One of the buzzwords that business professionals would encounter for the past few years and even more in recent times is ESG.
What is ESG?
ESG represents Environment, Social and Governance. It is a concept that stands for the environmental, social and governance aspects of corporate management and growth, where “environment” signifies protecting the natural environment, “social” means improving human capital development, people management, the work environment and advancing diversity, and “governance” refers to business ethics and being a fair and transparent corporate management.
ESG processes are methods to evaluate how a company fares in terms of social and environmental factors to pursue initiatives related to the Sustainable Development Goals (SDGs), which are set by the United Nations as means to achieving the ideal of a sustainable, diverse and inclusive society by 2030.
Companies thriving to do responsible investing can work towards integrating ESG factors into their investment processes. And this can cover, for instance, how companies respond to climate change, the effectiveness of their safety policies, and how they hire for diversity.
ESG is also critical for the long-term viability of a company's operations. A firm that ignores environmental and social concerns in favour of short-term profits could eventually subject management to considerable risk.
This is why, in today’s market, many institutional investors place a premium on ESG investments. It has become a standard for evaluating business performance, and an increasing number of corporations are disclosing ESG-related data in their annual reports.
Gabriel Nam, Partner at Page Executive Asia, speaks with professionals from respective specialisations with experience and knowledge in ESG efforts to help us understand the subject better.
ESG Insights with panellists
Donald Chan: Managing Director of APAC at CDP (cdp.net). Formerly an investment banker with strong investment and portfolio management in Temasek, including setting up CIX (Climate Impact X) in Singapore.
Caroline Wong: Director of Strategic Communications at The Lane Crawford Joyce Group. The seasoned communication and CSR professional previously headed ESG functions at Starbucks Coffee in the Asia Pacific.
Sam Crispin: Chartered surveyor with rich ESG advisory and academic background, with decades of consulting experience in the China market in companies like PwC, Cushman and Wakefield, and Savills, focusing on urbanisation city development and corporate environmental governance.
Q: While terms like “green”, “sustainability”, and “ESG” have been brought up more than ever in recent years, there has been increasing concern on “greenwashing”. What is your view on this issue?
Donald Chan: Greenwashing has increased as companies and individuals attempt to appear more “green”. It can range from misleading or deceiving customers that a product is environmentally friendly, to green-scamming where companies actively promote the benefits of activities that damage the environment.
This has been exacerbated with the advent of social media and fake news. It also impacts companies that are genuinely “green” by eroding public trust.
As customers, we should be careful and exercise more judgement. For example, what will be the rationale of a statement that a soup is environmentally friendly? Does the statement have a source? If there is a source, is it reputable and independent from the soap manufacturer? Through this process of Q&A, customers can avoid being victims of greenwashing and instead favour companies that genuinely make a positive environmental impact.
Caroline Wong: The landscape where the term “greenwashing” was coined in the 1980s is vastly different, and over the last decade, greenwashing has become a bit complex. It’s become confusing because there is little transparency behind what goes on in certain industries, such as the fashion industry.
If a brand is offering a collection that is sustainable, are they greenwashing? I believe consumers can play an important role in whether to engage with companies that are “greenwashing” or are truly sustainable by looking beyond the hype, having the time to review a company’s sustainability agenda to identify greenwashing faster in the future.
On the flip side, the positive side of greenwashing is that brands and companies are putting these topics as a priority to address.
Landscape of ESG over the past 20 years
Q: As one of the pioneers involved in ESG to different degrees (perhaps even before they are called “ESG”), what has changed in the landscape of ESG over the past 20 years?
Wong: I had the opportunity to work in CSR in the early 2000s with Starbucks Coffee that embedded sustainability early on throughout its operations and the benefits of seeing how it enhanced its brand and reputation, giving it a license to operate in new markets.
At that time, there was very little in terms of having any kind of unified market standard to record and recognise how well we were doing as a coffee retailer within the industry. Then, Starbucks Coffee created its pioneering coffee sourcing and ethical sourcing standards.
The launch of GRI, IIRC, and SASB has helped advance reporting and relevance for its investors. Whilst Europe and the US have always been ahead, it has taken a long time in Asia, especially for the less developing countries.
Historically, ESG was seen as a niche. In recent years, industries have been evolving their views towards the importance of ESG. It is still too early to say that businesses are maturing in their sustainability agenda.
With that said, now, there is definitively a stronger effort in injecting ESG principles into core business priorities, and we will see how companies respond to the consumer’s demands for cleaner, sustainable products that do not harm the planet.
Sam Crispin: Generally speaking, I think governments have failed to heed the warnings in an effective and meaningful manner. ESG is a solution for business.
With stock exchange rules increasingly mandating ESG reporting before it is required by legislation, we can see the lead being taken by companies. This shows the financial risk that industries attach to climate change and, most importantly, the risk of doing nothing.
That may include reputational risk, leading to decreasing revenues and physical damage and increased costs. While governments get together and talk about what to do, often with mixed results, business is getting on with the job.
Challenge of ESG investing
Q: While there is a rising demand for sustainable investing from investors, some often express the challenge of ESG integration into the investment process and the consideration of financial materiality. What is your take on that?
Chan: Our measures of economic performance do not fit well with environmental impact.
Let’s take an example of two people who live in the same area and work in the same office - with one difference: Jane walks to and from work, and Simon drives a car. According to economic calculation, Jane has virtually no value. Meanwhile, Simon will purchase a car, top-up fuel, send the car for servicing, etc. Every activity is measured and tracked in our economic calculation.
Yet Jane produces fewer carbon emissions and is likely fitter, and lives a healthier and longer life than Simon.
Hence, our first step is to recognise that we need to measure and track our carbon emissions and environmental matters. Secondly, where possible, we can incorporate various temperature scenarios into the investment analysis and decision-making.
Lastly, we can include additional compliance costs from current and future environmental regulations into our forecasts and financial models.
Strategies for raising ESG awareness
Q: Based on your experience, what are the effective strategies for raising awareness on ESG within the organisation in general?
Wong: Rising awareness within the organisation needs to be matched by an ESG agenda, which has to come as a commitment from the top management.
Companies need to translate ESG aspirations into measurements and report to their stakeholders, including employees, on its results. The awareness of ESG within the organisation will be a greater impetus from employees to ask about ESG issues and opportunities.
Asia's sustainable urban infrastructure development
Q: From the urban’s infrastructure perspective, how will you rate Asia’s overall development with sustainability at a macro level?
Crispin: Taking China as an example, after spending over 25 years working in urbanisation and city development, the development related to sustainability is encouraging and provides a model for other rapidly urbanising countries to learn from and apply to their own circumstances. Future elements of energy efficiency and smart transport networks have also been overlaid on the hard infrastructure, and we should all be very encouraged by that.
ESG hiring trends
Q: What is your prediction about hiring trends in this ESG spectrum in the foreseeable future?
Chan: ESG is an exciting and fast-growing area. We will see increased requirements for companies on ESG as countries introduce mandatory disclosures. This will create new career opportunities from measuring, disclosing and assessing performance to developing actions and projects.
I also expect technology to play an important role, particularly in Asia, in meeting environmental standards.
This will create new jobs as engineering skills sets merge with environmental science to develop the next series of technologies that accelerate the transition to low carbon.
Wong: Overall, Asia still has a talent shortage in the ESG space compared with Australia, Europe, and the US.
At the same time, companies that are hiring need to ensure they are committed to ESG and not paying lip service or overpromising their ESG commitments to candidates.
As the “E” and “G” principles become more quantifiable, the opportunity and excitement I see is the “S” piece, and having the talent to lead this aspect is emerging.
Crispin: The demand for ESG talents (that are lacking in Asia currently) is going to be immense and largely driven by mandatory ESG reporting. We will have sufficient talent in areas like energy and engineering solutions.
But the need is for senior executives, with a helicopter view on how ESG elements work together, to relate back to business management and decision making.
These are the key influencers at the board level that businesses need to adapt, survive and prosper in, what will be, a very different commercial environment in 20 years. This plays a critical role in balancing economics and sustainability.
Without economic sustainability, there is no environmental sustainability, and there is a very fine line to balance the two. With so much of the ‘consuming world’ emissions embedded in the ‘manufacturing world’, the Asian end of the supply chain that includes material extraction, processing, manufacturing and packaging, is critical, and will be the focus in Asia.