Harvard University

By: Zeng Han Jun

A study was conducted in 2021, on the mission statements of 122 publicly listed companies from countries including Estonia, Poland, Hungary and others. It tried to show how these companies’ mission statements changed from 2012 to 2021 and it clearly showed that there is a inclination towards/ away from using certain terms. I reformatted it in a table format for easy reference:

Other interesting terms that are becoming increasingly popular are: Sustainability (+1), Long-Term (+2) and Environment (+2) (Zumente, Bistrova, 2021). 

Broadly speaking, it seems like there’s a growing shift in that part of the world towards the Environmental, Social and Governance (ESG) branding, especially the part on Social. The study did not touch on the operational aspects therefore it is impossible for us to form any opinions on the operations.

I also noted that in 2018, the Governance & Accountability Institute revealed that 86% of S&P 500 firms released sustainability or corporate responsibility reports, compared with just under 20% in 2011 (GA Institute, n.d.). The gradual change in branding and reporting is somewhat evident. Well at least to me, it indicated that there is a growing awareness of ESG issues and challenges. It is good enough for me to learn that corporations have started to shore up their images. By right, it should be natural for these companies as the next step, to re-engineer its operations to meet ESG standards. A lot of people talk about “Green Washing”. “Green Washing” is like keeping a good, nice and green façade while the same toxic culture and pollutive operations persist. Based on the study, I am unable to derive more information about this therefore I cannot comment on this. 

Anyway, I have another thought to share; The younger generation are brought up differently. Technology is an essential part of their lives. Communication is instant and information sharing is… happens at quantum speed. Remember, these same people will be part of the future workforce and they are a group that do not suffer injustice easily. A bit of wrong doing here and some covering up there, usually end up becoming viral in the most popular social media platforms. This usually does not end well for the corporations’ stock prices and earnings. 

Additionally, many of these younger people live in clouds of digital tribes. People from all corners of the globe gather digitally in these tribes, for their hobbies such as photography, certain computer games, food, etc. Races, languages and religions might not matter that much when it comes to such associations. More important is the shared interests and hobbies that eventually lead to forging increasing empathy among geographically far-flung communities. I am certain that gamers from around the world are still gathering digitally for their latest runs/ practices of DOTA 2, League of Legends, Starcraft or whatever computer games that they have been playing prior to the pandemic, even when countries are closing their borders to prevent the spread of the Covid-19 viruses. 

The thing is, ESG isn’t exactly new. Similar concepts have been floating around for the past two decades or so but in recent years, growing awareness of environmental and human management issues have been quite instrumental in enveloping various terms like Responsible, Sustainable, etc under the broader umbrella of ESG. In a way, this new incarnation might help the industry to focus on what truly matters, in order to steer our ecosystem onto the sustainable development pathway. 

Then again, I need to remind myself time and again that ESG standards assess businesses and investments from an environmental, social, and governance perspective. No matter the scenario, there will always be the early adopters who are usually few in numbers. A large number of the remaining pack will adopt a wait-and-see approach. Some will not even know what is happening. When the wave comes, many will again be playing the catching-up game and initially get a low ESG score. 

Now, a low ESG score does not mean that the lenders, financiers and investors need to drop that business from the balance sheet. In lieu of that, this group of commercial entities are in the best positions to act as chaperones, advisers or consultants to improve the firms’ ESG scores and mitigate ESG-related risks. 

Mainstream banks are in a good position to assume this front. Their exposure to the entire market segment stretches from the micro to large caps and across all industries. This can mean two things to me at this point of writing: a risk or an opportunity. If you are the risk manager type of personality, you might perceive that banks are now exposed to the full range of risks from ESG challenges. Flip it around and it could be an opportunity to further value-add to the customers’ businesses by providing ESG advisory services. This line of business could even lend itself as an additional anchor to diversify value-added services, mitigating risks during times of digital upheaval.   

Advisory has always been about delivering values. ESG advisory even more so during these times, helping customers to deliver better long-term sustainable profits.  It is a win (Bank) – win (Customer) – win (Environment and Social) situation. Certain groups of bank employees could be identified and retrained in ESG advisory. They must be encouraged to understand the greater purpose behind the ESG drive. It is not just about the increasing number of investors and financiers who want to align their money with these ESG values, but more about the greater benefits to the larger ecosystem. The idea of contributing to the greater good could sometimes even be invigorating for some people. Well, ESG standards ultimately are about earning the money without causing negative impacts, right? 

Some food for thought. 

References

Navigating the Way to Sustainability. (n.d.). Retrieved from Zumente, I., & Bistrova, J. (2021). ESG Importance for Long-Term Shareholder Value Creation: Literature vs. Practice. Journal of Open Innovation: Technology, Market, and Complexity, 7(2), 127. doi:10.3390/joitmc7020127

By: Zeng Han Jun

Key Takeaways

• Growing interest in Environmental, Social and Governance (ESG) issues and the opportunity to shape corporate behaviour as evidenced by the increasing number of ESG frameworks; 
• Businesses are also progressively aware of the importance of ESG standards because of how it could affect investments and cost of financing; 
• Private sector does not operate in silo because many business processes are highly dependent on the larger ecosystem;  
• Studies have shown that new business regulations might reduce the number of smaller businesses. Smaller businesses have advantages in innovating;
• Creation of an ESG-certified business hub that already meets most of the ESG criteria. Bankers and financiers work with hub councils to allow pre-approvals for loans to businesses that have decided to set up operations in these ESG-certified business hubs;
• Pre-approvals could also be worked out for other types of debts or capital that require adherence to ESG standards; and
• This concept could help to drive up rental occupancy.

Overview

There is no denying that the Arctic ice cover has reduced drastically over the past 20 years (Johannessen, Miles, Olsen, Bengtsson & Myrmehl, 2003) and research has shown that there are strong correlations between the changing ice cover, global weather ecosystem and environmental impacts (Vihma, 2014). Given the potential environmental impacts, international organisations and governments around the world are stepping up to improve the awareness of sustainability and actively engaging the business community to include ESG criterias as integral parts of their business operations. Regretfully, many consumers are still having short-term focus on self-related benefits (Tasci, 2017) therefore more effort certainly is needed moving forward to improve awareness. 

Multitudes of ESG Frameworks

While international organisations and governments are busy at organising awareness programmes, many are also busy at developing new ESG frameworks in the hope of guiding companies along the sustainability path. According to an interview that was given by PWC Malaysia, their team had counted over 300 different frameworks, guidelines and standards on sustainability, and over 700 indicators (Ng, 2020). The explosion in the development of ESG frameworks can certainly dazzle even the most experienced buffet consumer. 

The competition among the ESG frameworks are intense, each vying for market share and trying to extend coverage beyond existing markets. It is almost impossible to predict if there will be a single ESG standard or several dominant ones, but it is clear that market sentiments are changing and ESG issues are increasingly relevant to businesses. In a recent survey that was conducted by Mckinsey, it showed that almost 75% of institutional investors wanted a single sustainability standard, with 85% saying this is needed to be able to allocate capital more effectively (Bernow, Godsall, Klempner, & Merten, 2019). This is why ESG issues are increasingly becoming more relevant to businesses. Businesses are increasingly being judged by how they handle ESG issues and this affects their ability to attract investments and their cost of financing (Raimo, Caragnano, Zito,Vitolla & Mariani, 2021).

New Business Reporting Standards Affect How Firms Organise Themselves

Businesses do not work in silo by themselves. Instead, their business decisions and operations depend to a large extent on the larger ecosystem where they have chosen to site in. Many studies have increasingly concluded that businesses and governments are closely linked therefore, close collaboration between the two parties could help to accelerate growth (Schneider, Evans, Silva, Chandler, Amatori, & Hikino, 1998). Strict adherence to ESG standards requirements is a matter of time and as with all types of regulations, it increases the cost of doing business. Some studies have suggested that regulations are fixed costs therefore businesses that are employing more than five to nine employees, tend to expand their businesses with the level of regulation. The number of businesses that are employing one to four employees, are likely to decrease with the level of regulation ( Calcagno & Sobel, 2013).

Different countries have different metrics to determine the size of businesses but most define a business size of one to four employees as that of small or micro businesses. Whether small businesses play an important part in innovation has been a subject of debate for many years and I am not going into that. However, it is clear that smaller businesses have the advantages in innovating. Smaller firms do not necessarily have the bureaucracy and silos challenges usually faced by larger firms, however; employees’ resistance to change and the mentality of “not invented here” would still be an issue regardless of firm’s size (Barham, Dabic, Daim, & Shifrer, 2020).

From this, we could deduce that there is the probability that the number of smaller firms would reduce when business reporting standards become more stringent. On the other hand, there is also the chance that the larger firms become even larger as they absorb more employees to tackle the new work that is generated by the new business reporting standards. Eventually, sources of innovations would spring more from the larger firms and this scenario does have some implications on the dynamics within the business environment. 

ESG-certified Business Hubs 

Clearly, a smaller firm would have less resources on hand and could face more challenges when trying to adhere to the new business reporting standards. This might affect their cost of doing business, raise the bar in attracting investments and increase their cost of financing/ debts. Investors, bankers and financiers will scrutinise these businesses, subjecting them to higher standards before releasing the much-needed funds. 

One idea is to create an ESG-certified business hub with high environmental and society standards already in place, for example:

1. Substantial percentage of the electricity sources within the ESG-certified business hubs are derived from renewable energy; 
2. Waste management systems within the ESG-certified business hubs encourage whole-of-system recycling efforts. Employees just have to follow disposal instructions to take part in recycling efforts; 
3. High employment regulations that adheres closely to the society part of the ESG equation; 
4. Low carbon emission and/ or carbon neutral technology housed within the ESG-certified business hubs that can be easily leverage by the businesses for their research and development (R&D) and business operations; 
5. Electric charging stations that are evenly distributed within the ESG-certified business hub to facilitate the usage of private and public Electric Vehicles; 
6. Risks mitigation measures are put in place within the ESG-certified business hub to reduce risks from climate risks and other types of foreseeable crisis; and
7. Others

Businesses that choose to set up their operations in such ESG-certified business hubs, should automatically fulfil some criteria of the E and the S parts of the ESG standards. In fact, banks and financiers should also consider working with the business hub council to develop pre-approvals for loans to the businesses that had decided to set up their operations in the hub. Or at least fulfil some parts of the ESG checks that are required for the commercial loan so that businesses have less paperwork to deal with. This reduces the need for lengthy and complicated ESG checks. Pre-approvals or partial pre-approvals could also be adapted for other types of debt or capital that require compliance to some form of ESG standards. 

Such arrangements have several advantages. Firstly, businesses can focus more on their products and services, and on improving their management/ governance. Secondly, environmental and sustainability initiatives could enjoy economies of scales and hub councils might be able to charge a premium for top-of-the-line facility management. Thirdly, the hub council could make the environmental and sustainability data transparent, which could serve as a good information source for external auditors, bankers and financiers to continually allow for the pre-approved loan arrangements and also makes for good marketing as well, if the district is managed well. Lastly, this concept could help to drive up rental occupancy. Businesses that want to secure pre-approvals/ partial pre-approvals for their debts and capital, and be automatically certified for certain parts of ESG standards, will want to take up occupancy in this type of ESG-certified business hubs. 

Such arrangement does not only benefit the small and micro businesses. Larger companies understand how bureaucracy can stifle innovations and have resorted to creating smaller business entities to spearhead innovation initiatives. Such ESG-certified business hubs can also house the newly spinoff corporate entities so that they could benefit from the loan pre-approvals amongst other business benefits, and also entrench itself in the cradle of innovation and sustainability.

The concept can be adapted for use beyond a hub. It can also be adapted for use in a village, town, district, province, state or even the entire country. The idea is to create small achievable wins that edge the community or society towards bigger victories in the future.  

References

Barham, H., Dabic, M., Daim, T., & Shifrer, D. (2020). The role of management support for the implementation of open innovation practices in firms. Technology in Society, 63, 101282. doi:10.1016/j.techsoc.2020.101282

Bernow, S., Godsall, J., Klempner, B., & Merten, C. (2019, August 08). More than values: The value-based sustainability reporting that investors want. Retrieved from Calcagno, P. T., & Sobel, R. S. (2013). Regulatory costs on entrepreneurship and establishment employment size. Small Business Economics, 42(3), 541-559. doi:10.1007/s11187-013-9493-9

Liberto, D. (2020, December 14). Small and Mid-size Enterprise (SME) Definition. Retrieved from Murray, S. (2021, May 14). Measuring what matters: The scramble to set standards for sustainable business. Retrieved from Ng, J. (2020, December 17). Cover Story: An alphabet soup of ESG standards. Retrieved from Raimo, N., Caragnano, A., Zito, M., Vitolla, F., & Mariani, M. (2021). Extending the benefits of ESG disclosure: The effect on the cost of debt financing. Corporate Social Responsibility and Environmental Management. doi:10.1002/csr.2134

By Zeng Han Jun (hjzeng@alumni.harvard.edu)

The sudden emergence of the Covid-19 pandemic has transformed the way that many of us perceived issues like working arrangements, commute options, housing needs amongst others. Still, the fundamental needs for affordable housing, environmental, social and governance (ESG) awareness and actions remain part and parcel of modern life in and beyond the cities. Governments, together with the Non-Government Organisations (NGOs) and private sector must embrace an open and collaborative approach to tackle some of the most challenging issues of our times, for example, the provision of a sustainable urban environment that allows for healthy socio-economics dynamics. 

From what I have seen, learnt and discussed with various organisations, I firmly believe that two important foundations were put into action during the Covid-19 period that could empower collaborative actions towards sustainable urban development and growth in the Southeast Asia region.  

First, the Southeast Asian countries came together and signed the Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement between the ten member states of the Association of Southeast Asian Nations (ASEAN) and its six Free Trade Agreement partners i.e. Australia, China, India, Japan, New Zealand and Republic of Korea . ASEAN comprises countries like Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

The RCEP marks ASEAN’s biggest free trade pact to date, covering a market of 2.2 billion people with a combined size of US$26.2 trillion or 30% of the world’s GDP. While it is largely being perceived as an economic partnership, studies have shown that the economy does affect the environment to a certain extent, which is why there are growing interests in promoting and activating the circular economy model to enable more sustainable and environmentally-friendly growth. 

With the RCEP, quotas and tariffs would be eliminated in over 65% of goods traded and this might improve market access. Business dealings would be made predictable with common rules of origin and transparent regulations which is always one of the top concerns for any potential investors. Apart from this, it also presents an opportunity to shape business policies to be more in line with environmentally-friendly practices and equitable social growth. A more holistic approach would encourage more firms to invest more in the region, including building resilient supply chains and services that could mitigate ESG-related risks and generating jobs that are grounded on strong meritocratic principles. 

Second, city mayors are stepping up with their experiences in working with international organisations on ESG-related projects. For example, Pasig City Mayor Vico Sotto from the Philippines, stepped up to initiate the ‘mobile market’ where city residents could purchase fresh goods right from their vicinity. This initiative encouraged people to stay home as the ‘mobile market’ is accessible. This reduced logistics transportation thereby reducing carbon emission and also helped in activating the local market. These upcoming mayors are well-positioned to understand the benefits of responding to global trends and commitments such as climate change, changing human behaviors and other ESG-related issues. 

Some of the more progressive countries within the Southeast Asia region, have emphasised on underpinning their forward policies with the sustainable development pillars. Cities must continually keep up and work towards creating a place to live, work and play and this has clearly become an even more important concept during the Covid-19 pandemic. During the pandemic, many already observed that global talents can continue to contribute productively from anywhere in the world therefore, do not really have the need to seek out places for work. To attract global talents, the main differentiator would be to create an environment that has high quality of life and also be climate-risks resilient. 

Apart from this, the attention is also once more again on urban areas and the mixed-use planning of these locations. Studies have also shown that people’s travelling behavior has changed under the lockdowns that were imposed during the Covid-19 pandemic. Demand for travel has reduced and that people will travel less by public transport. Walking and cycling can be important ways to maintain satisfactory levels of health and well-being. This will change the way urban planning is traditionally planned and unfolded. This entails a discussion with urban planning professionals and other stakeholders on urban density, open spaces and the demand for affordable housing.

My work with planners and finance firms from the region and beyond, revealed that there is a growing interest in the terms “Resilience” and “Climate Risk” and it is mainly driven by issues stemming from climate change. One common topic is to develop strategies to sustain the functioning of urban communities, business operations, supply chain operations amid stresses and disruptions that might occur due to climate change. A good number of cities around the globe are improving in this area and more Southeast Asian cities should certainly do more in this area too.  

Sustainable urban development is no easy task. Execution requires coordinating and communicating with stakeholders who sometimes do not see eye-to-eye on certain issues and it calls for a lot of skill and persistence to pull projects through. This is especially so for places where the administration has to take into consideration the rural areas and smaller communities, and how these communities seamlessly integrate with the changes of the urban and major cities.  

Keeping sustainable urban development on track entails setting out clear guidelines with hawkish monitoring. The mantra is to adopt a Whole-of-system approach whereby all arms of urban development work hand-in-hand and not against one another, while keeping the big picture in mind. Uninterrupted lateral and vertical communication is one of the key enablers to actualising the Whole-of-system approach, with proper mechanisms in place to review and adapt to new information. New information may sometimes require novel adaptation and is absolutely critical to fostering a city that flourishes.  

Sustainable urban development is not the only option moving forward but with many environmental indicators trending south at the moment, it could be the only logical pathway to Southeast Asia region’s future. 

===

References

(n.d.). Retrieved from ASEAN hits historic milestone with signing of RCEP. (2020, November 26). Retrieved from Morais, L. H., Pinto, D. C., & Cruz-Jesus, F. (2021). Circular economy engagement: Altruism, status, and cultural orientation as drivers for sustainable consumption. Sustainable Production and Consumption, 27, 523-533. doi:10.1016/j.spc.2021.01.019

UNUniversity. (n.d.). How Cities in South-East Asia Are Acting on the SDGs Ahead of Their National Governments. Retrieved from Vos, J. D. (2020). The effect of COVID-19 and subsequent social distancing on travel behavior. Transportation Research Interdisciplinary Perspectives, 5, 100121. doi:10.1016/j.trip.2020.100121