The outlook for economic development constantly evolves, with a stronger commitment to society and nature. Companies increasingly integrate the components of sustainability into their activity, paying more attention to the creation of sustainable systems that are based on the protection of nature, the well-being of society, fighting inequality, stimulating lifelong learning, etc. International forums have outlined responsibility for the environment and society as the main pillar of the economic future, and Romania has taken important steps in transposing these values at legislative level (Romania’s National Sustainable Development Strategy 2030, the National Action Plan, the 2021-2030 Integrated National Energy and Climate Plan, the National Circular Economy Strategy, the Code of Sustainability). International companies remain the main promotors of best practice in the field of sustainability at global level.
The business environment is involved in the sustainable development of the Romanian economy through active cooperation with public authorities. Identifying legislative gaps and addressing them is a priority for establishing solid foundations that allow the acceleration of efforts to develop a well-performing economy based on principles of sustainability and transparency.
Romania’s National Sustainable Development Strategy 2030 and the National Action Plan
The 2030 Agenda for sustainable development adopted by all Member States of the United Nations (UN) in 2015 provides a common plan of action for peace and prosperity, people, and the planet. This is structured around 17 sustainable development goals (SDGs) that cover areas such as poverty, health and well-being, quality education, gender equality, inequality and gaps, food security, sustainable consumption and production, economic growth, employment, infrastructure, climate change, ending pollution and loss of biodiversity, sustainable management of natural resources, access to justice and responsible institutions.
Romania, as part of the international community and a Member State of the European Union, supports this global agenda through Romania’s National Sustainable Development Strategy 2030 (SNDDR 2030). This document presents the local strategic vision in terms of the creation of a sustainable society.
The SNDDR 2030 sets 95 objectives related to the 17 SDGs and acts as a supporting framework for the other national strategies and sectoral policies related to the areas it covers. It is being developed and implemented by the line ministries.
In order to operationalize the SNDDR 2030, the Department for Sustainable Development was established, which operates within the working apparatus of the Government. Subordinated to the Prime Minister, this department has the role of coordinating the national efforts to implement the SDGs.
The business environment appreciates the efforts made so far to establish an adequate strategic and institutional framework and supports the application of an integrated and multidimensional approach in the implementation of the actions provided for in the SNDDR 2030 and in the National Action Plan for the implementation of the SNDDR.
However, the latest UN Sustainability Report (2022) reflects little progress for Romania over the last 10 years in terms of meeting the set goals. What is particularly worrying is that, based on the indicators monitored for SDG 4, Quality Education, this latest report indicates a decline in the case of Romania.
Considering the current security context, for the successful implementation of the measures necessary to build a resilient society, support economic growth, maintain natural capital and even support the restoration of ecosystems, it is absolutely necessary for the general level of education of the population to be increased. Thus, the business environment considers that projects in the educational field must be approached as a priority, in a consistent and coherent manner, and the education system must be modernized as soon as possible in order to allow for permanent adaptation to new developments.
As such, a better connection between the education system and labour market requirements is necessary. This can be achieved through the continuous training of the teaching staff and by integrating into the educational programs the subjects that are necessary for the exercise of relevant professions in the new European context of economic growth decoupled from the consumption of natural resources. Rapid steps are needed in this direction in order to enable a strategic economic positioning of Romania due to increased competitiveness obtained by rapid integration of new technologies and innovation.
The 2021-2030 Integrated National Energy and Climate Plan (INECP) includes Romania's objectives and contributions to the achievement of the EU's goal to be a leader in terms of energy transition at global level and to provide clean energy throughout the European Union.
As such, this plan is built on the basis of the elements that support the 5 main dimensions established at European Community level: energy security, decarbonisation, energy efficiency, the internal energy market as well as research, innovation and competitiveness.
Romania intends, through the INECP, to increase the share of energy from renewable sources in total energy consumption by 2030. This is expected to be done by increasing the installed capacity of wind and photovoltaic power plants, as well as by increasing the number of prosumers. Thus, the new share of renewable energy in the national energy mix must reach 30.7%.
If we refer to energy security, based on the recommendations of the European Commission, Romania has taken or committed to take measures for the implementation of several resource diversification projects, such as the implementation of the legislative framework necessary for the exploitation of natural gas resources in the Black Sea area and the development or optimization of the existing infrastructure of the electricity and natural gas networks, with a beneficial impact on the capacity to take over energy produced from renewable sources (RESs) and on the level of interconnectivity.
The business environment considers that, in order to be able to attract investments in new renewable energy production capacities, it is necessary to accelerate the development of electrical networks, to increase the flexibility and the level of interconnection, as well as to provide a high degree of transparency and visibility in terms of the timeframe for these works. Furthermore, we emphasise the need for stability and predictability being offered to investors through the legislative, fiscal and regulatory framework.
The National Circular Economy Strategy
On 21 September 2022, the Romanian Government adopted the National Circular Economy Strategy, developed under the coordination of the Department for Sustainable Development. Its objective is to support Romania's transition towards a circular economic model, in accordance with the EU’s Circular Economy Action Plan.
The main lines of action provided for in this document involve:
This strategy provides a macroeconomic vision for 14 Romanian economic sectors and their first evaluation in terms of the potential for circularity. Thus, 7 sectors with a high potential for circularity were identified:
The business environment considers that the Action Plan for the implementation of the National Circular Economy Strategy is necessary, and provides an adequate framework for cooperation between the public authorities and the relevant stakeholders, which should allow the achievement of more ambitious specific objectives. The circular economy entails a regenerative model, so it is fundamental that synergies between the economic sectors should be identified and strategically addressed. Moreover, it is necessary to carefully correlate this plan with other strategic documents concerning energy transition, so as to enable a higher use of renewable resources as an effective means of decarbonising the various sectors of the Romanian economy
The report “Limiting climate change and its impact: an integrated approach for Romania” is an important milestone in the national efforts to fight climate change and strengthen public policies in order to make the climate transition possible. This document, launched for public debate in September 2022, was drawn up by a working group established at the level of the Presidential Administration, within the Climate and Sustainability Department.
The report identifies a series of challenges that Romania must analyse in the context of climate change, as well as a set of measures to respond effectively to them. This document, also emphasises the importance of a holistic approach, with public policies based on data and science, in response to international developments and the “Fit for 55” package.
However, education is neglected in this document. Considering that climate change is a significant challenge, and that the effort to combat it will have a major effect on future economic and social policies, we consider that it is necessary to define and include specific measures in this document, which encourage the early formation of responsible behaviours against the background of a deep understanding of the interdependencies related to this phenomenon. Moreover, extensive and sustained measures are necessary in order to increase the general level of knowledge of the population on the issue of climate change, which is an area where the authorities, the business environment, the academic environment and NGOs can actively cooperate.
Following the transposition of the provisions of Directive 2014/95/EU amending Directive 2013/34/EU on disclosure of non-financial and diversity information by certain large undertakings and groups (NFRD), as well as by the appropriate national authorities (i.e., the Ministry of Finance, the National Bank of Romania, and the Financial Supervisory Authority), a relatively small number of undertakings have started to publish non-financial/sustainability reports/statements. Consequently, improvements are needed to the legislation to strengthen the application of the existing provisions, such as the introduction of more significant penalties for not publishing a report/statement, supplemented by penalties for non-compliance with the legislation. Moreover, a public institution should be set up to monitor and enforce compliance.
The lack of non-financial information in the public sphere to demonstrate the level of performance of companies could lead to the loss of development opportunities. For example, companies which fail to disclose this information could find it harder to attract financing, since finance providers might be unable to estimate adequately the risks and opportunities related to:
In future, the publication of non-financial statements and the adjustment of business strategies to go beyond the limits of legal obligations will be increasingly expected in the context of growing emphasis on sustainability at national and international level. Competitors will publish this information, while customers and the general public will be increasingly concerned with social responsibility and environmental protection. Moreover, national and international bodies will request this information, and increasingly more finance providers will want to have access to it too.
The initiative of the Department for Sustainable Development (DSD), within the Romanian Government, to launch, through the Code of Sustainability, a platform that facilitates compliance by organisations with the reporting obligations and, at the same time, the access of interested players to such information, is a step in the right direction. The involvement of the relevant players in the debate on the Code also represents a positive signal from the Government.
For the Code to be successfully implemented, account needs to be taken both of the lessons learnt by Germany – the model for the DSD project – and the current national and European conditions. Providing a reporting framework that is easy to follow and apply will be very useful for companies that have not published sustainability reports until now. It will be even more useful for SMEs that will be required to report sustainability information for the first time, after the adoption of the new Corporate Sustainability Reporting Directive (CSRD).
The approval of the CSRD represents an opportunity for the DSD project to be adapted, and this could be a way for the CSRD to be transposed into national legislation.
CSRD and local implementation
On 28 November 2022, the Council of the European Union issued its final approval of the Corporate Sustainability Reporting Directive (CSRD), endorsing the position of the European Parliament. The new rules will have to be implemented by the Member States within 18 months of the entry into force of the Directive.
The new Directive will apply to companies that meet one of the following criteria:
The CSRD also applies to insurance companies and credit institutions, regardless of their legal form.
The Directive will be implemented in three stages:
Beyond the significant increase in the number of reporting enterprises, the application of the CSRD will also lead to an increase in the quality of the reported information as a result of the introduction of reporting standards, as well as the requirement for the reported information to be to audited and verified.
Compliance with the CSRD provisions will require a considerable effort by companies, especially those that have not been required to report up to now. At the same time, in their turn, the authorities will have to make their own efforts to ensure that they have the necessary resources and the necessary level of competence to verify compliance.
BVB’s ESG Reporting Guidelines
Companies’ activities in the area of sustainability are considered an increasingly important element in the process of assessing their performance. Even though the trend is general, it is more visible on the capital market, as listed companies have additional transparency obligations.
The multiplication of ESG assessments as a result of increased interest from investors leads not only to the need to increase the quality of sustainability reporting, but also to the need for increased coherence in the field of reporting, as well as evaluation frameworks and standards. In their turn, these elements generate an increased need for reporting entities to understand the regulatory framework and best practice in the field of sustainability reporting and ESG assessments.
The BVB Guidelines are therefore very useful not only for listed companies that are at the beginning of sustainability reporting, but for all companies that intend either to report for the first time or to improve the quality of their reporting.
Beyond the declared purpose, the BVB Guidelines can also be a very useful instrument for the authorities responsible for applying regulations in the field of sustainability, especially in terms of the need to formulate the national framework for CSRD implementation.
Key regulatory acts:
In the sections below, we reproduce the main observations received from the business environment, together with our recommendations, in relation to corporate governance.
Company management
Below, we reproduce the new elements that we have identified as current topics among companies in terms of company management. Although most of our observations are made in the context of listed issuers, many of the best practices have general applicability and should be encouraged among non-listed companies as well.
As regards the composition of the management body, the independence criteria remain as relevant as ever, especially in the light of the implications of market abuse in the case of entities that fall under the legal framework established by Regulation (EU) No. 596/2014 on market abuse (MAR). The basic criteria provided by Law no. 31/1990 are increasingly taken into account by managers involved in the most diverse operations, from the development of a long-term incentive plan for management to the public reporting of transactions with related parties. The theme of independence remains closely related to that of avoiding conflicts of interest, especially in the context of deliberating corporate decisions that give rise to the risk of a manager obtaining undue benefits.
In addition to the considerations above, there are two new elements that we have identified as current topics among companies, i.e.:
The number of ESG requirements is increasing, from simple instructions to mandatory norms. In this respect, changes may be required in internal policies/procedures, as well as in conducting day-to-day business and in relations with investors. As an example, in terms of green financing, we note the new requirement in NBR Regulation 5/2013, according to which, when initiating environmentally sustainable credit facilities, credit institutions must include in their credit risk policies and procedures specific details concerning the environmentally sustainable credit policies and procedures covering the granting and monitoring of such credit facilities. In order to raise the awareness of company managers about ESG requirements at governance level, a greater presence of professional associations for company directors which would give practical assistance in the implementation of ESG policies or more sector-based initiatives would be welcome. We also encourage periodically inviting experts on ESG to meetings of the management bodies, with an advisory role.
We see increasingly greater interest in gaining the loyalty of managers and stimulating performance, especially through long-term incentive plans (LTIP), based on the granting/allocation of shares in the company or the parent company. These types of plan can take various forms, such as, stock option plans, free shares or restricted shares (generically called Stock Option Plan, “SOPs”).
Despite the fact that – for many years – the Fiscal Code has provided for the possibility of tax advantages (both for the company and for the beneficiary) in the case of the settlement of a stock option plan, as defined in the Fiscal Code, we note that there is still uncertainty within the Romanian business environment in relation to the following aspects:
We expect that SOP plans will not be widely adopted unless they fall under the scope of the advantages provided in the Fiscal Code, which is why clarification of the above-mentioned aspects is necessary.
In relation to the approval of remuneration policies, as well as the reporting of the remuneration granted – in the case of issuers on the regulated market – we note that the vast majority of listed companies have complied with these requirements on time. In relation to votes against the proposed remuneration policies –so-called “shareholders’ revolts” – there were a few rejections in 2022, both on account of the macroeconomic context and based on a lack of correlation between individual and company performance.
In terms of investor protection, this area remains in a continuous flow, the direction being clearly towards improving investor protection, especially in relation to those that operate on the capital market, not least due to the impulse generated by EU law as a result of the financial crises faced by Europe in recent years.
In the light of the increase in liquidity and the number of investors on the Bucharest Stock Exchange in recent years, the topic of market abuse is becoming more relevant than ever and, in this respect, we note that, generally, there is a clear understanding among capital market participants as to the obligations of issuers and related parties in terms of preventing market abuse. This compliance is found in particular in the formal notifications published on the BVB website to inform investors and participants. Thus, we note that the provisions of the relevant legislation – first of all, Regulation (EU) No. 596/2014 on market abuse (MAR), Law no. 24/2017 and ASF Regulation No. 5/2018 – regulate in detail the obligations of issuers, as well as the obligations of those who acquire access to privileged information, such as persons included in the “insider lists” kept by the issuers, consultants, etc.
A number of ASF rules have also been issued, supplementing the materials published by the European Securities and Markets Authority (ESMA). Consequently, we do not expect any significant Romanian legislative changes to be necessary, but this observation remains valid only as long as ASF continues to investigate – and to sanction accordingly – violations of the MAR regime.
On the other hand, we note concern among companies as to the need for clarification of situations that can be considered an exception to the application of the prohibition on the disclosure of privileged information. We note in particular that, in the context of merger and acquisition (M&A) transactions, which are preceded by the initiation of due diligence procedures, it is not clear to the participants in such transactions to what extent privileged information can be disclosed for the purpose of due diligence, so as to activate the exception provided by MAR, consisting of market sounding. A clarification from ASF/the Romanian legislator would be welcome in this respect.
Although the legal framework provided by Directive (EU) 2017/828 as regards the encouragement of long-term shareholder engagement (SRD II) – transposed by Law no. 24/2017 – established an unprecedented, wide range of rights for capital market investors, we still do not see large-scale exercising, especially among retail investors, of many of these rights. Consequently, there is a risk that, in the absence of “activist investors”, a generalized passivity of investors will perpetuate. In this respect, it should be remembered that SRD II introduced impact rights for shareholders, including the following: