Companies and investors worldwide are coming under increasing pressure to consider the ESG implications of their operations.
This is particularly true in Singapore, where environmental protection is increasingly driving both private and public decision-making as confirmed for example by the governmental Singapore Green Plan 2030 launched with an ambition to achieve zero net emissions by 2050.
In October 2023, the M&A Community organized a workshop in collaboration with CPA Australia that brought together leading investment professionals, industry experts, and thought leaders to discuss how much impact ESG is having on investment strategies and portfolios.
Below you can find the keynote speech by Bryan Ho, Partner and Climate and Sustainability Assurance Leader for the Asia-Pacific and Southeast Asia at Deloitte.
Measuring corporate social responsibility
Corporate social responsibility (CSR) and how to measure it is a topic everyone is talking about right now.
Not that we didn’t talk about sustainability and social responsibility before, but as the landscape has changed, so too has the vocabulary.
CSR was mostly about communication, but today’s investors want to see something more concrete and with quantifiable targets focused on the capital market, hence ESG.
So what are the implications for financial institutions? What are the common challenges that companies face? And what are the future trends?
The financial impact of ESG
Firstly, I think there is now more recognition of how far ESG commitments can impact a company’s financial prospects as well as their reputation. This goes beyond additional costs of compliance with new regulations.
In 2020, financial losses caused by natural disasters in the Asia-Pacific region ran to 100 million dollars, with only about 12% of that covered by insurance. We are already seeing insurers in some countries removing cover for certain events, for instance wildfires in certain U.S. states. This is starting to be a big issue for companies in industries that are highly impacted by climate change.
Then there are national commitments to net zero. Most Asian countries have very ambitious zero emissions targets and this translates into new regulations, such as Singapore’s carbon tax which will escalate towards 2030, not to mention the costs of demonstrating compliance.
Increased consumer demand for eco-friendly products, especially among the younger generation, includes company employees as well as clients. Investors are pushing companies to be green and are increasingly using ESG as a differentiator. Clients are also looking at customer behaviors, and asking their funding managers to look at ESG. So for some industries a business that fails to integrate ESG into its investment processes is going to be in trouble.
But it’s not only the environmental aspects that matter: transition to a greener economy means sourcing greener energy, but installing, say, a solar farm, has an impact on indigenous peoples. The social aspects of ESG matter too.
The regulatory framework
And of course these rising concerns are leading to political and regulatory pressures: financial institutions especially are now being required to consider environmental implications. In the past two years alone there has been a rapid increase in the number of such requirements being imposed in various countries.
Everything links back to financials: the ultimate goal is for a company’s financial statement to match its sustainability report, giving a full picture of its business model and how it creates value. We need to make the whole financial system more resilient. And we need to move fast.
Getting reliable data is becoming even more challenging. There are a lot of new terms and initiatives and financial institutions have been working together to create a number of reporting standards, initially making life more complicated. But the good news is that the IRS foundation has set up a new board and designed new ISSB standards.
S1 and S2 are the two standards that will be setting mainstream sustainability requirements, allowing companies to align their reporting of risk impact and management. Most of the regulators in the Asia-Pacific region are already adopting something similar: Japan has their own version, as does South Korea, but Australia, Hong Kong, China, and Malaysia are all planning to adopt the ISSB standard, as are other countries in Asia. In Singapore the accounting regulator has published a consultation on requiring companies/entities to commit to ISSB for disclosure. This will eventually be mandatory for all businesses in Singapore.
Now, the question we might ask is how investors will view the new requirements and if companies are ready for this. Let’s see what challenges they are both likely to face.
The key challenges to becoming sustainable
1. Perception of returns on sustainability
A Deloitte global survey on trends and the impact of sustainability risks found that the top issues were:
- Scarcity and therefore costs of resources
- A shift in consumption towards more eco-friendly products
- Reducing emissions
But when asked about changes to make their business more sustainable the respondents identified a number of obstacles, including difficulties measuring environmental costs and the expense of collecting data. They were willing to consider cheaper options, such as switching off lights, but changing a product or relocating a warehouse was seen as too costly and/or too challenging at this time.
2. Lack of political support
This is not an issue in Singapore where there is generous government support for emerging technologies, but elsewhere in the region, some renewable options are not commercially viable without public funding.
3. Lack of knowledge/experience
An MIU survey of U.S. companies found that many directors lacked experience with ESG topics. Their annual committees survey also suggested that most members would like more training, though this might not necessarily be forthcoming.
4. Lack of reliable data to make a business case for ESG
In BlackRock’s 2020 Global Sustainable Investing Survey, 55% of respondents cited poor reliability of data as a major challenge, with poor reporting also a concern.
5. Variable ESG ratings
There are numerous rating options on the market but they use different methodologies, giving different results, leading to concerns about quality and fairness.
All the excitement about ESG in the past 2-3 years has led to questions about greenwashing in relation to both governance and data, whether targets will truly make an impact, and how to ensure that investors trust in sustainable finance.
What does the future hold?
There will be more stringent ESG reporting regulations. Companies need to be prepared and work out how to align their sustainability targets, finance, risk management strategies, etc. because future reporting standards will expect everything to be interconnected.
Companies will need stronger engagement with investors and other stakeholders and be better at communicating what they are doing and what their business model is.
Climate decarbonization is already a thing. Companies will need to know how to set targets and commitments. More and more Asian funds are signing up to the UN’s Principles for Responsible Investment, and regulators will be looking for this.
Finally, you need to look at what you can do to support your clients, especially SMEs. Finding more cost-effective ways to do this will be critical.
The second part of the event was a panel discussion with Kelly Choo, Partner at True Global Ventures; Davian Sim, Managing Director, Investments at August Global Partners; and Andy Yap, Partner at ERM.
What is your opinion on current ESG trends?
Voluntary commitments are what will make the difference. Everything starts at home or even school and there is a direct family influence on the extent to which people make green choices.
I agree. Education is key. From a corporate perspective there may still be businesses wanting to stay fluffy but in Europe and Asia many companies are already more serious about their commitments.
On the E side we’ve been looking at water quality. We’re been concentrating on supply chain issues, rather than social aspects, but we are now looking at employee engagement and whether the community benefits. The biggest trend now is the focus on cybersecurity, especially in areas such as healthcare and the tech sector. There are also efforts to make finance more eco-friendly so more green loans with a strong follow through to borrowers.
With so much new regulation for financial reporting, the management role is super important. So how are companies dealing with ESG integration?
There are opportunities: for instance if you are in renewables you could get extra revenue from carbon credits to offset some of the costs. A lot of the focus is on the costs and the costs associated with risks.
In terms of integrating ESG into financial statements, one of my companies asked existing investors as part of the due diligence process what percentage of their manufacturing energy use was renewables, how much they recycled, etc. They are looking at building metrics into how they plan investments so they can track them to show stakeholders.
Integration is always challenging. Different types of investors may take more interest than others. It’s a struggle to get information, for instance, on your emissions, given that there is no sophisticated system of analysis. In terms of making it easier, don’t use technical language, just ask people to give you simple data and then do the calculations yourself. How can you get them to understand what you have or have not done? A lot of companies want to invest in ESG because they want a good story, so give them one.
How do we manage the gaps in data that we know exist? How do you communicate with your stakeholders and are you under pressure from them to provide information?
We ask the due diligence questions and then we also ask what is important to them. Apart from making a financial return they also contribute to charity. They create jobs, manage inclusion, this all counts. It’s about how you communicate, how you wrap it up.
Other LLPs have really onerous requirements and good luck to them consolidating those, but sometimes the user interface is not good so there’s a real problem getting the correct disclosures. There are a number of solutions out there but I think it’s very important to find commonalities, make sure you do some proper tests and then design some macros to populate a questionnaire, and your consultants should be able to help you find the right platforms and design the tests.
The benefits of integrating ESG and which sectors are ahead of the curve
Having ESG as part of the narrative can definitely help a company to attract investment. For instance, Canada’s cryptocurrency mining sector has an arrangement with the government whereby they can instantaneously divert the energy back to the grid. This helps reassure the public, as well as creating jobs and revenue for the government.
”Sometimes it’s the social aspects that are more challenging, for instance healthcare or affordable housing. So integrating E and S will be a big thing in future,” said Brian.
As to sectors, more and more banks have been asking for stress testing, partly because of regulatory requirements, but they also have a clearer sectoral pathway to look at transition.
Some companies are finding ways to create loyalty for greener options. For instance a traditional technology company rewarding employees for greener travel choices or the finance industry trying to justify its carbon usage, or not traveling first class.
There has already been some consolidation of standards, especially in Europe. After that it’s about acquiring reliable data, putting in proper process and control, looking at the latest trends and terminologies, and reviewing internal systems to ensure that the different responsibilities are clearly defined.
“The number of tools on offer is bewildering, probably because the programming is not difficult to do. Companies need to compare how well they can customize the data and also look at other sources of data,” commented Andy.
The consensus now is that ESG does make a difference, and Singapore’s new sustainability launch pad will allow companies to compare and learn what other companies are doing.
Generally companies need to ask what is the most efficient, cheap and eco-friendly way of getting to where we want to be.
”ESG helps companies make better decisions which gives them a positive incentive to adopt it,” concluded Bryan.