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Limited ESG reporting among key financing barriers in CEE, report says

The Polish think-tank Institute of New Europe (Instytut Nowej Europy) has published a new report on attracting foreign investors to the Three Seas region, comprising 12 countries of the Three Seas Initiative (Austria, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia).

As identified in the report, the lack of information on available opportunities (for example, underfunded PR and limited investor outreach) and limited reporting (language-wise) on environmental, social and corporate governance (ESG) are among the biggest barriers to attracting greater foreign funding for the region, especially in the area of infrastructure.

“Today, among SMEs, knowledge of ESG is either very basic or non-existent,” one of the co-authors of the report, Julita Wilczek, tells CEENERGYNEWS. “[For example] According to PwC’s CFO Compass Survey, 73 per cent of Polish companies are still not ready to implement ESG reporting. There is a need for decisive action, similar to the one taken during the implementation of GDPR. Some activities are already being undertaken by the Polish Chamber of Commerce, but without a major, nationwide campaign, it will be difficult to prepare all companies for the requirements of EU and national law when they come into force.”

Other key reasons highlighted in the report included: “insufficiently competitive investment incentives” in comparison to Western Europe, “scarce and uncoordinated promotion of the regional potential as a whole and inadequate effort to tailor the existing offers and services to specific countries and their values”.

On a positive note, the report noted that the region offers “investors relatively high yet safe rates of return from their assets” as its combines “characteristics of emerging and developed markets”. The region’s attractive human capital, comparatively low costs of labour, geographic and cultural proximity as well as EU membership were also highlighted in this context.

For example, the report noted some of the major foreign investments in the region’s energy sector, including CATL’s (Chinese battery producer) announcement of the 100 gigawatt-hours (GWh) battery plant in Debrecen, Hungary, an investment worth over 7 billion euros.

Call for a greater focus on “green investments”

The need to focus more on green investments was also highlighted in the report’s recommendations, particularly in the context of ESG reporting. Many foreign investors believe that sustainable investments are underdeveloped, with such belief stemming from the insufficient amount of information in English available for prospective investors, according to the report.

As stated in the report, this change is easy and relatively inexpensive to implement and combined with adequate PR efforts, can significantly increase the region’s investment prospects.

“Increase in the companies’ awareness of ESG could be achieved by the creation of national/regional ESG rankings, similar to Global ESG Monitor,” says Julita Wilczek, looking at the steps that the region could take to attract green investments. “There are, of course, various ESG competitions already, but their methodology is not transparent and they do not allow companies to compare with each other.”

“When it comes to action on the part of companies, one thing is key – the acceptance that it is impossible to be a modern company today without a focus on ESG compliance. ESG reporting is becoming a standard expected by customers, investors, business partners and even employees,” Ms Wilczek highlights.

Missing regional leadership?

“I think it is too early to pinpoint a leader in this area,” points out Ms Wilczek when looking at regional energy companies and their leadership in ESG reporting. “Mainly because there are still relatively few companies obliged to report non-financial data and there is no single reporting standard that would allow for comparison. It is worth noting that in Poland (the largest Three Seas state) energy companies do not win ESG reporting competitions, like the Sustainable Development Reports competition organised by the Responsible Business Forum (FOR) and Deloitte. The opposite trend can be seen in global rankings, like the Global ESG Monitor, in which four energy companies can be found in the top 10, including in the first two places.”

Nevertheless, she recognises that there are companies whose ESG reporting is worthy of attention. Among those, she mentions PKN Orlen, the largest company in the Three Seas, which can be considered a trendsetter when it comes to reporting as it currently reports its ESG activities in its integrated yearly report, available both in Polish and English.

“Another worth-mentioning case in the Three Seas region is the Austrian company Enery, which focuses on renewable energy production in several regional locations,” Ms Wilczek concludes. “It is one of the companies in which the Three Seas Initiative Investment Fund has invested so far. Enery publishes a separate sustainability report, which is available in English. As it is a much smaller company (created in 2019 and employing less than 100 people), Enery reporting standards might be particularly useful for regional SMEs, which are currently mostly exempt from ESG reporting.”

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