ESG: If You Don’t Know This, It’s Time to Retire

“ESG investment is a set of operational standards that refers to three main criteria in measuring the sustainability and impact of an investment in a company, namely environment, social and governance criteria”.

– B Triyono (Gajah Madah University, Indonesia, 2018)

This clear definition of a worthy goal smooths out numerous complications including regulation, transparency, standards, disclosure, data, etc. Let’s understand these better, see their global context, and then explore the current reality of and opportunities for ESG in ASEAN.

 

Background

Financial analysts tend to break down ESG into its 3 elemental criteria, E-S-G, whereas global bodies like UNDP recognize a more holistic legacy and challenge. Environment, social and (corporate) governance overlap to some extent, and each pillar interacts with separate issues (eg. climate change, poverty/health/COVID and accounting standards).

Governments and global organizations try to guide and inform stakeholders to coalesce around common standards and frameworks. The UN’s 17 Sustainable Development Goals (SDGs) for ESG outline a 5-part framework for investors to shape real-world solutions by (i) identifying goals, (ii) setting policies and targets (iii) for investors to shape client progress, (iv) financial system/s to shape collective outcomes and (v) global stakeholders to collaborate.

This interacts in turn with society’s shifting opinions on ESG, influenced by political, and generational factors among others. In some ways, ESG is a moving target. The theory is that warmer embrace of ESG will improve actual investment outcomes of the “triple bottom line”: social, ecological and financial. Yet in practice some corporations are just trying to keep up – to preserve their reputations and be on the right side of evolving regulation.

 

Practical impact

What do these worthy, ethical ESG codes mean in practice? Companies, their staff and directors increasingly need to reflect on these evolving principles in their daily responsibilities and objectives. Each company’s activities, products and services need to be assessed on 3 critical dimensions for sustainable development: the economy, society and the environment. These 3 “dimensions” are in focus for the International Financial Reporting Standards (IFRS) Foundation whose mandate is now expanded to include sustainability issues. Indeed, a new International Sustainability Standards Board (ISSB) will soon exist to give ESG standards the same reliability and consistency as conventional accounting standards.

Clearly for companies in some sectors (eg, technology, sustainable, health) this will prove easier than for companies in others (eg, mining, energy). Last year, 31 publicly traded US companies named their first-ever Chief Sustainability Officer, a number rising steadily each year since the first CSO was appointed in 2004.

Recent AGMs have shown an amber light to ExxonMobil, Chevron, Amazon and Facebook. At Exxon’s AGM, activist ESG shareholders supported by Vanguard and BlackRock won their vote to add at least two of their nominees to the Exxon Board – pushing Exxon to update its view of climate change and its “insular culture”. The same week, across the Atlantic in The Hague, a district court found in favor of environmentalists against Royal Dutch Shell, ordering the company to accelerate its decarbonization plans. Minority shareholders in Facebook have proposed 5 formal resolutions demanding ESG improvements, including on child sexual exploitation and platform misuse. This all impacts how equity analysts value these companies.

 

Focus on ASEAN

More positively, ESG discipline can offer opportunities to companies and their investors alike. Investments in green infrastructure will generate >30 million jobs in Southeast Asia by 2030, according to the Asian Development

Bank. These are likely to focus on 5 sectors: agriculture, oceans, urban & transport, waste management and clean energy. Data, digitization and related technology are other new, developing sectors well-suited to Asia. By making better use of big data, developing ASEAN markets like Indonesia, with its young population of 270m, can capitalize on digital development to enhance education and healthcare. No surprise, then, that 60% of the region’s investors plan to incorporate ESG into their investment analyses by end-2021.

Whether leading or responding to this ESG investment drive, ASEAN countries are embracing it. Singapore, Malaysia, Indonesia, Philippines and Thailand have all issued Sustainable and Responsible Investment (SRI) Roadmaps of various kinds. Throughout the region, the importance of ESG’s “social” pillar has been evident and enhanced by the pandemic, with governments and companies supporting citizens and employees on non-profit, favorable terms.

It’s not confined to Asia: pharma giant AstraZeneca has risked huge company resources to produce massive quantities of their life-saving COVID vaccine at cost, without profit. Thirty-three years on, Gordon Gekko’s “greed is good” quote in Wall Street sounds very out of place – but he wasn’t facing a global pandemic or ESG activists.

Today, as a minimum, corporates in Asia and globally are well-advised to consider how their products and processes may appear under the harsh light of ESG scrutiny – whether by their consumer, government, regulator or (social) media. Pronounce and reinforce positives; admit challenges and how you propose to meet them; don’t try and “greenwash”.

 

ESG cannot be an afterthought

The ESG mindset is here to stay. Major global bodies, led by the U.N. and supported by governments globally, are driving the changes. It is what their voters and citizens demand of them. Objective scientific data – whether on climate change, environmental sustainability or corporate governance – evidences a practical need to re-set our moral compass. This mindset will only become stronger and more influential as millennials and Gen Z, who feel it most strongly, progress to more senior roles while the boomers retire, then die. Younger generations don’t see “the environment”, say, as an externality to our economic model. ESG is a vital, integral part of the corporate model; or even (for some) it is the model – as with AstraZeneca’s vaccine. If we can’t all go that far, that fast (and we can’t) at least let’s listen, learn and adapt better than Exxon or Shell .



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