Home
published on 15 September 2022 | reading time approx. 5 minutes
by Ilona Nurmela
Supplying and distributing a specific product or service from the beginning to end is what is known as the supply chain process (involving sourcing of materials, R&D, manufacture, finance, customer service, distribution & marketing). A 2015 survey from Cone Communications[1] found that 9 out of 10 millennials would switch brands to one associated with a more ethical cause – for a $100 product, customers were willing to pay an average of $27 more, if it were made under good working conditions, $19.50 more if the production's carbon emissions were offset and $18.50 more, if the raw materials were ethically sourced. This is why supply chain compliance and ESG (Environmental Social Responsibility) have been a concern in recent M&A deals, due diligences and investment opportunities – investors want to know what risks they are open to, if the business they want to invest in should turn out to be not ethical at some point in the chain.
CSR (Corporate Social Responsibility) and now ESG are part of responsibly doing business in Estonia. Making sustainable reporting and due diligence mandatory has been creeping up on Estonia via various EU Regulations.First there was Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 (in force from 2013) laying down the obligations of operators, who place timber and timber products on the EU market, to certify their products (FLEGT/CITES license or permit) in order to stop the trade in illegally harvested timber and timber products.Next, in 2014 there was EU Non-financial Reporting Directive (NFRD) Directive 2014/95/EU requiring from 2018 onwards for large companies to publish information on implemented environmental, CSR and HR policies, including information on human rights, anti-corruption and bribery, and diversity on company boards. The focus was also on due diligence procedures throughout the supply chain with a view to addressing existing and potential negative effects. For some strange reason only the diversity element (read: women) on company boards caused a stir in media, but perhaps that was because the NFRD did not exactly impose a legal obligation on EU companies to undertake due diligence regarding human rights compliance. The regulation offered an easy way out – a “comply of explain” principle – i.e. if companies do undertake the due diligence, they are required to report on it and if they don’t, they are required to explain why they do not.Then there was EU Regulation (EU) 2017/821 laying down supply chain due diligence obligations for EU importers of tin, tantalum and tungsten, their ores, and gold originating from conflict-affected and high-risk areas, making them check that the minerals or metals they buy do not contribute to conflict, forced labour or other illicit activities.Now there has been a proposal to pass (and from 2023 also implement) a new EU Regulation on supply-chain compliance where human rights and environmental practices are concerned, with fines and rights for victims to sue for damages in case of non-compliance [2].
In Estonia, CSR/ESG reporting is largely voluntary, but the pressure from investors and even employees has made companies realise that the reflected need for more transparency means ESG reporting is, indeed, important. NASDAQ e.g., has developed ESG programmes for stock exchanges to be implemented for companies listed on NASDAQ Nordic and NASDAQ OMX Tallinn. Listed companies include and publish CSR reports in their annual audited reports. There are also a few consulting companies like Sustinere who regularly analyse the level of sustainability disclosures in the Baltics. As at 31.12.2019, according to Sustinere’s report[3] listed and state-owned companies are ahead in voluntary sustainability and environmental impact reporting, while locally owned large firms lag behind. Only 1/5 of the Top 100 largest Estonian companies report on ESG systematically and comprehensively and only 1/3 of disclosures are supported with numeric, measured data. Surprisingly, state-owned enterprises report more on ESG than listed companies (as per 2019 data available).Quite a lot of Estonian companies have codes of business ethics or codes of conduct, outlining the principles of sustainable business, including adherence to human rights and protection of the environment. After realising that 98% of the financial sector’s environmental impact is in its supply chain (compared to direct operations), a few Estonian investment firms have voluntarily joined the PRI (Principles of Responsible Investing) ESG initiative of institutional investors acting sustainably in the best interests of their beneficiaries. From 2014 PRI has two Estonian signatories and third company joined in 2020[4]:
Out of the 13,000 EU firms that the proposed EU supply-chain legislation is supposed to impact – i.e. for which ESG shall be mandatory, not voluntary – very few firms are located in Estonia. The thresholds of application are:
In Estonia, ESG risks are assessed in most M&A transactions in the course of legal due diligences. ISO certification, sourcing certification and recycling is the new “normal”. More and more firms develop policies for CSR/ESG, ethical business, HR, environmental protection and commit to reducing carbon dioxide emissions or report on being carbon-neutral, but very few metrics can be found on company websites.
Besides the industry sectors mentioned above, other risk factors may trigger application of the EU chain-supply legislation when measuring and reporting on compliance:
Alice Salumets
Partner
Send inquiry