ESG in Legal Practice
Environmental, Social, and Governance (“ESG“) is more than regulatory compliance. It assumes a proactive approach on the part of private actors in response to environmental, social, and governance concerns. The phenomenon might be difficult to grasp in societies captured in a long process of transition and catching up with global business models. In this post, we review the current state of affairs regarding ESG in Serbia and desirable developments for the future.
ESG has captured virtually all aspects of modern business activities. ESG considerations affect investment policies, supply chains, manufacturing, import and export, to name a few. They have also affected legal practice, both externally and internally. Not only that law firms advise clients on the observance of ESG factors such as the size of carbon footprint, the level of human and labour rights of employees and across value chains, as well as the presence of corrupt practices, but they are expected to adjust their own work to enhance the pursuance of ESG goals. While these points are well-established globally, especially in the multinational business context, Serbia is lagging behind. A serious catching up is needed, and the burden seems to be on the civil and private sectors.
Serbia faces numerous challenges engaging ESG considerations. The poor level of environmental protection is heavily publicized, for example Belgrade being constantly among the most polluted cities in the world (see here and here). The respect for human rights standards is also at the forefront of public attention, for example regarding recent allegations of forced labour or slavery of Vietnamese workers in the town of Zrenjanin (see here). The corruption perception index is quite bad, and there are constant allegations of corrupt relations between investors and the government (see here).
The problem is that Serbia has no legislation addressing ESG concerns besides traditional regulation in the spheres of environmental, labour, and criminal law and similar. While ESG per definition goes beyond regulatory compliance, hard law requirements are still important considering the objections that voluntary commitments to ESG standards do not bring desirable results, coming from the civil sector, but also expressed in the European Parliament’s resolution that advanced a draft directive on corporate due diligence.
We have already analysed the prospective effect of future EU regulations regarding environmental, human rights and good governance due diligence on Serbian businesses (see here). However, the legislative process in the EU has been slowed down, and even once adopted the directive would need to be implemented within member states though local laws. This means that the effects of this EU legislation are unlikely to be seen any time soon.
Notwithstanding the lack of formal obligations, the private sector in Serbia provides evidence of some sectoral self-regulation and promotion of voluntary commitments, notably through initiatives led by larger, multinational companies. Codes of conduct for suppliers exist, taking into account most of, if not all, ESG considerations. Banks also report ESG policies, for example in lending.
Prospects for the Future
Activism has played a crucial role in the development of ESG criteria globally, and there is no reason why Serbia should be any different.
What the civil sector needs to do is to develop a more nuanced, comprehensive, and sustainable approach, moving away from an anti-investor sentiment towards a capability to influence investors and businesses in the long term to include and prioritize ESG considerations in their agenda. Furthermore, the role of civil society organizations in the monitoring of the observance of ESG criteria in practice is important. Civil society organizations can provide an overview of good and bad practices in the Serbian specific context and ultimately encourage and assist prospective legislative action.
Given that stock markets and collective investment schemes are almost non-existent in Serbia, not much can be expected from shareholder activism.
As suggested above, law firms have a double role in the promotion of ESG, insofar as they both advise clients on ESG issues and implement ESG criteria in their own operations.
In 2022, Serbia finds itself at the beginning of its ESG journey but not ill-equipped. Actors do exist and issues are well-identified, and it now remains to be seen to what extent international ESG trends will spill over to Serbia.