at least two of the following three thresholds: a) balance sheet total: EUR 20 million, b) net turnover: EUR 40 million, c) average number of employees during the accounting period: 250.
The reporting obligation may now seem distant. However, it is necessary to keep in mind that the creation of a detailed overview of all necessary aspects of ESG requires long-term and conscientious data collection on the functioning of the company and its suppliers. You can start taking the first steps now and literally put them to good use as part of your loan application at your bank.
Source: construction.cz
