Environmental, Social and Governance (ESG) policies have become a top priority for regulators in Europe, as evidence shows that sustainability and business in society requires a new paradigm. ESG encompasses risk mitigation on climate change, inequality in society, and fair leadership in governance.

To this effect, the European Commission (the executive arm of the European institutions), as well as the European Central Bank (ECB) are leading in defining taxonomies and regulation in how businesses and organizations will be assessed on performance. This, in turn, will verify business’ license to operate. This European regulation will impact any and all business being conducted within and through Europe.

The European Commission released a comprehensive action plan in 2018 to make finance more sustainable. The plan aims to mainstream sustainability by redefining the way organizations and businesses measure performance, and how they attribute value to capital. Specifically, the EU taxonomy classifies sustainable economic activities, the development of sustainability standards, and the integration of sustainability risks into investment and supervisory practices.

Cyprus finds itself at a crossroads, now, as regulatory bodies are seeking to embed ESG metrics in the financial reports of businesses and organizations. For example, the asset management company, Blackstone, is leading the debate in the assimilation of ESG policies, stating that “ESG principles are crucial to developing strong, resilient companies and assets that deliver long-term value for our investors”.

How will this impact Cyprus, and what will Cypriot companies have to be aware of?

To combat a lack of accountability and transparency, the EU proposed the Corporate Sustainability Reporting Directive (CSRD). This proposal requires businesses and organizations with over 500 employees to report annually on their ESG policies and practices, as well as their impact on the environment and society. The directive also requires companies to report on human rights, anti-corruption and bribery, and social and environmental policies and outcomes. According to a Covington report, the “CSRD will apply to an initial group of large EU companies from 2024 and gradually extend its reach to smaller companies over the course of the following four years.”

This will change the way accountants conduct internal audits and monitoring, as well as how businesses place value on initiatives that align with their intentions and vision. Fostering greater sustainability has its own challenges, and reporting on measurements of sustainability will be of utmost importance. 

Pascal Durand, a French lawyer and politician, believes that the reporting rules for large companies on their ESG initiatives is something that has been a long time coming. “Today, information on a company’s impact on the environment, human rights, and work ethics is patchy, unreliable and easily abused. Some companies do not report, others report on what they want.” He continues, adding that “From now on, having a clean human rights record will be just as important as having a clean balance sheet.”

Keeping an eye on the change in stakeholder maps will be important in 2024, when looking to sustain business growth during a time of change. Following the trend of environmentally sustainable initiatives, consumers are increasingly interested in environmentally-friendly companies. For example, according to an IBM study, 70% of consumers in the US and Canada believe in the importance of brands being eco-friendly. In terms of a business’ priorities with sustainability, Georg Winkler, Senior Partner at McKinsey, believes that “it’s top of mind for boards and investors alike, obviously, and investors are increasingly directing capital towards sectors and companies based on their ESG strategy.”

Companies, big or small, will have the opportunity to contribute to a more sustainable future. This is an opportunity to engage with new audiences and consumers, shifting the stakeholder map of businesses.

The ESG standards are continuously advancing, as evidenced by the upcoming rules set by the European Union Parliament set to take effect from 2024 to 2028. The Parliament's announcement in late 2022 emphasizes:

“The Council is expected to adopt the proposal on 28 November, after which it will be signed and published in the EU Official Journal. The directive will enter into force 20 days after publication. The rules will start applying between 2024 and 2028:

• From 1 January 2024 for large public-interest companies (with over 500 employees) already subject to the non-financial reporting directive, with reports due in 2025;
• From 1 January 2025 for large companies that are not presently subject to the non-financial reporting directive (with more than 250 employees and/or €40 million in turnover and/or €20 million in total assets), with reports due in 2026;
• From 1 January 2026 for listed SMEs and other undertakings, with reports due in 2027. SMEs can opt-out until 2028.”

There is much work yet to be done in Cyprus' journey towards sustainable development, as highlighted in the 2022 Eurostat report "Sustainable Development in the European Union". While progress has been made in reducing per capita greenhouse gas emissions, the country still lags behind the EU average. Additionally, the growing gender employment gap in Cyprus, exceeding the EU average, serves as a reminder of the need for ongoing and dedicated efforts towards a socially sustainable future.

The imperative need for ESG implementation in both the public and private sectors in Cyprus is becoming increasingly clear as the country's sustainability transformation lags behind. The urgency of this matter was emphasized in the 2020 PwC's Restart Cyprus report, which emphasized ESG standards as a crucial aspect of rebuilding Cyprus in a post-pandemic era.

Major corporations in Cyprus are already adapting to the standards. For example, the Bank of Cyprus mentions that it has made significant strides in its ESG journey, with an ‘A’ rating from MSCI and a shift towards a more mature charitable model focused on generating Social Capital through partnerships with organizations including businesses, customers, NGOs, and the state. Additionally, several of the audit firms are providing ESG financing services while the Cyprus Investment Funds Association (CIFA) is actively working towards educating the industry. It is noteworthy to mention that currently, ESG reporting is not a requirement in the listing rules of the Cyprus Stock Exchange, and the exchange is not mandating listed companies to submit annual sustainability reports according to the UN's SSEI.

Cleopatra Kitti, an INSEAD Alumni, board member Senior Advisor to international corporations and governments, and founder of the Mediterranean Growth Initiative, shares, “We are on the path to understanding how ESG will impact Cyprus. The island will follow EU regulation, however, as the timeline is approaching, Cypriot businesses and organizations must be prepared for the new regulatory obligations. Senior leaders and board members must understand the shift these obligations will require in forming strategy and mitigating risk.” 

In the words of Ban Ki-moon, former Secretary-General of the United Nations, implementing ESG standards is not an option, it is a moral obligation for businesses to secure a sustainable future for all.

What are your thoughts on the future of Cyprus and the ESG directives?