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Reimagining Industry

Reimagining Industry

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CEE Legal Matters spoke with CMS Partner and Head of Environmental Law Practice in Poland and CEE Agnieszka Skorupinska and CMS Turkey Managing Partner Done Yalcin about the impacts of the EU Green Deal and the rise of ESG in Europe and beyond.

The EU Green Deal Push

“The EU Green Deal is radically different from anything we’ve seen in the past in terms of an EU strategy,” Agnieszka Skorupinska explains. “Before it, we were used to seeing strategies being issued by the EU, with some of them being followed up by various actions and others less so – people were not always really paying much attention to them,” she adds, noting that we’ll soon pass the two-year mark since it was published. This was a period in which the strategy “has been rigorously followed by EU institutions with further detailed actions and further legal acts, like the EU Climate law.” The timeline has been, and remains, “extremely tight – it is all happening, it’s not delayed, it’s not simply left somewhere out there – with a new development resulting from the strategy almost every month.”

Critical to keep in mind, according to Skorupinska, is that the strategy truly covers the entire economy and industry in general, not just, say, the energy sector. Overall, it focuses heavily on sustainability, irrespective of the industry companies are operating in, and all the legal acts that have or will result from the strategy will create a lot of challenges before those that are not climate neutral. And Skorupinska says that, while emissions are a big component, there are many requirements beyond them (for example, those placed on chemical producers). “We’ll see a lot of regulatory pressure to look at how you get your energy, to not emit greenhouse gases, but also to be more sustainable in general. Such a transformation will not be easy, but it does have its benefits for those who work out a new model that incorporates this transformation – they will be beneficiaries of immense competitive advantage,” Skorupinska adds.

And this wave of regulations coming from the EU “will definitely have extraterritorial effects as well,” Done Yalcin explains, pointing to CBAM (border tax adjustment) as an example “that will have an impact on every company that sells products in the single market as well as on European companies with international supply chains.” Looking at Turkish exports (for which the largest market is the EU) as an example, Yalcin explains that an annual tax burden of USD 4 billion might be registered if Turkey does not initiate investments that will ensure compliance with the Green Deal. “Another example regarding how initiatives in the EU Green Deal train would create effects in non-EU countries could be the Corporate Sustainability Reporting Directive (CSRD). Although it basically brings disclosure obligations for companies within the bloc, if your company has an ultimate parent in a non-EU country, you could end up being subject to the CSRD,” she adds.

The carbon adjustment border mechanism – CBAM – mentioned by Yalcin is also used by Skorupinska to illustrate that the Green Deal does not only imply the regulatory stick. “There are also certain carrots, intended not just to encourage companies to undertake this transformation, but to also support them in the process. CBAM, for example, is a completely new legal tool with the purpose of equalizing the playing field for industry players producing in the EU, with all the greenhouse gas emissions restrictions in place, against those outside the EU, who might not have such burdens.” Through it, the hope is that companies will continue to be encouraged to produce, and be active, in the EU market.

Beyond protectionist approaches, “it is always important to think about money,” Skorupinska says: “Will there be any for the transformations on the horizon? For now, unfortunately, this is not that obvious.” While there are various strategies “on the table, in which financing is mentioned, not much has happened on this front up until now and the general impression so far is that industries will have to get the financial resources for this transformation on their own,” she adds. And this is currently a gap that not just EU market players are worried about, with Yalcin pointing to “Turkish policymakers having stated on numerous occasions that the EU, acting as a global rule-setter in this area, must take the lead in coordinating international efforts to finance the transition by mobilizing finance for its partners.” Yalcin further gave the example of Turkey only ratifying the Paris Agreement “after it was promised access to the necessary funding. According to recent reports, Turkey has reached an agreement with the World Bank; the German Federal Ministry for the Environment, Nature Conservation, and Nuclear Safety; the French Ministry for Europe and Foreign Affairs; the United Nations; and the EBRD on a USD 3.157 billion fund to ward off the effects of climate change,” much of which will be spent on a “green transformation.”

ESG Financing

“Non-financial reporting has been around for some years now,” says Skorupinska, but ESG is being considerably strengthened currently. “Businesses have to look at themselves and disclose their situation with respect to various issues that are not really just legal compliance but a bit more – being widely sustainable, going beyond the legal minimum requirements to show that you are well-managed and that you oversee the risks around the corner. Climate change is a good example. This reporting requires a different approach from what was normally used. Businesses need to carry out due diligence in respect to ESG and, from experience, they might need to change or supplement the way in which they are operating. In terms of their supply chain, for example, they might need to check for and apply new standards to their suppliers.”

And ESG is increasingly affecting the ability of companies to secure financing. “On this front, we have very strong actions from the EU over these past two years,” notes Skorupinska, pointing to the introduction of the EU Taxonomy as a particularly important tool. According to her, if a financial institution in the EU wants to say it is financing a sustainable green project, it will only be able to do so if the project is compliant with the Taxonomy, which contains very specific technical requirements for the business. “It doesn’t mean that financing has to go to sustainable businesses only, but we already see a tendency, with many banks stating that they won’t invest in non-sustainable businesses, and I think this will create a tremendous need for businesses to align,” she adds, which leads Yalcin to conclude: “The topic around ESG has lost the smell of nice-to-have and is now a must-have. And it is here to stay because the climate crisis in which we find ourselves will not disappear. Therefore, every company that wants to be prepared for the future, to survive in the economic market and to remain attractive as a trading partner, must face this issue. And this rather yesterday than today.”

Bring In the Lawyers

“We kick in when industry players want to comply with the relevant reporting obligations,” Skorupinska explains. “Some of it is purely technical but, for some, you need to adopt new procedures, new internal documents, new clauses on the contracts with, for example, your suppliers.” This is why Yalcin points to the need for a holistic approach: “We recommend a comprehensive due diligence to clients, not only legally but also operationally, to evaluate exactly what is happening in the company. At the same time, the supply chain of each client is put under a microscope. Based on the results, must-haves and nice-to-have measures are defined and implemented. In addition, we work with clients to develop appropriate policies and codes of conduct, etc.

According to Skorupinska, there are also investment structuring elements that need to be looked at from a legal perspective: “Ultimately, this is a legal act, so checking your investments against the Taxonomy is, to a large extent, a legal element.” And this, she predicts, is likely to go further in the near future, with an increasing “tendency when you are doing an M&A to consider if you want to buy a business based on figuring out how it will impact your ESG compliance and how it fits within the Taxonomy, in case you want to finance it down the line.” While not there yet across the board, Skorupinska says they are already seeing “some clients wanting to get this ESG and Taxonomy sorted out ahead of time when looking at assets to buy.”

Ultimately, “doing more than what the law requires you to do means reputation,” says Yalcin. “This makes you a more attractive trading and business partner and gives you a competitive advantage over other companies that have not yet seen sustainability as an opportunity. It also makes you a more attractive employer, etc., not to mention the positive effect on the environment. The better and more fully compliant they are, the more prepared business owners will be for the future.”

This Article was originally published in Issue 8.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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