Disclosures Decoded: EU Regulations with Robert Adamczyk
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Summary
In this episode of the No Nonsense Sustainability podcast, host Ildikó Almási Simsic engages with Robert Adamczyk, head of the energy sector team at EBRD, to explore the complexities of EU sustainability regulations. Adamczyk, a key figure in shaping European ESG frameworks, shares insights into the challenges and opportunities presented by the Corporate Sustainability Reporting Directive (CSRD) and other related regulations.
The conversation delves into the concept of "Double Materiality," the balance between reporting requirements and actual impact, and the role of standardized reporting in improving corporate transparency. Adamczyk discusses the historical context of ESG risk, the evolution of reporting standards, and the implications of recent regulatory changes on companies across Europe.
Key conclusions include the necessity for companies to integrate robust management systems to meet reporting standards, the potential for standardized reporting to drive better investment decisions, and the ongoing challenges of aligning global sustainability standards. The episode underscores the importance of transparency and accountability in corporate sustainability efforts.
Highlights
Robert Adamczyk discusses EU sustainability regulations' impact on companies.
The concept of "Double Materiality" is explored in depth.
Challenges of aligning global sustainability standards are highlighted.
The role of standardized reporting in improving transparency is examined.
Historical context of ESG risk and reporting standards is provided.
The balance between reporting requirements and actual impact is discussed.
Key takeaways
1. EU sustainability regulations present both challenges and opportunities for companies.
2. "Double Materiality" involves assessing both financial and environmental impacts.
3. Standardized reporting can enhance transparency and drive better investment decisions.
4. Aligning global sustainability standards remains a significant challenge.
5. Robust management systems are essential for meeting reporting standards.
Timestamped breakdown
[0:09] — Introduction to the Episode: Host Ildikó Almási Simsic introduces the topic of sustainability disclosures with guest Robert Adamczyk.
[0:30] — Robert Adamczyk's Background: Adamczyk shares his extensive experience in shaping European ESG frameworks.
[1:12] — Shift to Reporting: Adamczyk explains the integration of site-specific impact assessments with corporate reporting.
[4:01] — Historical Context of ESG Risk: Discussion on the evolution of ESG risk and reporting standards.
[10:43] — Understanding Double Materiality: Adamczyk elaborates on the concept of double materiality in sustainability reporting.
[14:20] — Challenges with CSRD Implementation: The difficulties faced by companies in implementing the CSRD are discussed.
[16:07] — EFRAG's Role and Structure: Explanation of EFRAG's function and Adamczyk's involvement in it.
[22:16] — Impact of Standardized Reporting: The benefits of standardized reporting for investors and stakeholders are explored.
[27:10] — Double Materiality as a Risk Management Tool: How double materiality aids in assessing risks and opportunities is discussed.
[42:04] — Future of ESRS and CSRD: Adamczyk speculates on the future implications of ESRS and CSRD.
Edited transcript
Welcome back to the No Nonsense Sustainability podcast. I'm your host, Ili Kawa Mashi Simik, and today we're talking about sustainability disclosures. My guest is Robert Adamic, who's the head of the energy sector team at EBRD. He's got over two decades of experience in heavy industry uh energy sector. He's one of the key architects of European ESG frameworks. He has developed guidelines for sustainability disclosures for Bucharest, Warso and Prague stock exchanges and is currently serving as a member of the sustainability reporting technical expert group as at FROG. Welcome to the show, Robert.
Welcome and great to see you.
Yes. Um so you combine a very unique set of expertise with being able to do sight specific impact assessments and also the reporting. What was the moment where you kind of shifted from this project specific work towards the more like reporting aspect of sustainability.
I think this is the sort of misconception. It's never been a shift. It's always part of the same work. And uh I've always looked at of course sight specific but we always look at corporate issues wherever we uh have done whether I before the EBRD or at the EBRD and the corporate uh side is just as important and when we do capital markets as well we just look at the reporting side. So is it a shift? No, it is using the data that you have from sight specific information and when we finance sight specific we need to make sure that these sites are are actually fine good and we we uh do no do no significant harm is always at the con at the core of everything we do and we look at the corporate issues in terms of how they manage what's the management systems and the reporting is really reflecting those corporate management systems and procedures and should do And to be uh Hank when I started my career got in the early '9s was doing uh work on privatizations in Eastern Europe. And as part of the privatizations, we would assess each company both at the site level and also at the corporate level of their liabilities or the valuations. And I worked both for the state particularly in Poland but also for investors that were coming in and uh looking at of course the sight specific issues which in Eastern Europe were huge and we were dealing with uh true uh huge legacy issues contamination pollution large workforces that need to be restructured. Many companies we would go in would be looking at reducing the uh headcount by half or more because they were over over staffed and that was the restructuring that was happening was very painful uh issues in the '90s but also the pollution the pollution side was huge the health and safety quite often didn't exist the health and safety people were literally dying in these plants and therefore you look had to look at the site specific looked at the impacts there were no impact assessment ments done before these factories were cut off and built. It was heavy industry because Eastern Europe was particularly heavy industry uh focused and uh how to bring them up to European standards. Stop eco dumping. I mean were the first policies of the EBD from the '9s ' 91 was in fact to stop eco dumping stop factories closing in the west polluting and moving into Eastern Europe to ensure that EBD and other institutions didn't finance that. So I think the reporting side uh was always there. If I was doing a privatization, the prospectors needed to look at the liabilities. And something I repeat in many fora I think is that ESG risk is not new.
Reporting liability is not new. You had IS-37 in terms of accounting standards to look at provisions and contingencies. We have the EU recommendation from 2001 on how to address environmental uh contingent liabilities and in every privatization we would have to look okay in the valuation what do we put on the books and now uh and it's easier when you're doing privatization because I can put a contingent liability or provision which doesn't affect the actual cash flow it's harder to do it once you are uh going ahead so really the reporting side And GRI was first that came out. Uh
GRI is the global reporting.
Absolutely. And uh it's US-based. And so you have the reporting standards have been for a long time. Uh you've always had uh IFRS and we're looking at ISSB the global looked at provisions and contingencies as international accounting standard 37 and so forth looking at those provisions. You you needed to disclose. The problem was that uh everybody disclosed things differently, assessed things in a different way and there wasn't a common uh standard and therefore a company with clever lawyers and I worked on some of those projects in before the EBRD of hiring clever lawyers uh or working with clever lawyers and providing advice uh to say whether it's a liability or not. And you might have a uh an issue in terms of pollution, but if it hasn't been discovered yet, do I need to disclose it? If there is no regulation that has come in, is it an important issue? You had the issue of uh of a factory in the Czech Republic contaminating the Elba all the way to Germany with cyanide and it was only a 50,000 euro fine. So is it all the fish died in Ela, but it was cyanide. So it actually disappeared after uh after within a year there was no residual impact because it it it this it is a short short impact but nasty impact. Uh but the fines were small and therefore in a big corporation if you have these the impacts are small and therefore not material financially. They were often not reported but reputationally they could be quite big. uh uh legacy issues can be b and we had the cases of course ABB nearly bankrupt of asbestos claims. We have uh number of companies in different areas uh that have had the disclosures and the heavy industry particularly needed to start to disclose information on their uh risks. We had mining companies for a long time looking at provisions for closure of mines. Now again, not everybody provided that in the right way uh and or assessed it in the right way. Some some mines are still not they're no longer used but they're not closed and that is because you don't want to pay the uh uh restoration costs uh of that. So I think in the social of course issues I mean the bow pal no one actually was ever made liable for it properly in a in a full way which which is of course still astonishing in this world. But that side I think is where people have always thought about it. Always were looking at bringing some standards. we had the CSR, corporate sustainability uh corporate social responsibility, CSR reports uh and
but even there the scope was very different and I guess that's what we're going to talk about today how we're going towards providing better defined scope and more guidelines
and I think this is where the change so it came from uh good practice providing information quite often more in the philanthropy and more on the side of PR and marketing And you know every CSR reports or every many CSRs reports at some stage used to have a sunshine a nice baby and a wind turbine
because their scope was proactive positive impact they created and they did not talk about operational risk mitigation
and I think this is where what we do you know I'm in the risk department and I've always worked in due diligence 30 years of working on due diligence assessment starting in as I say in the early 90s in some of the polluting difficult industries at a time where information was difficult to obtain. So I do you could say I have a good grounding of actually assessing uh being one day in a in a steel plant and the next day in a in a Pepsi Cola bottling plant. you had the impacts uh very big of privatizing agricultural facilities where the where the issues were just as bad if not not worse because of uh how uh farming waste was managed or not managed. So I think the the areas that uh we've always looked at is is that risk liability venture capital firms private equity always looks at that and always has and that is in the valuations and I've worked on valuations where we've reduced the cost of a asset by 20 30% by saying you don't have the right documentation or there is a risk of pollution and therefore it's material but it didn't happen always worked a lot with of course that due diligence with legal firms uh and uh because quite often it's it's also that client privilege if I discover something on the due diligence not disclosed
and the fact is that the US has always led on this risk
and I think still is in some ways. So although we have and I think in the current world there's a lot of changes the US moving one way Europe another we've got omnibus which we discuss got uh the Chinese standards but
liability remains the same uh pollution remains the same it kills you in the same ways human right violations are the same wherever you are and we're all could say equal and therefore the liability potentially uh is as high people try to hide away from it or or put it through the supply chain that's where we I think uh the challenges come in but we have uh the liabilities always been there and the risk and irrespective of whether I worked at the EBRD or before and I think any venture capital firm will be looking at the same issues because it can affect them reputationally and can affect the balance sheet and the balance sheet ultimately is what they're looking at uh and the balance sheet is quite often also or the valuation is affected by reputational issues just as much and this is where we come into the double materiality.
Exactly. So that that's our buzz word of the episode by the way. So if you had 60 seconds to explain it without me having to buzz you,
what would you say? What what is double materiality?
Double materiality is first of all the first things which I did in the past was the financial issues, the risk of pollution, liability, costs of investments. So I've got those sort of tangible issu issues that are there. But I have to look at so my impact on on on having on the on the environment and how to cost to to address it. But then environment can have a impact on me and uh in addition I've got the reputational issue. So the impact of course of climate change is one of those the flooding the risks of uh of actually fires and that that is and many companies can't get the get insurance anymore. So it's that side of of looking what I do outside what the environment does to me and then the reputational side which is of course quite often never be quantified because that is the side which is quite often not tangible uh as a reputation is uh is sometimes hearsay what's in the press sometimes whether it's accurate or not is another issue but it can affect your valuation so I'm looking at double materiality of what is significant to me where do I have an impact on where it can have an impact on myself and the concept is what we do at IFIS always
scoping right
yeah but before we go to scoping but as IFIs the EBRD uh IFC others we always look at double materiality we don't call it that
because we look at not just the the financial impacts because they as I say there could be a fine of polluting a river could be very small and therefore from that financial uh materiality it could be insignificant if I have a fine of 20,000 euros going through the magistrate is caused. Uh it's imitative. Now the closure of the factory can have additional and there will be but there's all the reputational impacts the clean up the the actual uh side I need to look at it. So it is significant more than that fine that can come over. The US of course has a different liability issues and you know in the UK I get fined 20,000 in the US I might be fine beget the uh uh punitive damages through a court which could go into hundreds of millions
and that I think is is uh also a difference uh where we're looking at so the double materiality has always been there for IFIs because we look at the risks the reputational risks the impact on the environment and society I mean the social issues are just as important if if uh and becoming more and more important I think because environment is easier sometimes to quantify and assess
but the areas of uh social on the other hand is a lot more difficult and a bigger challenge you have also the issues on biodiversity because I can see the impact directly I do
but it's the indirect impacts it's the associated impacts that come in the same with climate and of course climate targets that we have which are in themselves a liability because if a country has uh declared they will have certain reductions I'll have to meet those and that is in terms of emissions air quality on other areas but also carbon emissions and therefore I'll need to have these plans and the transition plans but going back to the double materiality the double materiality is
a riskmanagement tool and companies that have done that and particularly under the CSRD which has come in which
the corporate social
corporate sustainability reporting
reporting directive
which has been subject to the omnibus it's still there it's still the same directive but the number of companies that fall in scope has been reduced or is being reduced
and that's quite a scandal
it is it is uh it is an lack of understanding by some I think uh decision makers and uh and I think politicians who think that it's a burden and there was a burden and we did make an mistake in Ephra of um and I think it's not just frag just as a whole professional society of implementing the CSRD and straight away wanting limited assurance audits. We should have
what is the what is the limited assurance audit?
So the limited assurance audit is that there's an independent verification of the requirements. Now there's a reasonable assurance where you go into a detailed assessment.
Yes. And a limited assurance is that where you go through through an assessment. Now there wasn't enough guidance. There wasn't there may be enough understanding of what it is because a limited assurance uh needs to be for the auditors needs to have a reasonable opinion and to get
what is a reasonable opinion
that you actually do quite a lot of due diligence to appine whether it is correct or not. So what happened is in many audits the auditors went in okay but in I want to review all your scope free. Now our intention was not to review with a scope 3 at the limited assurance uh and that it will be a a cheaper audit of your procedures and whether you did the double materiality your scope your assessment of of the risks in the right way and once it went into sort of doing more details the cost went from 10fold in in price the changes. So okay that that is and then of course no one was prepared and it we should have delayed it by two years basically
but is that so the quick word on what frag is and who are the members of this uh expert group
so frag is uh the European uh financial reporting advisory group to the eur European commission so it's a body that is independent and advising the commission uh set up by uh the number of states uh uh EU you've uh funded uh approach and it has a board but it has a financial reporting and it has a sustainability reporting. For each one there is a board and the board uh is uh uh with with representatives from different countries but some also um industry members is uh the decision-making and that board is advised by the technical expert group
and you're a member of that?
I'm a member of that. there's about 58 or something like that nearly 60 people in in that group uh alto together with some observers as well from some European institutions uh that the EIB uh um banking authority European banking authority and you have also uh then uh members selected some have been by uh designated by by countries but also uh members selected based on their experience and expertise. who are there. So I am uh there as an uh affiliated to the EBRD. So for me that has allowed me to take that uh time out but I am providing independent advice as an expert. So it is not you say tilt on site and we have discussions and presentations on the various issues and the SRS's are very much aligned to the uh EBD or IFC performance standards of the current Europe uh EBD environment and social requirements under the new policy uh because they include environment pollution biodiversity they follow very same headings they follow the same headings workforce uh uh community issues um stakeholders. So we have uh and then it's what we are reported but in order to report you need to understand what procedures and what data why is that data there.
So so this is where where my my involvement has been particularly on the pollution and biodiversity side. Okay. what do we need to have and also some of my old hat is uh uh involved in the in in bank I suppose on the on the uh on some of the social issues but also labor issues as a representative in the bank of labor issues is um or internals uh uh side like works council is how do you uh address the grievances and information in the right reporting To do that you need procedures you need to follow international standards the ILO standards the BAT requirements so and this is where they overlap with what we are doing in terms of projects we're looking at ISO standards we're looking at uh best practices we're looking at IUCN requirements we're looking at BAT requirements water directive and so forth and these uh requirements is that we're trying to put on your reporting what procedures you need to manage those risks and assess those risks and then report. So we don't maybe go on the in as an IFI on the reporting side is that side but actually the core of the procedures is the same. Any project we invest we want the institutions to have and the our clients to have the institutional capacity to implement our requirements which are very similar and ensure they have procedures. So the actual overlap inside is huge. uh the reporting of course is not what we're going to separate but we have um is very useful for investors because if I am going to do a cap and and and then again maybe turn back the whole point of the reporting and st is simplification through standardization as the former uh uh well
but is it simplified so most uh the the latest CSRD compliant reports they're over 100 pages
well the some 100, some are even 200, but some of the very good ones particularly from some Scandinavia 50 and they're audited and they're very good. So the question and the old GRI and the reports would be actually longer or CSR. So so you it's not a question of of the the volume. It's it can be 50 pages if done properly even for a larger company. uh the problem is that there hasn't been experience and therefore it's gone a bit so wide and this is why I think the audits we should have the allowed people to do first of all reports and then came in on the reporting the reporting is getting the key KPIs and providing key information to stakeholders and confirming you've got procedures to address uh those issues uh and this is where the IFI world we're in the same we want companies to have procedures which we invest in
yes
uh and we don't maybe require them as to do the reporting although we ask them to report to ourselves on the project level but I think at the corporate level it's very important to have that because if I'm doing a capital markets transaction then my access due to also uh various restrictions is quite limited and uh I can only rely on publicly available documentation
yes and these sustainability reports are publicly available
they are and if they're audited then there is a certain reasonable assurance process in there uh there is more confidence for me to rely and if those reports follow a certain standardized approach and address issues in a similar way of course there will be better and worse and and everything else but that's life uh in every but at least I can make a judgment by reading it that it follows a certain set of standards and regulations
but are these reports are just data analysis or do they actually contribute to that continuous improvement of management systems.
I I
because it's a little bit like a chicken and egg. Maybe you have good policies and then you can have a good report. Maybe you have the nice report but you don't have the good management system.
So, you know, it's a bit like you have ISO 14,000 old standards being put in place and the fact you had a standard doesn't mean that you had a management system in place.
Exactly. although it was certified and whether you bought the certificate or not. So there is of course a risk of greenwashing and there's a lot of EU legislation and I think going against greenwashing uh or greenwishing even uh that is uh so there is a risk that the reports are glossy reports that provide glossy information and then there's no substance behind it. But I think the market will start to pan that out. And this the whole point of if you have a standardized approach, standardized reporting. And of course, it's a shame uh how it's been cut down the scope, the number of companies that are mandated to do that because it's even hard to compare peers with peers. But the big companies will be there. There will be an audit system and there certain systems will be provided. And of course, if you misrepresent these things come out eventually.
Yeah. as we had with Volkswagen or some other companies which had provided information which then proved not to be correct and the hit that they had particularly in the US with the liability issues although it wasn't required in in those countries to have that that for misinformation was very very high so I think this is an area where if you have the reports you will have the and and this is my my take on it and whether it's correct or not is if I have the CEO of a company having to sign off a report and take actually accountability and responsibility for it, they will look at the data is there. First of all, the lawyers will look at it and then they understand why what are you assigning? Why are you signing this? Second of all, it will mean that there is a discussion at the board level of what am I signing? What is this data? What am I committing to? uh by doing
is it a commitment or is it a reporting on what's already been done? It's a commitment because you are looking at some and this the whole the SRS is being slightly reduced but the whole uh original you're looking at your longer term uh commitments and and I think one of the things that already came out once people had to start doing some of the requirements a lot of companies suddenly said oh my net zero target is actually not as
and they backed out and that was good
and that is good because you had a lot of companies commit to things without thinking about it or making PR statements we'll commit to net zero and then you go well actually your industry can't commit to that or your business plan doesn't reflect it so you've committed to something which you haven't but if I have to then make a statement in the annual report which is subject to uh the same regulations as my financial report then the liabilities are much high so the companies have which is good because it means that we will know who really has in the target who's thinking about it the double material reality is usually done at the board level as well. What is significant for us and this in the current world you're looking at uh the time of course when we started the work was before the war in Ukraine uh and this is terrible what was happening there but we had the uh we had it at during the pandemic where supply chain suddenly became a bigger issue.
Yeah. And uh so you need as a corporate as a company and in your value chain to assess your suppliers and supply assess those supply chains is it really a material because a lot of companies found out that we have free suppliers but actually they all come from the same factory. Uh so if something happens in that factory be it a fire be a flood or there are real labor related issues child labor other things and we need to stop that supplier actually there's no other supplier and that has allowed companies to assess their risks assess their operational risks and that's a key issue of of uh the IRO is I'm trying to uh look at my operational risks uh on the sustainability front on be it in nature, be it on the supply chains, be it in the pollution or climate, it's a scope free of course which comes in that have just basically passed on their missions elsewhere
and uh that I think is a good and the companies that I spoke to that have done a proper double materiality even when they didn't like the the process of the reporting and the bure bureaucracy because of how the audit is required the one element they all said on so far I said that double materiality was a good exercise for It enabled us to look at what are the real risks, opportunities, reputational, which way we're going and what it impacts our strategy or should it impact and that I think is where it's good and you shouldn't do it every year. The double material you do it once and do it sort of repeat it every so it's a it's a risk management tool that enables you do it once properly and then you just fill in the sort of additional issues as things change. uh and that I think is uh essential in a good management system and a good corporate management and governance. So, so this is where when I think that the overlap of what we were trying to achieve and a good company will then see okay I need to put resources I need to check my supply chains you know what this do we build a car but at least you build you know if I'm going to build a gas fired power plant to supply myself I will at least know that there will be costs and other issues repercussions cooling water is a big issue so maybe we should go away or or maybe change the location uh the supply chain is the entire And and this is where the European system which was circularity particularly in the current day I want to know what materials rare earth metals are suddenly becoming in short supply because of geopolitics. So do I recycle? Do I actually manage to utilize what I have? Where are those materials coming in to enable to uh complete my uh my my investments? And the the question just uh one is the the D the Dutch it was very interesting how lack of information can result in some very uh weird decisions. So the Dutch government wanted to nationalize a certain semiconductor uh operator uh because it was Dutch and with China everything seems to have forgotten that all the production was China. China stopped the supply of those semiconductors which had a repercussion that some German car manufacturers could were potentially under threat and again lack of information from a decision maker at a certain level that thinking well we'll we'll just take this and it'll be fine showed how the supply chain the value chain the value chain because it's not only my supply but actually who I supply to can have a very big impact on the economy of Europe never mind
how much transparency is too much transparency because when we do our due diligence as a with our IFI hat those are for internal purposes whatever we find we do uh provide a summary on a website but it seems like what we're talking about under double materiality and the value chain these are very sensitive business information that can potentially make or break deals so how much transparency in sustainability reporting is too much transparency
I don't okay there's there's two things first of all they are some areas which are commercially uh sensitive and that's why you have your legal team to go through and apply some of those uh clauses that this is actually sensitive or or not and that will be particularly in the defense industry and other areas that you will have and that the application of that will will take place. You have of course some of the basic data shouldn't be uh problematic. you know the your your you know number of women on board in the management that's that's information that should be there and everybody should have that. What is your uh uh sick leave or or uh what is the impact on your labor in terms of health and safety? again you send those statistics they are out there if you wanted and 90% if not 95% of the data that you have and you disclose is already reported to many uh regulatory issues and uh
yes but not in the same report so that's the criticism for a lot of like other initiatives that the data is out there but it's not centralized
yes and this is what we're trying to do so you'll have it centralized and hopefully I can use that data so the so the companies can't claim they don't have the data because most of it is particularly in Eastern Europe we are still the legacy of of you could say uh communism which has some good aspects about it in terms of this labor the labor inspectorate I would say in Poland is better than in the UK uh sanitary inspector has quite quite a lot of teeth the environmental inspector really goes in can have a lot of teeth so it is it is actually the old systems are there and they're actually been functioning well and in some ways you could say why Poland's a success. It's it's combined both both systems and uh developing uh and actually the regulations are there and yet it is uh moving at a at a fantastic pace but it is uh so the data is there the the data can be found through access to information anyway but how centralizing it the aim is to enable I mean we have to go back the data was there for the financial markets and financial investors to be able to make a decision whether they invest or and uh and having it in one pool and elsewhere. It's also helped stakeholders but that to be frank that was secondary information to stakeholders. The aim was that my analysts can have a look at a company compare one company with another. Which one do I invest? Do I invest in the one that has a transition plan? The one that has outsourced everything production to China. The one that has production and I know where the costs are in Europe for instance. and that data would enable me to make an investment and look at the potential returns in uh the current volatile environment. So I don't think that so I say I don't think the data issue in terms of of how much data there is there are some issues which you have to prepare and the transition plans people didn't have them your climate strategy but you should do that anyway you have the data in one place absolutely utilizes it's what is useful for the financial markets it is useful for for for investors to be able to compare one company with another so hopefully will enable better capital flow and better investments to be made inside Europe because I can make the judgment and the whole point of uh the requirement is to how to shift the investments and the private sector into those sustainable or better uh industries away from those which are uh maybe not have a future or or are worse. So it is a conscious decision for uh that our pension funds which I hope will be paying out in 30 40 50 years time do not make those investments of you know let's say investing in a in a winery in an area which is going to be subject to drought uh but maybe wine in England is a good idea. So it is uh that but because it's a 20 30 years time we're looking of of those returns for the for that pension fund. So you need to look at those risks uh in the right way and therefore they need to have the information uh to make those investments. The secondary of course then uh your suppliers will also want to know do I supply this uh company or not and do I you could say put my entire future with a company that has a future or doesn't has a future.
Yeah. Because we often forget that suppliers are companies too, right?
Yes. And the suppliers also need to know well it's not just that I want any contract but if I'm building my future based on working with with a certain company I need to know that that company has that if it hasn't for instance is still going to be producing diesel engines uh and is not outsourcing or changing is that going to be in five years time still as big a market and as a supplier to them of widgets is that my uh livelihood potentially not friend maybe I should look at somewhere some diversifying as well where to sell my widgets and that again is something I think people uh forget stakeholders you could say communities but we want that site but we also as uh the example of the Netherlands if we if our decision makers do not have some data and can collect that data and the whole point of uh you have a European single access point and uh so you'll have information flowing through with AI technology will be able to to to zoom zoom in that data But if you haven't got data, we don't know whether we're on track of our transition plans. We don't know what about as suppliers and the supply sources in terms of where Europe and this is a European CSRD European system. I I see it as an essential element of our sovereignty and survival as Europe because we need to we are dependent on external energy. So we need to decarbonize. We need to look at energy sources. we're dependent upon external uh suppliers of uh some raw materials. So I need to look at the circularity. I need to look at where materials how can I maximize the use of it and at least have information of where the sensitive industries where I'm importing not importing and where which ones are coming in. I need to look at water resources. Water is a big issue huge issue. Droughts we got droughts in Poland probably sorry that's so Poland is is but it is a big issue. So water use, data centers need water. Where you going to put the data centers? We will need to have that data uh on that side. Biodiversity of course a big issue is is as well what how we want to live and the social side the people issues how we treat people how where the employment is. Do we pay our contractors on time subcontractors big issue is that many big companies don't pay theirmemes and ifmemes don't get paid for 6 months or a year they go bust. So again we need to understand which industries which countries are not paying or not notmemes need that data to be able because then the governments can make an action say come on pay up or do certain systems to to help them because if you have delays and payment with high inflation these companies will not survive. So, so again is it a is it it is um essential for us as Europeans if we and and pollution of course if we are going to go into more defense industries which we will for various reasons uh then we don't want to have polluting industries coming in and saying well is the state secret why am I dumping that mercury into the river yeah uh no you need to have those companies also applying systems and knowing where they are and that reporting is going to be a very uh essential information because you will have it through the regulators but was it go through the regulators now with the AI system through the disclosure of information you will be able to make okay we have a problem here in Europe we need to look at certain areas
who's going to do that
well the whole point is uh that uh well there there's two two ways I mean there's the one one view is the market will help to shape and move the invisible hand of the market uh but the market has to have regulation and therefore the regulators and therefore the commissioner ultimately but also member states to be able to have information which way would they go and also important for csos which are essential part of our life and you could say uh have access to data to enable them to focus their attentions of which way they need to focus to ensure that the living standards uh are maintained in Europe our air quality our labor standards and everything is also maintained and we don't sort of end up uh in in a way which becomes just the sort of free market capitalism where uh no one cares about anybody and you get go on maternity leave and you get sacked as it happens in some countries. some of these like labor related disclosures are interesting for me because as with the ESG uh reporting and they look at is there a policy yes or no they don't look at is that policy appropriate for the scale and scope of the company operation does it really meet national standards because we assume it does but sometimes it doesn't
and this is where the ESRS's are very useful and of course we will be uh publishing on the 4th of December. So there will be the new uh ESRS's. They're cut down significantly because of of the political uh will of uh requirement. But I still think they're quite robust and will be useful uh to ensure that there is reference to ISO standards, there is reference to human rights and the auditors are there to review to ensure that those principles at least are materially met. And even if they can't do this all reasonable and then go into the uh full detail throughout the assessment, they at least check that these policies refer to that there's internal audits that there's internal assessment uh being done and that these areas are addressed in the audited report and if they're not they will have to make a footnote uh and say well this we haven't got evidence or haven't got information which will then allow NOS's or in due diligence say okay well the auditors haven't signed off on this clause. was
so what's the problem?
Uh or you haven't provided enough information what's your problem and that will enable to uh stack and of course auditors uh are not a full 100% uh foolproof system. That's that's obvious but it is an area where the auditors do give a certain level of assurance and the riskmanagement side and that's what we're trying to do and companies will start to have to think about the social issues the dimensions the labor issues the IO the supply chains and that is a good uh sign because if you think about it you can still make a decision as I say the CSRD does not allow you to to create the black death fund that will fund you know war uh uh whatever you know child labor and everything and you disclose it that's my business plan it it it's as long as it's legal you can you can have that and maybe you know there will be some companies will say I want to fund that but at least you're transparent in terms of your business strategy your objections and your investments and that is the key and that's what we're trying to do so if I want to buy work with a certain company or want to be employed by that company or have them be be working for me or be their subcontract fact I were working with them. I know what they stand for and at least I can call them out uh on those issues but it also means that the culture of the company will be sort of steering in that direction to actually apply these requirements
and I guess now employee employees and like the public are more aware and sensitive to company mandates and sustainability initiatives. So going forward, what do you think will be the biggest changes brought to us by ESRS and CSRD?
Well, unfortunately CSRD has been the number of companies in scope has reduced significantly. So if I look at this was talking the Polish stock exchange, we had uh even an FRD uh we had 3,000 companies originally in scope and we're looking at 200 right now. Uh there's hund and odd that we're reporting only 51 companies will be on the stock exchange have to report
in all of Poland.
Yes. But those are listed on stock exchange. So there will be potentially up to 150 maybe 200 depending how the s final decision makes but it shows the reduction of by 90%.
And uh is that right? No it isn't because many companies report anyway. it will be the benchmark. If the euro Europe uh reduces those requirements too much then we will have the Chinese standard will be the benchmark and it's going to be a very uh you know paradox that Europe was leading uh UK even at one stage was leading on sustainability on the sustainability reporting and sustainable standards. China is making leaps uh and bounds forward and I if we are to use good industry practice if it will become that the Chinese standards are the best we will have to require but we forget as well not only that that becomes the sort of golden standard now whether it's applied in China or not but it becomes the standard to be applied but the Chinese companies we want to do business with will ask us for that information and it's going to become a a paradox that you know in Europe we go where we've deregulated everything else it's it's great and the Chinese come no no no no you want to do business with us give us information and this is I think again people don't understand that the world is moving China is moving very in terms of renewable energy and changes China has made uh you know there are problems significant problems labor issues other issues in in China and there there are some areas which are atrocious as well uh but China is leading in some areas so the Same will eventually happen in India as they as they develop. Uh these countries are not backward. They are developing and moving fast in a very sort of fastly fast evolving world with it and systems. We are having uh competing at global levels and even with slightly big globalization right now these companies are international. We look at international resources. there is a need uh for capital to flow and the capital does flow still between different areas. there is a a a large amount of money coming into different and why do you invest and you know you change the tax regime in the UK suddenly find a lot of people leaving what's going to be the impact on that there's going to be less tax revenue so you have to increase the tax and more people will leave and uh and it becomes a bit of a vicious circle if not well managed um and it is unfortunately in the world unless you have one common standard which we will not have in the in the foreseeable future the world is there will need to be these benchmarks. So I do hope uh that the European that that the air fragus ESRS's will be a good benchmark will be utilized therefore by companies also on a voluntary basis. Uh now of course if you're voluntary it means that whether you can rely as much because it's not assured it's it's a voluntary and if you're voluntary you can cherrypick uh unless you audit them and the companies go well actually I'll not in scope but I'll do it and I'll have myself audited. that will be a big big area as IFIs we are requiring more and more information as well and information on both the supply chains on the biodiversity issues on the labor issues uh and I think that's where companies will have to also provide that information anyway they will use a benchmark I say hopefully you're probably not the Chinese but anyway but even so it should become one I mean this the global taxonomy that was being worked on was aiming to do that and the work is being slightly reduced and stopped but it will come back and we are looking at them maybe.
Do you think that's real? Do you think that there will be a global taxonomy and we will agree on the same standards that are applicable in all these different regions of the world?
Um okay yes and no. I think we will have there was a lot of work done on a global taxonomy. The taxonomy got a bit too complicated and therefore it sort of also uh had its problems. But I think there will be because there is a need to define uh glob. It won't happen in it's it's stalled right now. it will happen in the next three four years I think and then we'll be uh you know and people like uh uh Sean Sean Sean from climate bonds uh will be know critical in developing a lot of things which he has is I think there will be certain benchmarks put forward uh and utilized and the climate bonds initiatives some of the work they are setting up some some some standards to try to uh assess the taxonomy uh I think we'll we need to have some definitions of what is green in terms of requirements and therefore there will be maybe not a global standard but there will be sort of references we use the European we sort of further uh update that it it got too complicated for people to actually implement it and that's the problem is and I think this is a a real problem sometimes is once we put everything together becomes very complicated and ultimately we need a simplification so I agree with the omnibus concept of simplification. For instance, we needed to simplify. Yes, we did. But it went onto the other side of deregulation and and people misunderstood the simplification from trying to cut everything and reduce
and uh and particularly as people do it anyway. So I think uh this this will it's it's uh it's like um an economic uh you you get to sort of a bit of a crash on the stock stock exchange. Yeah.
And we've basically got a technical correction where it's gone too far and it will come back. So the issue of this is this is where the CSRD is not dead. The CSDD has been amended but it's not dead. It's been reduced in scope and number of companies that apply. Okay. So we'll start to apply to the bigger companies as we learn to develop it. It hasn't been that big shock that we uh wanted. We're bit over ambitious. It will be implemented. we will further refine it and that it will percolate down to the companies and in the next three years, four years people will realize what the impacts are. I think the political swings will will go in the swing from one from the right to the left and maybe go back to the middle somewhere where there will be I think dialogue again between center right and center left because right now the omnibus the center right went with with the far right to to vote against you know environment. social legislation which was the first time a certain consensus broken at the EU level which is quite terrifying but hopefully those parties will sort of have deep soul searching and come back to to normality and we will come back with the need because it is needed it's needed by the market it's needed for Europe it is needed for the global standard investors want to know what they invest in they also SFRD is being right now updated as well uh we could argue for the better or for the worse but it's being amended as well in line line with that that's an ongoing right now discussion but there will be a need to invest and a lot of investors and lot of individual investors will want to know where the pension funds go they will also want to know where they're investing the pressures are there uh and I think uh in terms of renewable uh side I mean they have to have the right regulations we will move in in that direction. So I think the pressures will come back. It's just a swing. It's swung a bit big bit on the other side but it's still there.
Yeah.
And therefore if the core is there and the big companies will have to report, it will be come back and more companies will have to be reporting. It's the natural way of doing things. It's unfortunately that there was a knee-jerk reaction and
and I guess it will contribute to this like continuous improvement over time and continuous inclusion of more companies.
Absolutely. And as IFIs we require certain data. We need to do good projects on on sustainability but also look at risk. I mean the politics is always there but ultimately we do not want to invest. We're doing wherever we invest we have the principle do no significant harm and ensure that people are not worse off.
Yeah. as a principle and where we can we try to make them better off and we through the policies and do some net gains or at least uh wherever we can and that philosophy is embedded in our policies that philosophy is embedded in what we do uh and we don't want if a project does net loss or or has an negative impact then maybe we're not the ones to fund it that are sort of politically driven that can can do this but even so the popular populations will not like it and I think there is a risk aversion even among the sort of uh most investors and uh therefore we're looking at that uh investment and we look at how Europe is changing we look at the I mean I'm I'm from as I say Poland we have the Warso has changed over the past 20 years I'm sure as well Budapest Hungary is same it's beautiful it's cycling lays a lot of European money. Air quality is improved, safety is improved and that I think is you know London as well is there's a lot of improvements. That's what uh you know people want. We're not going to give it up and uh people will vote if if necessary. So this trend is a happening trend throughout and I think uh it will continue uh as long as we can of course affordability but it's a move where we will want to direct the capital investments into those areas because it makes our lives better and we do then appreciate and then cities boom and economies boom as a result.
Well hopefully. Thank you for being here with me today Robert and discussing sustainability reporting and disclosures. We'll be back with some more next time.
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