5 min read
Environmental, Social, and Corporate Governance (ESG), though slow to gain traction, has captured the focus of investors, corporates, and financial institutions in Asia. It is a term that is hailed frequently in the financial sector, but it lacks universal benchmarks and a consensus on how it can be applied practically across different industries. The comprehensive and universal adoption of ESG in the ecosystem remains a tedious and seemingly elusive goal due to:
- The different needs and requirements of stakeholders,
- The proliferation of reporting and compliance standards and frameworks, and
- The ambiguity of the term and what it encapsulates.
This article tackles these challenges and explores the key considerations corporates must account for to solidify its ESG practices.
Meeting the Needs of Varying Stakeholders
In addition to a traditional focus on shareholders, companies need to consider a broad range of stakeholders to implement ESG effectively. While one may think dichotomously about the interests of both parties, integrating sustainable principles actually provides attractive returns for both. Companies that ‘play the long game’ by investing in long-term payoffs over short-term economic gains experience better cash flows and generate more revenue in future. By shifting the focus away from strictly companies to other stakeholders in the ecosystem, new pathways and partnerships for ESG integration are possible.
As noted by Deborah Ho, the Country Head Singapore and Head of South East Asia at BlackRock, “Being able to connect to your stakeholders, establish trust and act with purpose lets a company understand and respond to some of these changes happening in the world. [Companies’] prospects for growth are connected to their ability to operate sustainably, and serve a full set of stakeholders.”
Find Universal Alignment on ESG Reporting and Taxonomies
Collaboration is necessary to synthesise the various reporting standards that exist to establish a universally-accepted benchmark for companies to disclose and report on ESG across countries and sectors. One strategy taken by Ayala Corporation is the adoption of the IIRC’s Integrated Reporting Framework, which provides a cohesive approach to corporate reporting, merging the different reporting standards and communicating the full range of material factors pertinent to an organisation’s operations.
From the perspective of Ayala Corporation, Victoria Tan states, “The challenge rests on the alignment with the frameworks, and ensuring that people do a comprehensive reporting. We are a diversified conglomerate and the needs of our business are different. Since 2016, we have adopted an Integrated Reporting framework as a communicating tool to discuss the strategies we employ, and the outcome and output of those strategies.”
Another pain point for investors is the multitude of taxonomies that exist, such as the taxonomy in development in Malaysia and Singapore’s recent GFIT taxonomy, which makes it difficult for investors and financial institutions to navigate the different requirements across the countries they operate in.
However, Herry Cho, Managing Director and Head of Sustainability and Sustainable Finance at SGX, noted that companies and investors should continue finding ways to increase their environmental efforts,“There are efforts at the ASEAN level, which are just at the cusp of starting on how to come up with a language that allows capital to flow better, to greener projects over time. [However, we should] not [forget] that there are other environmental contributions that companies and investors must continue making.”
One example of collective action is the ASEAN mission to develop a sustainable finance taxonomy, which is driving the alignment of the different frameworks to establish a common reporting language. The framework is expected to be completed by 2021, and has involved bodies such as the Capital Markets Forum, Insurance Regulators’ Meeting, Senior Level Committee on Financial Integration, Working Committee on Capital Market Development, and other stakeholders such as nonprofits, local government bodies, and communities under the 2017-2025 Regional Action Plan for Southeast Asia.
The Matter of Materiality: How the Sustainable Development Goals (SDGs) can Guide ESG Compliance
Materiality is the main driver behind ESG adoption. In order for companies and institutions to operate responsibly, they must have a holistic and comprehensive understanding of how their organisation and operations tangibly impact society and the environment. This task, however, is tedious, time-consuming, and involves integrating the voices of multiple stakeholders. Companies must think long and hard about their historical, present, and long-term impact.
Aligning impact with the SDGs that make the most sense for a company is just the first step. Public-private partnerships, and partnerships with NGOs, civil society, and academia are crucial for companies to create stakeholder value by contributing to the material SDGs.
As SDGs were created for policymakers and governments, they must not be considered as a language in themselves. Instead, they must be paired with a clear investment framework in order to be impactful. For example, under measurability, a company must demonstrate clear KPIs linked to the SDGs, which helps to eliminate ‘greenwashing’ by demonstrating action. BlackRock is an example of a company that pairs SDGs with a clear investment framework. The company uses an investment strategy that advances SDGs by linking them to their materiality, additionality, and measurability framework when measuring companies on ESG performance.
The Way Forward
It is evident that stakeholder capitalism is here to stay, and it has the potential to drive long-term resilience and profitability. Investors, regulators, and corporations must work together with each other and with civil society in order to ensure that we are on the right track to turning ESG from a fleeting trend, to a tangible reality.
AVPN launched the Sustainability Dialogues series to provide Asia-based businesses and financial organisations insights and practical guidance on what ESG means for them in the context of the current crisis and beyond. Watch the full recording of Building Strategic Partnerships between Investors and Businesses.