Sustainable business will shake up the market and change the mindset of companies.

The phenomenon of sustainable business is increasingly penetrating the very way companies are managed. The growing number of regulations, as well as customers themselves, are forcing companies to adopt and implement it. According to Jan Sůra, partner at the law firm Císař, Češka, Smutný, ESG (Environmental, Social, Governance) will also significantly impact interactions between companies. "I believe that compliance with ESG principles may soon become a basic condition for cooperation between companies," he says.

Why do you think companies should pay attention to ESG and not fall behind?

First of all, it is necessary to say that ESG is basically not a new concept. Companies have been involved in sustainable and responsible business for some time in the form of CSR (Corporate Social Responsibility), with environmental and other supplementary strategies for customers and employees. However, the current form is different for several reasons. While it used to be more of an ethical or moral matter, now there is separate regulation at the European level, which will increase and apply to more companies. Our task is not to accept it mechanically and uncritically but to properly adapt it to the unique Czech environment. We must also not forget financial institutions, banks, and investors. All these entities have voluntarily committed to ESG, directing significant financial flows and investments toward it. This will fundamentally affect the entire market and economic competition—no company can avoid it if it wants to operate effectively.

Where should a company just starting to adopt these principles begin?

The foundation of everything is governance, i.e., the principle of good management. If a company is not managed properly, good management of social and environmental aspects cannot be expected. There is also legal regulation that sets rules on how companies must measure, evaluate, and report their activities. According to these rules, the individual components of ESG cannot be separated—they form one whole. Today, companies tend to divide these aspects and focus, for example, on only one. Such an approach is mistaken; ESG is indivisible, and responsible business is only one.

ESG in the business sector is often perceived as something that mainly concerns large companies. How do these principles apply to small and medium-sized enterprises?

That is also a misconception. It is true that existing regulations primarily affect larger companies, but newly adopted or discussed regulations are expanding the range of companies they apply to. More importantly, large corporations will have to look at their supply and customer chains through the ESG lens. Therefore, these obligations will not directly impact small and medium-sized companies, except insofar as large companies will require certain data and behavior from them. Honestly, smaller players often do more for responsible business than large companies. Large companies focus mainly on global environmental aspects like the carbon footprint, but due to the scale of their business, they can struggle to naturally connect ESG to their core operations. Conversely, if you are a small or medium-sized entrepreneur operating in a specific region, you address issues related to that location and better see the impact of your activities on the environment, employees, and community. As a result, small companies often have a much more thoughtful ESG strategy than large multinational corporations.

How should large companies approach ESG?

There is no universal recipe. It is more about an individual approach. Every company sets different demands on employees, has different customers, and its activities have different environmental impacts, or sometimes none at all. In practice, I have encountered two approaches so far. One is creating specialized departments tasked with comprehensively covering ESG issues. The other is that ESG components become a natural part of the company and permeate its entire management. I personally consider the second approach more correct and honest. Tightly linking responsibility and business is naturally more difficult, but it is the direction companies should take.

Which legal regulations should companies pay attention to?

The problem is that companies perceive ESG regulation purely as a new type of legislation. However, all the areas involved have long been subject to regulation. Looking at the components, there are hundreds of legal regulations for environmental protection at both Czech and European levels. There is also a vast number of labor laws related to remuneration, workplace safety, or non-discrimination. It is important to mention consumers, who are covered by extensive Czech and European legislation. And last but not least, ESG already affects market behavior, regulated by competition law. There are really many regulations where ESG principles can be found, so this topic should not be understood simply as everything being contained in new regulation.

Is there a minimum set of ESG obligations every company should fulfill?

Every company should primarily assess all the regulations that apply to it in the ESG area. It is essentially a form of compliance, so one can start by checking whether the company already meets the existing legal requirements and which ones. Only then can decisions about additional steps and adopting a specific strategy follow.

One compliance manager cannot cover such a large amount of regulation. How should competencies and responsibilities in this area be divided within a company?

I don’t think the compliance department should be the primary place responsible for this area. Today, it is standard for companies to establish specialized positions at the executive level specifically to manage ESG activities, with strong emphasis on contact with top management. ESG is also related to a company’s connection to the external environment. We cannot imagine some closed production facility where principles are simply implemented. Therefore, so-called ESG councils are established, which include external members. These can be experts on the type of environmental protection relevant to the company’s location. Representatives of employees or the region also sit on these councils. This advisory body helps management consider local and specific conditions when making decisions. This is also a way to promote better and responsible management.

I suppose such an advisory body is not yet standard in the Czech environment?

It is rather exceptional; such intensive contact with the company’s external environment is often lacking. For now, the highest level they reach is having employee representatives on supervisory boards, which is basically a legal requirement. Beyond the law, companies tend not to allow others to interfere with their activities.

Due to ESG, many new regulations and decrees are emerging. Can you give specific examples of what is currently gaining importance in Czech law due to ESG?

ESG will fundamentally affect competition law. It will change its rules to favor those who comply with ESG principles, and I think Czech rules are not yet prepared for this. Corporate behavior is changing or is already changing. The standard assumption that companies are established solely for profit is now gaining other dimensions and will require a different legislative approach. Companies will have to consider public interest, which can sometimes even conflict with their business. If we want managers to incorporate ESG elements into their activities, we must provide them with a safe legal basis

Author: Adéla Nekvasilová

The full article was published on pravniradce.ekonom.cz.