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Caroline Bright and Vladimir Hrle, IFC’s Integrated Environmental, Social and Governance Program in Serbia, in partnership with the Swiss State Secretariat for Economic Affairs (SECO)

A Timely Opportunity For Serbian Companies To Go Sustainable

In Serbia, change is happening, with the country all set to prioritize a green path to accelerate its post-COVID-19 economic recovery. Going forward, as the nation responds to several challenges including a recognition of the environmental damage from legacy activities, Serbia’s vulnerability to climate change needs urgent attention

The silver lining is that this presents the Serbian business community a timely opportunity to factor in environmental, social and governance (ESG) aspects into decision-making to ensure benefits for companies, their customers, the nation’s workforce, communities, and the environment. ESG practices are not just about doing good; they are fundamental to a company’s success.

ESG is defined by IFC as a set of environmental, social and governance factors considered by companies when managing their operations, and investors when making investments, in respect of the risks, impacts and opportunities relating to:

• Environmental issues: potential or actual changes to the physical or natural environment (e.g. pollution, biodiversity impacts, carbon emissions, climate change, natural resource use);

• Social issues: potential or actual changes on surrounding community and workers (e.g. health and safety, supply chain, diversity and inclusion); and

• Governance: corporate governance structures and processes by which companies are directed and controlled (e.g. board structure and diversity, ethical conduct, risk management, disclosure and transparency), including the governance of key environmental and social policies and procedures.

More and more stakeholders are demanding that firms follow good sustainability practices to prevent social and environmental harm, such as worker health risks or pollution. While good practices ensure safe and healthy working conditions, they also allow companies to grow sustainably while managing risks and impacts. In a world where sustainability is increasingly seen as essential, most international investors are averse to companies with no ESG policies and practices in place.

It is imperative that the top-level of the company – management and the board – must be involved and committed, and this is why Environmental and Social considerations cannot be tackled independently of Governance

Sustainability is not a short-term, technical challenge, but requires on-going commitment and changes in company practices. It involves shareholders, communities, as well as considerations about the planet – which requires long-term vision. Therefore, it is imperative that the top-level of the company – management and the board – must be involved and committed, and this is why Environmental and Social considerations cannot be tackled independently of Governance. An example of this is how the board of an international retailer recently committed to environmental and social results as part of its managerial incentive program, instead of the usual focus on short-term profits alone. Some of the key indicators introduced included increasing the reuse or recycling of packaging, and targets to ensure good wages throughout its supply chain.

ESG is particularly high on the European Union’s agenda, which is undertaking regulatory steps to integrate ESG factors into company operations and reporting. These include environmental impacts, social and employee-related matters, respect for human rights, anti-corruption, and bribery. Companies must describe the policies, outcomes, and risks related to these, including in their supply and subcontracting chains. This helps identify, prevent, and mitigate adverse impacts on people and the environment. Studies show that good ESG practices are associated with better firm performance, easier access to capital, and improved development outcomes.

Based on the sustainability information that companies disclose, an increasing number of investors want to better understand the risks of—and opportunities afforded by—sustainability issues. Civil society, too, is demanding information in this area to be able to hold companies in their neighborhoods more accountable. Recent examples include local protests about air pollution from factories, and construction infringing on areas of natural beauty and forests.

Integrating ESG factors into the investment decision process is a central pillar of EU’s Green Deal and Sustainable Finance agenda. The aim is to channel private financial flows toward sustainable investments that support internationally agreed targets to reduce negative environmental and social impacts, for example, the Paris Agreement and the Sustainable Development Goals adopted by the United Nations.

Serbia has already adopted a range of ESG reporting standards. While the Law on Accounting obliges large companies to make ESG disclosures, enforcement of this mandatory legal provision is likely to gain momentum in the near future.

Integrating ESG factors into the investment decision process is a central pillar of EU’s Green Deal and Sustainable Finance agenda. The aim is to channel private financial flows toward sustainable investments that support internationally agreed targets to reduce negative environmental and social impacts, for example, the Paris Agreement and the Sustainable Development Goals adopted by the United Nations

At IFC, we factor in ESG considerations in every investment we make, and our ESG standards are widely adopted globally by a large number of international investors. They also inspired the ‘Equator Principles,’ which are used by international financial institutions in financing big projects. When IFC makes an investment, we require the company to meet certain ESG criteria to consider its impact on society and the environment. This way, companies are able to absorb IFC investment while becoming more ready to attract other investments.

In Serbia, IFC is implementing an Integrated ESG Standards Program in partnership with the Swiss State Secretariat for Economic Affairs (SECO). The program aims to encourage the adoption of ESG standards by companies, build capacity of local intermediaries to provide ESG training and advice, and improve the regulatory environment for ESG. In addition, the initiative supports financial institutions—including banks, private equity funds, and institutional investors—to integrate ESG standards into their investment process. The goal is to promote sustainable finance products, thereby encouraging greater allocation of capital to companies with strong governance and sustainability performance.

All Serbian companies, private or state-owned, are at the forefront of ESG issues and have a huge scope to make an impact on society and the environment. The timing is right for Serbia, with a young family-owned business sector that is now reaching its 2nd generation, and has been working on its governance and institutionalization. This is the perfect opportunity to also develop a vision for sustainability while working on company governance. To do so, companies can adopt frameworks to understand and manage these risks, which will allow them to explore opportunities—attract new investment, link with European supply chains, improve their performance, and make a positive social impact.

Now is the time for change—one that is robust as well as sustainable.

www.ifc.org

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