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Sustainability And ESG In The Transport Sector In Bulgaria – Corporate Governance

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In recent years, the terms “sustainability” and
“ESG” have been steadily making their way into the
professionally oriented media. But what do they mean and why do
they have particular implications for business in the transport
sector?

One of the most popular definitions of sustainable development
is development that “meets the needs of the present without
compromising the ability of future generations to meet their own
needs“1. In 2012, the United Nations Conference on
Sustainable Development defined a set of seventeen goals to work
towards in order to achieve sustainable development for humanity,
including: alleviating poverty and hunger, raising education and
health standards, achieving gender equality, sustainable economic
development, preserving nature through environmental management and
consumption.

While the concept of sustainable development has its own history
and has been the topic of discussion and focused political debate
for 50 years now, “ESG” is a relatively new notion,
although it has its roots and foundation in the pursuit of
sustainable social development. The acronym is interpreted as
Environmental, Social and Corporate Governance and indicates three
main areas of non-financial reporting for companies, finding its
historical roots in the principles of socially responsible
investment. In the past decade, consideration of these factors,
along with financial disclosures about companies’ performance,
has emerged as an ongoing trend for determining business
sustainability and justifying responsible investment decisions on
both sides of the Atlantic – in the United States and the
European Union, albeit pursuing different approaches to enforcing
these principles.

Non-financial reporting is not completely unfamiliar to
Bulgarian business. Under the provisions of the Public Offering of
Securities Act (POSA), companies issuing securities have been
obliged since as early as 2007 to report on their compliance with a
corporate governance code. Since 2016, the Accountancy Act has
extended this obligation by reference to POSA to certain public
interest entities, including credit institutions, insurers and
reinsurers.

Effective 2017, as a result of implementing the provisions of
the Non-Financial Disclosure Directive, the Accountancy Act
introduced a requirement for all public interest entities that are
also large enterprises within the meaning of the Act and that have
more than 500 employees to include in their management report a
non-financial statement containing information on the company’s
policies, development, impact and performance in relation to
environmental, social and employee issues, respect for human rights
and fight against corruption.

Although the circle of obligated companies seems large because
of the broad scope of the definition of a public interest entity,
the threshold of 500 employees in the scale of the Bulgarian
economy reduces this circle to an extremely small number of
companies. However, this will soon change. The draft of the new
Corporate Sustainability Reporting Directive, which has been
intensively debated by the European Union institutions, is expected
to be finally adopted by the end of this year and reporting under
the new regime is expected to be launched as early as 2024 for
activities in 2023, which means that obliged entities should start
planning, monitoring and documenting their activities under the ESG
criteria in less than 2 months. The new directive significantly
expands the range of obliged entities, with the Institute of
Certified Public Accountants in Bulgaria (ICPA) estimating that
over 800 Bulgarian companies will be subject to this
requirement2.

This additional obligation will obviously increase the
administrative burden for a considerable number of companies.
However, it is very important not to view ESG as synonymous with
yet another compliance requirement and yet another folder on the
desk of the compliance manager or the company’s chief
accountant. The implications are much more far-reaching and
neglecting these issues could lead to significant problems for any
company, not only those that, under the new directive and the
related special regulations, will be required to include
non-financial statements in their annual reports.

On the one hand, disclosure of ESG compliance can and
increasingly will have an impact on companies’ financing
options. Some banks are already signaling that their future funding
decisions will be heavily influenced by sustainability
considerations. EU policies focus on sustainable funding as a means
to promote and support the achievement of the Green Deal and the
EU’s climate and sustainability goals, which means that through
policy implementation, ESG criteria will also play a pivotal role
in private financing decisions.

Although the stock market in Bulgaria is not yet well developed,
the impact that sustainability considerations will have on the
decisions of investors in publicly traded companies is also
important. At the beginning of August this year, the Bulgarian
Stock Exchange announced that it would create an ESG index in which
companies will be included on the basis of their sustainability
performance rating. The rating will be based on an analysis of
company data by a foreign company with experience in this field.
However, it is not yet clear what the methodology for this analysis
will be. As cited in a release published on the stock exchange
website3, its CEO says the new index will be built on
solid metrics that are recognized as global expertise and
methodology and believes it will help Bulgarian public companies
improve their ESG performance in line with global standards and
allow them to contribute to Bulgaria’s sustainable economic
development.

However, it must also be taken into account that global
experience and existing methodologies for measuring the
sustainability of assets are very diverse and often conflicting.
Each of the world’s largest ESG rating providers applies its
own methodology and algorithms to compile the scores and ratings,
using dozens of metrics that include everything from climate change
to environmental pollution and from product liability to tax
transparency. The weighing of ratios between the E, S and G
criteria also varies from rating to rating and does not always
coincide with the specific interests of investors. This problem is
acknowledged, and the International Organization of Securities
Commissions recently published a report calling for greater
transparency regarding the methodologies used in the ratings
process.4 Therefore, both investors and evaluated
companies need to be aware of these differences and variations in
evaluation and keep in mind that not every element of ESG can be
objectively measured and universally evaluated.

Furthermore, while even after the CSRD comes into force, by no
means all companies will be directly obligated under the new
regime, the need of those affected, i.e., larger companies, to
address the associated risks will affect their smaller suppliers,
service providers and all types of business partners with whose
interactions obligated companies’ disclosures may be impacted.
This may and will influence obligated companies’ decisions in
selecting business partners, suppliers and subcontractors, and will
result in additional requirements for all companies in the supply
chain, regardless of their size and whether they have a
non-financial reporting obligation.

The transport and logistics companies in Bulgaria that will be
directly affected by the legal obligation for non-financial
disclosure will not be a huge number, but they will not be few.
More importantly, due to the nature of their business, which places
them firmly in the supply chain of all industrial and consumer
products, all transport and logistics companies will be at least
indirectly affected, as contractors, sub-contractors and service
providers to directly affected companies, resulting in pressure on
them to comply with sustainability criteria.

This pressure will be in addition to the regulatory and
institutional pressures the sector will face in the context of the
Green Deal and the so-called “Fit for 55” package –
a package of legislative measures to reduce greenhouse gas
emissions by at least 55% by 2030. Among the European Union’s
sustainable transport policies are5:

  • Reviewing the rules on road tolls for heavy goods vehicles and
    including a new scheme to tackle CO2 emissions to help reduce the
    sector’s carbon footprint

  • Introducing rules to curb CO2 emissions from passenger cars and
    light commercial vehicles, with the European Commission proposing
    to reduce emissions to 55% for cars and 50% for light commercial
    vehicles compared to 2021 levels, and to set a target of 100% for
    2035 for both categories

  • Emphasizing railway transport and promoting its further
    development, as well as a modal shift from high-carbon transport to
    railway transport, as an effective means to decarbonize
    transport

  • Taking measures to reduce the environmental footprint of
    aviation through the use of different types of fuel, including
    sustainable ones, and through different levels of fuel consumption
    in the years to come. A proposal to review the EU Emissions Trading
    Scheme, including for aviation, is also under consideration.

  • European Commission proposal on the use of renewable and
    low-carbon fuels in maritime transport, aiming to reduce the
    greenhouse gas intensity of energy used on board the ships by up to
    75% by 2050 while promoting the use of cleaner fuels by vessels
    docking at EU ports

These ambitious goals of the European Union may prove even more
ambitious from the point of view of Bulgarian business. The
published National Recovery and Sustainability Plan points out that
“the carbon intensity of the transport sector in the country
is 3.5 times higher than the EU average, reaching 2.8 kg of
greenhouse gases per €1 of gross value added in 2019” and
that “the sector is one of the major greenhouse gas emitters
and is associated with 26% of their total amount”, making it
necessary to intensify investment in sustainable transport to lower
the sector’s carbon footprint. The measures taken by the
companies in the sector, respectively the lack of active measures
in the direction of compliance with the mentioned policies and
regulations, will certainly be a factor in assessing their
sustainable development and compliance with the ESG criteria.

Lastly, due to the Green Deal and climate considerations most
often used as promoters of the notion of ‘sustainability’,
the general perception is that ESG is primarily about the
environment, as a kind of ‘green’ compliance. This
interpretation, apparently, has its grounds in relation to the
transport sector, given its substantial “carbon
footprint”. This, however, may lead to underestimating the
other two pillars and especially the social considerations, which
could be equally challenging, especially in an economy that has
been facing many difficulties for years and is heavily affected by
the global challenges of the day. These considerations can affect a
wide range of diverse aspects of a company’s operations,
including care for employees and compliance with labor and social
security legislation, respect for human rights, relations with
customers and consumers of the company’s services, personal
data protection and information security, impact of business
operations on the social footprint and society, etc.

In conclusion, it is of utmost importance for all companies in
the sector to undertake, as a matter of priority, a review and
analysis of their activities, not only with regard to the
thresholds and criteria for the application of non-financial
reporting obligations, but also in the broader context of ESG
criteria, because these will, in the very immediate future, in one
way or another, have a significant impact on their business and
their relations with all business partners, especially in the
context of the European Union, and in the context of international
transport in general.

Footnotes

1 In 1987, the United Nations-sponsored World Commission
on Environment and Development, chaired by the Norwegian Prime
Minister at the time, Gro Brundtland (known as the “Brundtland
Commission”), published a report called “Our Common
Future,” which examined the causes of negative environmental
impacts, the interrelationships between social justice, economic
growth and environmental challenges, and proposed political
solutions to address all three categories of problems. This report
also contains the definition above.

2
 Reporting corporate sustainability (ides.bg)

3 https://www.bse-sofia.bg/exchange-news/id/132844

4 FR09/2021
Environmental, Social and Governance (ESG) Ratings and Data
Products Providers (iosco.org)

5
 Clean and sustainable mobility for a climate-neutral EU -
Consilium (europa.eu)

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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