The investor landscape has transformed dramatically in the last five years. Historically, businesses were focused on appeasing financiers, whose only real concern was whether or not the business in question could generate returns. Today, there is a slightly longer checklist of parties to appease.
In addition to investors, businesses must now also meet the demands of customers, government regulators, suppliers, insurance providers, and employees as well, many of whom are calling for stricter adherence to Environmental, Social, and Governance (ESG) standards. This has had a large ripple effect on businesses across the planet, some of which are only just now onboarding with the ESG movement.
In the bustling Asia-Pacific (APAC) region, many businesses have pivoted their strategies to align with regional ESG ambitions, which include an assortment of benchmarks such as the United Nations’ 2030 Sustainable Development Goals (SDGs). In this article, we will discuss the state of ESG in the APAC region with several RSM experts, including Dennis Lee, Partner, Deputy Leader (ESG Practice), Real Estate Industry Vertical Leader, RSM Singapore; Jacob Elkhishin, Partner, Risk Advisory and ESG services, RSM Australia; and Kenny Mak, Senior Manager, Head of ESG, Risk Advisory Services, RSM Hong Kong.
The current issues facing APAC
Like most other regions across the planet, APAC faces considerable challenges on the road ahead. However, its issues are compounded by the sheer number of people that inhabit the area. According to the United Nations Population Fund, the APAC region is home to 60% of the world’s population, making it a high priority for both ESG transformation as well as international investment.
The sizable population centres within APAC have resulted in several long-simmering environmental concerns. Pervasive smog increases and prolongs heat waves, and rising sea levels have affected daily life for all citizens of the region, bringing the side effects of industry to everybody’s doorstep. However, there is hope in action.
‘Air quality was one of the major environmental issues in China for many years’, says Mak. ‘The situation has been highly improved in recent years after the implementation of new policies and measures by the Chinese government’. These commitments fall into four main categories—net-zero electricity generation, green buildings, green transport, and waste reduction—and are part of an overarching (albeit ambitious) strategy to achieve ‘carbon neutrality’, or the state of net zero carbon emissions.
In Singapore, the challenges raised by energy infrastructure are exacerbated by a lack of options to diversify energy sources away from natural gas. ‘We have made some progress in terms of adoption of solar energy’, says Lee. ‘However, there are constraints in scalability’. Another critical challenge is the decarbonisation of the region’s largest business sector: enterprise businesses. ‘Whilst many businesses recognise the risk of not decarbonising, they still lack the urgency to take action, make viable changes to their business models, and adopt more sustainable practices’, says Lee.
Australia is also no stranger to the effects of climate change. Every five years, the Australian government releases a comprehensive paper known as the “State of the Environment” report. According to the report released last year, rising temperatures, habitat loss, pollution, and mining are the biggest contributors to environmental damage in the nation. ‘Australia has been plagued with extreme weather events in the last few years with no concrete plans to tackle them’, says Elkhishin. ‘Bushfires and flooding have damaged communities and assets that have our governments under pressure to support communities and businesses’.
He continues, ‘Australia has recently passed one of its most significant emissions reduction legislations in the last 10 years, targeted at the country’s major polluting facilities to make further strides in attaining the 2030 commitment to reduce national carbon dioxide emissions by 43%, compared to 2005 levels. The passing of the Safeguard Mechanism amendment bill will drive action and, whilst targeted at larger polluting facilities, it will obviously impact the full value chain, creating financial exposure risks, as well as opportunities for businesses to consider’.
Regarding ESG, there are environmental problems that exist right now and problems that will exist further down the road. Damage control is essential to mitigate the immediate needs of the region (especially where large-scale loss of life or displacement could be a factor), but regional governments must also develop strategies that extrapolate into future states.
Singapore faces similar challenges to other developing nations in southeast Asia. Gender diversity, inclusivity, regulatory health and safety challenges, and capability building are all issues that have risen to prominence in recent years. However, as a highly developed city-state, Singapore also faces a unique challenge in that it has a lack of natural resources, further stressing the importance of its human capital.
‘A decade ago, Singapore embarked on a skills transformation programme spanning many industries’, says Lee. ‘There was a consensus that many traditional sectors needed to innovate, and that the supporting workforce would need to be skilled up accordingly. Employers would therefore need to have better clarity on the training landscape and what would be needed to close the skills gap. This presents an opportunity for advisers, such as myself and my colleagues in RSM, to help our clients not only transform but develop capabilities from the ground up’.
On the subject of human capital, the value chain in Australia has become a focal point for ESG initiatives, which includes across borders. There is a rising awareness that the methods involved in sourcing, making, shipping, and delivering products must come under scrutiny. ‘First Nations’ community relationships and involvement are key to ESG strategies, especially in regard to working with Aboriginal and Torres Strait Islander peoples’, says Elkhishin. ‘The proportion of Australian ASX (Australian Stock Exchange) 200 businesses that have a Reconciliation Action Plan (RAP) is still not enough. The involvement of rights holders on the “S” of ESG reporting should be driving the extension of principles to all individuals that are impacted by a business or operation’.
In China, despite the overall increase in urban household income, issues such as unemployment, forced labour, unpaid wages, and misconduct are still sources of grievance today. ‘Since the establishment of the constitution, gender equality gained unprecedented importance in Hong Kong and China’, says Mak. ‘On the other hand, corruption was another major social issue that has threatened to thwart or cancel out any progress being made. The Chinese government has recognised that corruption is a key inhibitor to ESG and intensified its effort in opposing corruption’.
In Australia, there is a growing desire to install governance mechanisms to reinforce positive cultural practices and an integrated approach to ESG strategic planning and risk management. The list of imperatives includes (but is not limited to) enterprise risk management and business resilience, fraud and corruption control plans, quality and standards for assurance practices, and information and privacy protection (a particularly hot-button issue among the general public).
‘Whilst large ASX-listed companies have mature governance practices driven by the ASX Corporate governance recommendations and principles’, says Elkhishin. ‘There is maturity gap for businesses that are small to medium, which may have limited formal practices established’.
In Singapore, regulators have offered listed companies a phased approach toward ESG reporting. However, two key concerns stand out, both of which were published in a notable 2023 business survey on the governance of ESG. The first is aligning governance to performance and ensuring that those that are responsible for driving the transformation of businesses and their ESG plans are recognised and remunerated appropriately. The second concern has to do with accountability.
‘As companies scramble to identify professionals and competent executives to lead ESG transformation, how much authority and responsibilities are accorded to these individuals’, asks Lee. ‘How many capabilities do board representatives have in steering the ESG agenda? What is expected of such internal resources to achieve in terms of ESG progress within a realistic timeframe’?
Hong Kong faces a gender gap that is not only hard to ignore, but also poses a significant risk to investment. According to a 2022 study by the Hong Kong Institute of Certified Public Accountants, the average size of the board among all the Hong Kong-listed companies studied was 8.2 members, which is less than the international benchmark of 11 members. On the other hand, the female representation on the boards of these listed companies was 15 percent, which is also much less than the international benchmark of 30 percent. However, it appears change may be on the horizon.
‘Along with the revised and updated corporate governance code, listed companies with single-gendered boards are now required to appoint a director of a different gender no later than 31 December 2024’, says Mak. ‘And as of July 2022, the Hong Kong Stock Exchange (HKEX) no longer approves new listing applications with single-gender boards. It is expected that these efforts will increase board diversity and effectiveness in the future’.
The last five years
The aforementioned size of the APAC region makes it both a high priority and an opportunity to lead by example. Perhaps for this reason, there has been some urgency with regard to ESG, resulting in an exponential increase in efforts and resources invested in recent years.
‘The past five years have been transformational’, says Lee. ‘In 2021, the Singapore Green Plan 2030 was rolled out to strengthen commitments under the UN 2030 Sustainable Development Agenda and the Paris Agreement, as well as to achieve our net zero emissions target by 2050’.
Although Singapore accounts for around 0.11 percent of global carbon emissions, the country has made significant efforts to reduce emissions domestically. ‘Singapore implemented a carbon tax in 2019 which has provided an impetus for businesses and individuals to reduce their carbon footprint in line with our national climate goals’, says Lee. ‘I am sure other RSM member firms are seeing similar trends in their jurisdictions’.
Similarly, Australia has doubled down on its ESG intentions. Last September, the Australian Government passed the Climate Change Bill 2022. The bill sets out the nation’s greenhouse gas emissions reduction targets, requires the Minister to prepare an annual climate change statement, and empowers the Climate Change Authority to give the Minister advice that relates to the preparation of an annual climate change statement. The act also legislates the commitment to cut greenhouse gas emissions to 43% below 2005 levels by 2030, and to reach net zero by 2050.
‘Sustainability reporting aligned to a recognised reporting framework, such as the Global Reporting Initiative (GRI), is now becoming the norm for many medium- to large-cap companies listed on the ASX’, says Elkhishin. Additionally, this reporting must also include the following: disclosure of material climate-related risk exposures, targets and performance metrics aligned to the recommendations of the Task Force on Climate Change Financial Disclosure (TCFD), and attributions to the 4th edition of the ASX Corporate Governance Principles and Recommendations. Furthermore, the edition released in February 2019 included language that compelled listed entities to disclose not just material exposure to environmental and social risks, but also how they intend to manage those risks. ‘Whilst not mandatory’, says Elkhishin, ‘the basis of the principles is an “If not, why not” approach, where an explanation is required if the board of an ASX-listed company deems a recommendation not appropriate, for transparency’.
Further north, Hong Kong and China have enacted similar measures. ‘In recent years, there are three regulatory ESG reporting requirements with both mandatory and "comply or explain" components’, says Mak. ‘One for Hong Kong listed companies, one for investment fund managers, and one for ESG funds’.
Hong Kong, China, and the Hong Kong Stock Exchange (HKEX) are increasingly integrating ESG factors and reporting requirements for listed companies and fund managers. Both Hong Kong and China have committed to achieving peak carbon dioxide emissions before 2030 and carbon neutrality before 2050 and 2060, respectively. The HKEX has updated the ESG Reporting requirements several times in the past five years, and in 2020 the city established a Green and Sustainable Finance Cross-Agency Steering Group (GSFCA), a multi-regulator steering group co-lead by the Hong Kong Monetary Authority ("HKMA"), the HKEX, and the Hong Kong Securities and Futures Commission ("SFC").
‘Since 2016, China has been one of the largest green bond issuers in the world and is now the second-largest market in the world after Europe’, says Mak. ‘In 2022, the China Enterprise Reform and Development Research Association has published the nation's first ESG Disclosure Standards’.
The changes happening right now
ESG represents a massive transformational shift that has seemingly taken the business world by storm, almost overnight. However, for all the talk of initiatives and strategies, the fact remains that action is the true currency of change. And in the APAC region, there is plenty of action in effect.
With the release of more and more guidelines and regulations on ESG and sustainable finance in recent years, investors and the financial industry in Hong Kong and China have begun to recognise the importance of these initiatives, and the potential impact on the financial performance and value of enterprises. ‘Nowadays, many people will regard companies with poor ESG performance as failing to manage medium-term and long-term risks properly’, says Mak.
Legislative mandates are an effective way for governments to apply pressure. The Climate Change Bill passed by the Australian government in September of 2022 created a series of milestones to drive change. These ambitions represent a significant amount of work that must be done in a relatively small window of time.
However, it’s not just government mandates that are driving change. Australian companies are rethinking and reassessing the impact of their operations in the context of their competitors’ performance, their clients’ demands, and in helping provide access to capital and investment. ‘Sustainability has become a key enabler to growth, not to mention the key to access markets and capital’, says Elkhishin. ‘However, as important as our current ambitions may be, it’s also imperative that we keep our eye on greenwashing and take appropriate action against it’.
Regulators in Singaporean financial markets are emphasising the importance of mandatory ESG reporting for certain sectors that are more emission intensive. Moreover, local large banks and financial institutions are driving subscriptions toward sustainable finance and green bonds. The Government is also lending support to Singapore businesses through targeted grants which support sustainability capability development projects, and sustainability standards adoption.
‘We are seeing ESG, as a concept, filter into business plans and boardrooms’, says Lee. ‘In the last four financial budgets, the government has rolled out concrete sustainability policies and action plans. The government has a strong focus on strengthening Singapore’s resource and climate resilience’.
Advice for businesses just starting their ESG journey
Enterprise-wide transformation can be a considerable undertaking for any business, especially those with limited resources, time, and budgets. For this reason, there are still many organisations that are only just now taking the first steps of their ESG journey.
In this section, our APAC experts weigh in on some of the key takeaways to help these businesses get started.
Jacob Elkhishin, Partner, Risk Advisory and ESG services, RSM Australia:
- Identify what is material to your business and strategic operations based on understanding your stakeholder needs and expectations.
- Find the ideal ESG framework and set a baseline year. This will enable performance and progress tracking.
- Develop a Strategy and implementation roadmap.
- ESG crosses over multiple parts of all businesses and should be integrated into strategic planning, so make sure you understand your internal capabilities and educational needs to ensure knowledge and awareness at all levels within the business.
- Assess your data: what data do you currently have, what data do you need, and how can your ESG reporting data be more streamlined?
- Set up trackable progression metrics towards ESG.
- Align actions towards ESG reporting as an investment, not a cost.
- Agree on ESG measures at the governance level with a clear strategy.
- Avoid quick, cheap technology solutions and greenwashing.
Kenny Mak, Senior Manager, Head of ESG, Risk Advisory Services, RSM Hong Kong:
- When a company is starting their ESG journey, “governance” would be the most important part, as the attitude of the board to ESG will be closely tied to the outcome.
- Securing the support of the board of directors and executive leadership team would be the very first step to their ESG journey, as this can help to establish ESG as part of the culture within the company.
- To integrate ESG initiatives into key governance processes, enhance board-level oversight and further develop the overall strategy and risk management mechanism.
- Establish a partnership with an experienced international consulting firm to act as a guide on the ESG journey.
Dennis Lee, Partner, Deputy Leader (ESG Practice), Real Estate Industry Vertical Leader, RSM Singapore:
- Be clear about what ESG means to you. Does it afflict the continuity of your business? Or does it accelerate and support cost and resource-saving measures you are looking to achieve?
- Be self-reflective. Where do you stand in your ESG journey? What are your competitors doing? Where do your industry’s ESG aspirations lie?
- Prioritise and set realistic targets to show tangible and measurable improvements. Nothing creates momentum and trust better than business leaders who deliver on commitments and celebrate victories.