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Importance of applying Environmental, Social, and Corporate governance principles for business 20.06.24

The transition to "Green Economy" and becoming a supplier of "green energy" are priorities of Azerbaijan's economic policy. It is not by chance that 2024 has been designated as the "Year of Solidarity for a Green World" in our country by the relevant Decree of the Head of State. This year Azerbaijan will also host COP29, a prestigious event. One of the main directions of the Environmental, Social, and Corporate Governance (ESG) approach is addressing environmental issues. The application of ESG principles provides the "green economy" with the opportunity to contribute to the transformation process.

What is ESG?

ESG (Environmental, Social, and Governance) means environmental, social, and corporate governance, respectively. Overall, ESG is a set of criteria and guiding principles that measure a business's impact on environment and society, as well as how transparently and reliably the business operates. The "E" component of ESG reflects the extent of a company's environmental responsibility. This component is related to issues such as corporate climate policy, energy use, waste management, environmental pollution, and the protection of natural resources. The "E" element also helps evaluate the environmental risks that the company may face and how the company manages these risks. This also includes direct and indirect greenhouse gas emissions, toxic waste management, and compliance with environmental regulations. The "S" component is related to the company's policies towards its employees, suppliers, and customers. This component covers issues such as the company's investment in social initiatives and activities, as well as maintaining employee health and safety in the workplace. The "G" component covers issues such as the company's use of accurate and transparent accounting methods, adherence to integrity and fairness in selecting its executive employees, and accountability to shareholders. Each private company can adopt one or more ESG directions that suit it and implement them within the company.

The Benefits of ESG Principles for Business

The impact that business entities can have on the surrounding ecosystem, both locally and globally, is of significant importance. The application of ESG principles in enterprises not only serves to protect the environment but also has a significant impact on increasing the competitiveness of enterprises, attracting external investments, and especially their access to foreign markets. Therefore, business entities that prioritize the environmental component, which is a key element of ESG (Environmental, Social, and Governance) integrate efficient and economical technologies, "green innovations," into their business processes, significantly influences cost optimization for entrepreneurs, increases their productivity, and enhances their competitiveness. On the other hand, aligning the production process with environmental protection standards and producing eco-friendly products helps increase the export potential of enterprises and access financial resources. Meeting ESG requirements allows enterprises to develop sustainably and better manage external risks. ESG factors are currently considered by institutional investors as part of the asset selection process. Therefore, before investing, private equity funds conduct necessary research on implementation of ESG principles and prefer companies that apply these principles.

Measures taken in Azerbaijan for implementing ESG.

The subgroup on "Environmental, Social, and Corporate Governance (ESG) standards" was established within working group on "Corporate Governance, Investments, and Corporate Social Responsibility"of the Business Environment and International Ratings Commission in our country to promote ESG more broadly, to combine efforts of the state and private sectors in this direction, and to ensure the implementation of a conceptual framework on September 30, 2022. The sub-group is headed by the Small and Medium Business Development Agency (KOBİA). The sub-group includes representatives from about 20 institutions and organizations from both the private and public sectors. To ensure systematic activity in the ESG field, a strategic vision document for the medium term was developed in our country in the past period, and "roadmaps for 2023 and 2024 to stimulate and encourage the application of Environmental, Social, and Corporate Governance (ESG) principles" were approved. Within the framework of implementation of the 2023 Roadmap, an analysis of the current situation in the country in the ESG field was conducted as well as the survey was carried out, and international experience was studied. Additionally, the legal and regulatory frameworks, current and newly introduced norms and rules related to individual ESG elements were reviewed.