Overview of ESG regulation in Belgium or How to embed sustainability in the value chain?
ESG” stands for Environmental, Social and Governance criteria, which aim to integrate sustainable development and long-term issues into corporate strategy.
The environmental criterion considers a company’s impact on the planet, i.e. its climate balance, greenhouse gas emissions and carbon footprint.
The social pillar analyses dialogue within companies and more generally health and safety standards, equity issues, diversity integration, gender equality and employee training.
The governance criterion looks at the transparency of governance bodies, the monitoring of executive remuneration, the fight against corruption and gender parity in management.
In practice, ESG reporting is an analytical framework designed to measure a company’s non-financial performance. In the past, purely financial criteria dominated the way investors measured corporate performance. Now, with climate change and social dialogue as key issues, investors and all stakeholders are looking for more comprehensive and inclusive ways to measure a company’s performance and impact.
In the Belgian business ecosystem, ESG is now an integral part of assessing a company’s overall value.
From a legal perspective, the sources of ESG regulation in Belgium are mainly international treaties and European legislation.
In 2004, as part of the United Nations Global Compact, UN Secretary-General Kofi Annan launched the first appeal to 50 chief executives of major financial institutions to integrate ESG issues into the financial sector, marking the genesis of ESG criteria.
The main incentive for the development of ESG criteria at the international level came in 2015 with (i) the adoption by 193 countries of the UN’s 2030 Agenda for Sustainable Development and (ii) the signing of the Paris Agreement, the international treaty on global warming.
On the European continent, we note that the European Union is the main driver of the ESG transition of the economy, with a number of directives and regulations published to accelerate the ecological transition of the economy and achieve the “Green Deal”.[1]
Sometimes, however, the European Union is also a source of paralysis and even blockage when it comes to going beyond the promotion of ESG criteria. The draft directive on Corporate Sustanibility Reporting (CSR), which aims to make large corporations more accountable for human rights and environmental abuses. In particular, this project should help combat child labor and prevent tragedies similar to the Rana Plaza accident[2]. Although the European institutions had painstakingly reached an agreement in trialogue in December, some states subsequently threatened to abstain or vote against the text, thereby wiping out more than two years of discussion and compromise. It was only at the cost of raising the thresholds that would bring certain companies within the scope of the directive, and thus reducing the number of companies concerned, that some reluctant states agreed to vote in favor of the text. It now remains for the European Parliament, in its plenary session, to approve the text so that the Directive can finally be adopted.
Regardless, affected companies will be required to measure their direct and indirect environmental impacts beyond their own operations, taking into account the entire lifecycle of their products and components. In turn, their own customers and suppliers of all sizes will have to measure and communicate their own impacts, meaning that even SMEs will now have to adopt an ESG approach.
Internally, the FSMA – the Belgian Financial Services and Markets Authority – is responsible for monitoring compliance with the provisions of European regulations, in particular Regulation 2019/2088 on the publication of information in the field of financial services (SFDR). The FSMA has made the fight against greenwashing a priority by requiring that sustainability-related information for investors be complete, accurate, clear, transparent and not misleading. In practice, the FSMA publishes questions and answers aimed at harmonising the quality of the above-mentioned information.
The Belgian private equity sector is particularly revealing of society’s new perception of ESG.
Indeed, we note that environmental, social and governance (ESG) issues are playing an increasingly important role among Belgian private equity players.
The “Private Equity Responsible Investment” survey conducted by PwC[3] in 2021 already shows that:
- 35% of Belgian investors (in the survey sample) systematically assess the ESG risks and opportunities of target companies as part of their due diligence;
- 39% of these investors have rejected a potential investment on ESG grounds;
- 26% of the Belgian private equity players surveyed have committed to comply with the investment principles endorsed by the United Nations, and a further 30% plan to do so in the coming years.
ESG-sensitive activities are now recognised by Belgian investors and society in general as a driver of the value creation process.
Pre-acquisition assessment of specific ESG risks and opportunities, ongoing ESG support and monitoring (including the requirement to calculate their carbon footprint annually and follow a plan to reduce it) are now part of the SD that investment funds undertake to ensure that their portfolio companies meet the new sustainability requirements.
In practice, this is reflected in a fund’s choice of investment thesis, the selection of its various investment targets, the structuring of its portfolio of holdings and the fund’s reporting to its sponsors.
Man-made environmental damage, loss of biodiversity and social unrest in the streets have led to a global awareness of the need to move beyond purely financial analysis.
To generate sustainable growth, the Belgian private equity industry now recognises ESG as a source of value creation. More fundamentally, the private equity industry is participating in the development of a new mindset that will transform Belgian society.
There is no doubt that Belgian ESG regulations, whether European and/or national, will become increasingly dense and complex in the coming years in response to the many challenges facing our society.
Beyond the commercial arguments, a committed ESG policy is an argument for hiring young people in particular and will facilitate certain types of financing.
In public procurement, evidence of ESG practices will be one of the key award criteria in the coming years.
Temporary aid is planned, mainly at regional level, for companies that invest in an ESG approach.
Written by Jean-Nicolas Goossens and Bernard de la Vallée Poussin.
[1] The so-called Taxonomy Regulation, presented in 2018 as part of the Sustainable Finance Action Plan, was adopted by the European Union (EU) in 2020, in line with the European Green Pact’s goal of carbon neutrality by 2050.
[2] In 2013, nearly 1,100 people died in Bangladesh when a garment factory supplying European clothing brands such as Zara and Mango collapsed.
[3] Private Equity Responsible Investment Survey 2021 – PwC.