14 Jul 2021

Asian Businesses Step Up to ESG Reckoning

Corporates in this region have been put on alert that ESG obligations go beyond shareholders.

Digital trading platform HeveaConnect, which connects various stakeholders along the natural rubber supply chain, is one example of how private-sector players can come together to drive environmental, social and governance (ESG) consciousness. PHOTO: HALCYON AGRI

IN recent years, rising demand for mobility due to higher incomes and population growth have set in motion calls for more energy efficient transport. Less spoken about is environmentally-friendly rubber - the key raw material that vehicles run on - even as the consumption of natural rubber has risen by 5 per cent annually in the last two decades.

In 2019, Singapore bank DBS partnered with Halcyon Agri, a global leader in natural rubber, to set up HeveaConnect, a digital trading platform for sustainable rubber.

The online marketplace, which connects various stakeholders along the natural rubber supply chain, is one example of how private-sector players can come together to drive environmental, social and governance (ESG) consciousness.

ESG issues have been around for a long time, but recent years have seen a greater push for companies to commit to these efforts. The Covid-19 pandemic, in particular, has indelibly pushed many of these hitherto "invisible" issues into society's collective consciousness.

Apart from ravaging the global economy and crimping supply chains, the pandemic also left permanent and visceral impact on the lives and livelihoods of many.

Questions are increasingly being asked regarding businesses' roles in supporting their customers, employees, and society at large.

"Even as we are beginning to emerge from the worst of the pandemic, perceptions of what role businesses must play have increasingly morphed from a narrower definition of shareholder primacy, to one of needing to support sustainability and broader ESG agenda," Joseph Poon, group head of DBS Private Bank, told The Business Times.

Accountability beyond shareholders

There is growing public discourse that corporate leaders must be accountable not only to their shareholders, but also to a broader network of stakeholders.

While governmental and regulatory support for ESG has been on the rise in recent years, effective and lasting change requires a ground-up approach, Mr Poon said.

He cited the example of HeveaConnect, which has over the last two years attracted larger industry bodies. Notably, the Singapore Exchange (SGX) in March this year announced a US$1.5 million investment through its wholly-owned subsidiary Asian Gateway Investments for a 9.09 per cent stake in the platform.

There is a growing body of evidence relating a company's social and environmental impact and its financial performance.

A meta-study by New York University's Stern Center for Sustainable Business and Rockefeller Asset Management, which examined more than 1,000 research papers, found that improved financial performance due to ESG becomes more marked over longer time horizons.

Corporate sustainability initiatives also appear to drive better financial performance due to mediating factors such as improved risk management and more innovation, the study found.

Why does integrating ESG into corporate agenda make good business sense?

DBS' Mr Poon suggests that robust ESG practices can lead to a stronger corporate brand, access to cheaper financing and a larger pool of capital, and better stock price performance.

With more institutional and sovereign investors, as well as banks such as DBS integrating ESG criteria in their investment thesis, businesses that have robust ESG practices and successful outcomes will better their access to capital and debt.

Meanwhile, corporate ESG practices also guard against tail-risk controversies resulting from poor corporate governance.

"Embracing the importance of evolving socio-economic and environmental conditions also allows companies to identify emerging strategic ESG issues, adapt nimbly to mitigate market challenges, and be better positioned to benefit from strategic opportunities," Mr Poon added.

"With purpose embedded in the organisation's culture, these companies will likely also be able to attract and retain better talent."

Government support paves the way

While corporate efforts from the ground up are necessary for lasting change, governmental support can go a long way in driving ESG development in Asia.

Today, many Asian companies still lag behind other regions of the world in terms of ESG disclosures. Asian assets also generally tend to have lower ESG ratings than their counterparts in Europe and North America.

This is a reflection of how economic growth still dominates various national agendas in this region, which is home to many developing nations that are still in early stages of economic development and living standards.

Amid rising consumer expectations and government calls for businesses to focus on sustainability issues, some governments have already stepped forward to integrate sustainability in their national agenda.

For instance, the Singapore Green Plan 2030 unveiled in February this year includes initiatives by the Republic to encourage decarbonisation in the maritime, aviation, energy and chemicals sectors, and steps to promote green financing as well as foster sustainable development.

For the first time since 1986, China has omitted a numerical gross domestic product (GDP) target in its latest five-year plan, which covers 2021 to 2025, instead setting longer-term climate goals and introducing the idea of a carbon-emissions cap.

Meanwhile, in Japan, a green growth strategy to achieve carbon neutrality by 2050 includes plans to boost renewable energy, phase out petrol-powered cars, and reduce battery costs.

Efforts aimed at galvanising the business community to adopt sustainable practices are also underway.

Take for example the Hong Kong Stock Exchange, which issued new guidelines around mandatory disclosure on ESG reporting in December 2019.

Closer to home, SGX is working to launch stock indexes that comply with ESG principles, as well as encourage the listings of green and sustainable bonds.

"This top-down focus gives businesses more incentive to reduce their carbon emissions," Mr Poon said.

"Over the past couple of years, we have seen more Asian corporates making commitments to move towards net-zero emissions, as well as taking steps to decarbonise and assess the financial and other ramifications of transiting towards a low-carbon economy."

This article was written by Kelly Ng and first published in The Business Times on 14 Jul 2021.