ESG could be defined as responsible investing strategy and practice which includes 3 key factors in investment decision making: social, environmental and governance factors.

ESG is becoming more important and present in the investing world because there is a growing number of clients who take into consideration ESG factors when deciding on which fund to invest in. 

Croatia in ESG practices

ESG investing is still at its early phases in Croatia. There is undoubtedly a higher level of ESG practices in Croatia and the future of investing.  This to some extent will come as a consequence of regulators already increasingly emphasizing that responsible investing is an integral part of asset management services.

At the EU level, asset management companies will need to start announcing how they integrate ESG factors into investment decisions. Recently, Croatia’s regulator (HANFA) announced that the International Organization of Pension Supervisors (IOPS) has adopted Supervisory Guidelines on the integration of ESG factors into investment and risk management of pension funds. Moreover, according to MSCI Croatia implemented 2 regulations by Governments with ESG practice in 2019. The regulations include slean and energy-efficient road transport vehicles. It also includes commission Decisions 2009/300/EC and 2018/59 on the ecological criteria for the award of the Community Eco-label to televisions.

Croatia has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are highly relevant to the rating and a key rating driver with a high weight.

Key rating drivers

Fitch forecasts the economy will contract by 5.5% in 2020, from the growth of 2.9% in 2019, due to the impact of the COVID-19 pandemic.  Croatia is highly dependent on tourism and tourism-related activities. According to Eurostat, the ratio of tourism to total domestic supply stands at 9.8%, by far the highest figure in the EU (average is 3.4%).

The hit to tourism and other services will have a significant effect on employment, consumption, investment and exports. However, it macroeconomic professionals expect the economy to recover in 2021. Moreover, the economy will expand by close to 3% on the back of service sector growth and a pick-up in exports as global demand resumes.

The chart above shows that HT leads the list with an ESG score of 61.97, followed by Ad Plastik with 45.76. The early adopters to ESG practices could possibly benefit from having high ESG scores as it might attract a new pool of investors who are seeking investments in companies with implemented ESG practices. 

Summary

Croatia is leaning towards ESG practice and many companies show deep interest in ESG topic through published articles and reports. We can clearly see that there is a better understanding of the environmental, social and governance challenges. Investors are looking to invest in companies with long term ESG strategy. Existing and future regulatory changes at EU-level (EC’s Action Plan on Sustainable Finance) provide a further decisive impetus to embrace sustainability aspects.  We can advise clients in devising the ESG strategy and communicating it to various stakeholders.  ESG strategy is not a stand-alone issue but should be integrated into the overall company’s strategy, operating environment, and business model.