The profusion of shocks experienced by economies around the world in recent years may raise questions and concerns about the validity or implementation pace of energy transition or sustainable development policies. The current crisis will not slow these processes down, but rather accelerate them. Implementing ESG factors in business is not an obstacle, but a rational response to today's most important challenges.
The fact that we are currently struggling with the aftermath of the war in Ukraine, the energy crisis or global inflation does not exempt us from the imperative of urgently seeking solutions to mitigate the negative effects of climate change. The latest risks make it all the more reasonable to seek an alternative to fossil fuels ‒ especially to oil and gas, a tool of political blackmail for Russia ‒ in the development of the renewable energy sector. In turn, the pandemic, the migration crisis and ageing populations draw our attention to social issues. Disruptions in global logistic chains are forcing changes in governance: shortening supply chains and reverting industrial production and services to home markets. All these phenomena are part of the idea of ESG, i.e. in business activities, looking not only at profits here and now, but also taking into account non-financial criteria (Environmental, Social and Corporate Governance).
Long-term Goals Remain Valid
In 2021, the value of sustainability bonds issued globally reached one trillion dollars. They already account for 10-12 per cent of the total debt instruments sold annually. Increased investor interest in sustainable financing, as well as everyday consumer choices, such as the growing number of photovoltaic installations or the sale of electric cars, indicate that ESG is not a passing fad, but a sustainable trend that is also in line with societal expectations.
“So far, due to the typically high cost of implementing solutions that meet ESG standards and the long time needed to see returns on them, such investments were encouraged by the low interest rate environment. Today, the perception that they are less attractive is influenced by a globally significant increase in rates and a decrease in the availability of capital. However, this effect should be at least partially offset by the regulations currently being introduced”, points out Beata Kozłowska-Chyła, Ph.D., CEO of PZU, the company leading the PZU Group, the largest financial conglomerate in Poland and Central and Eastern Europe, which has been consistently implementing its ESG strategy since March of last year.
In the banking sector, the cost of capital needed to generate a unit of credit for sustainable investments will be lower than for investments that do not meet this condition thanks to, among other things, the Regulation of the European Parliament and of the Council (EU) on prudential requirements for credit institutions and investment firms. Other regulations serve to achieve a similar objective with regard to bond market financing, of which the PZU Group is an active participant.
Both the long-term processes and the sudden shocks affecting economies around the world will generally encourage accelerated implementation of public and corporate policies conducive to sustainable development. Optimising businesses solely for current financial costs, which previously seemed to be the primary fuel driving globalisation, will have to give way to an approach that takes the long-term dimension into account. ESG factors such as employee wellbeing, environmental impacts of operations, and effective corporate governance structures will play a key role, says the CEO of PZU.
In 2022, the European Commission launched consultations regarding the functioning of ESG ratings in the EU and inclusion of these factors in credit ratings. Participants included rating agencies, investors, and rated companies. An overwhelming majority of respondents use ESG ratings (77% use them to a large extent). This also holds true for large Polish companies. In February 2022, leading rating agency Sustainalytics assigned an ESG risk rating of 18.6 to PZU SA. This means that the risk that the company would experience significant negative financial impacts stemming from issues related to environmental protection, social responsibility or corporate governance is low.
Crisis As a Catalyst
European, national or corporate green and sustainable strategies are being put to a difficult test today. With gas supplies from Russia to the EU being cut off, the difficult situation on the fertiliser market or the general increase in the cost of fossil fuels and food, ambitious assumptions about the pace or scope of change must sometimes give way to the primary need to ensure security for states and citizens. This is particularly true of the energy transition, as in many EU countries gas was supposed to be the primary transitional energy source, balancing a market increasingly fed by volatile renewable energy sources (RES). It is now apparent that, to a greater extent and for longer than expected, this role will have to be fulfilled by coal and nuclear energy.
“This situation has emphasized the validity of our approach, which involves working in partnership with all energy clients, supporting them in their transition efforts, motivating them to change – including through ESG factors assessment. Let's remember that in the Polish landscape, many of the companies whose operations are sensitive to ESG risks today are at the same time the same ones that invest the most in RES development. Cutting them off from financing would be a measure that would inhibit rather than accelerate the transition; it would also be costly in social terms,” points out the CEO of PZU.
However, the consequences of the war and geopolitical crisis are by no means clear-cut. Rising prices of non-renewable energy, or even the unavailability of previously used fossil fuels, will encourage green investments and their relative cost may decrease. Sustainable agriculture could serve as a similar example, where the large investments needed to implement advanced machinery and AI-based systems will be offset by reduced use of herbicides and fertilisers.
The risks in global logistics that became apparent during the pandemic will spur businesses to shorten their supply chains. “Poland has a large well-educated and qualified workforce, many innovative sectors (including finance), access to the Community market as an EU Member State, as well as NATO security guarantees. In the present circumstances, these are important advantages which give us a chance to take over some of the production returning from Asia”, notes Beata Kozłowska-Chyła.
Bringing industrial production back to European countries will entail investing in improved worker productivity. This is likely to take the form of increased spending on transport and community infrastructure (reduced commute times, easier reconciliation of family responsibilities and work, better quality of services in the local area, improved air quality), social infrastructure (care for children, the elderly and the disabled) and technological infrastructure (remote working, remote process management). This is effectively nothing other than ESG in practice.
Leadership Role
It is in large corporations that ESG solutions are tested, which later gradually become a market standard. This is the case of the PZU Group, which is the insurance market leader in Poland and remains at the forefront of banking, investment and healthcare markets. In Poland alone, its services and products are enjoyed by some 22 million customers. For more than a year and a half, the PZU Group has been implementing its ESG strategy for 2021‒2024, entitled "Balanced Growth".
For the insurer, supporting sustainable and responsible business, which contributes to reducing the effects of climate change, such as increasingly frequent and damaging natural disasters, is particularly important. The PZU Group wants to achieve climate neutrality (last year it reduced CO2 emissions by 26.2 per cent compared to 2019) and is also switching fully to energy from renewable sources. It supports development of green energy both through its product offerings ‒ insurance tailored to the needs of owners of renewable energy installations, funds allowing customers to invest in companies in the renewable energy sector ‒ and as an investor. The PZU Group has already earmarked PLN 420 million (EUR 90 million) to finance the construction of wind farms and has invested a further PLN 300 million (EUR 64 million) in ESG-linked bonds.
In the social dimension, one could mention the development of an offer that responds to the most important present-day needs: medical services and health insurance, products dedicated to senior citizens or pension products. The insurer also supports employers in building good and effective relationships with their employees, e.g. by offering a benefit platform. PZU also focuses on the wellbeing of its own employees. This includes a permanently implemented hybrid working model, relocation of the company's headquarters to PZU Park ‒ the most ecological and ergonomic office building in Warsaw ‒ and a modern wellbeing programme for the workforce.
We are aware of our responsibility in the area of sustainable development, which stems from our position as a leader in the financial sector. This is why we have joined, for example, the UN Global Compact initiative. We want to actively co-create a just transition strategy for the Polish economy and also be a partner and guide for foreign investors who want to invest in sustainable business in Poland and our region”, concludes Beata Kozłowska-Chyła. JPO, KTR ©℗
Beata Kozłowska-Chyła, CEO of PZU. Leaders of financial market have a special role to play with regard to promotion and implementation of ESG in business. One of such institutions is the PZU Group, the largest insurance and banking conglomerate in Poland and CEE.