Awareness of sustainability as a business concept is not lacking among business leaders in Asia. Influential conferences such as the Boao Forum for Asia (BFA), regional business media, and international thought leaders heavily promote sustainability as a ‘must-have’ element of a company’s strategic future.
Yet, many observers agree that concrete actions are still lacking, and that the pace of change in adopting sustainable practices needs to be accelerated. One reason for this is that business leaders may not yet be fully on board with the ‘Why’ of sustainability – Why must we start now, what is the hurry? What are the specific benefits of improving our Environmental, Social and Governance (ESG) performance?
The simple answer is that sustainability, if done well, leads to competitive advantage. Effectively presenting the most compelling reasons to engage in sustainable business practices is the vital first step in opening new dialogues with industrial decision makers. Each of the five drivers of sustainability action detailed here might resonate more or less with a particular business, but what is most important is what they all have in common – they are all sources of competitive advantage in a dynamic and ever-changing region.
i. Changing Legal Framework
ESG issues cover a wide range of legal territory, including but not limited to environmental law compliance, product quality and safety, occupational health and safety, labor relations, supply chain management, community investment, and corporate governance regulations. The scope and detail of all of this legislation is enormous, but it is also growing fast.
Every year in ASEAN and in other Asian markets important regulations are being introduced or strengthened. Some recent examples from just one aspect of ESG law are China’s recent crackdown on environmental policy enforcement, proposed increases in environmental protection taxes to take effect in July 2018 made by the Vietnamese Ministry of Finance, and the first-ever carbon tax to be levied on Singapore businesses beginning in 2019.
The takeaway here is that all companies will ultimately be affected by these changes – the trend is set and irreversible. Competitive advantage will be gained by proactive companies that recognize the direction of the changes and can make smoother (less costly) transitions to the new legal environment. The way to do this is to start early and plan well – fundamental change takes time and must be handled with care.
ii. Changing Financial Environment
A significant financially-oriented ESG driver affecting Asia is the growing influence of activist investors in regional stock markets. Briefly defined, activist investors are institutional investors who use their voting clout as large (but still minority) shareholders to effect top-down change within a company. Activist investors can have a variety of aims and strategies, but one common goal is to unlock shareholder value by improving ESG, especially corporate governance.
In their May 2018 analysis of activist investing in Asia, JP Morgan Chase found that there were 106 activist campaigns launched in 2017, and that since 2011 the compound annual growth rate in the number of campaigns launched has reached 48%. International law firm Schulte, Roth & Zabel revealed that in Asia smaller firms are more likely to be targeted by activist investors than larger firms. 59% of all companies with headquarters in Asia that were subject to activist demands in 2017 had a market cap of less than USD 250m. This same figure for the EU and the USA was 35% and 32%, respectively.
With demands such as increased diversity of board composition, transparency in CEO succession planning, significant changes to shareholder voting practices, and enhanced disclosure related to conflicts of interest, publicly listed companies in ASEAN are well advised to have their affairs in order to avoid becoming the next target.iii. Human Resources Strategic Benefit
Sustainability is, by definition, a long-term goal. Companies with a long-term strategic orientation are already very familiar with a key challenge – to attract and retain top management talent. There is a wealth of research demonstrating that an employee’s attitude toward the company is a major factor in how long they stay with the company, and the quality of their work. This is often known as the psychological contract, where the expectations of employees must be met by the company’s actions taken in line with the firm’s own values.
An observed trend among knowledge workers, especially younger talent that demonstrates management potential, is the desire to work for ethical companies that make a positive impact on society and the environment. Therefore, companies that wish to benefit from long-term employment of top talents have a real motivation to support sustainable business practice, in daily practice as well as in their public communications.
Realizing sustainable business goals is an achievement that the PR department can promote, but in terms of Human Resource strategy improving ESG performance can help a company establish an employer brand that will attract and retain top talent. As described by Harvard Business Review, employer branding is an activity with great strategic importance, often overseen by the CEO or CMO, but driven by employees using social media in a climate of transparency and advocacy. Companies that are successful in creating strong employer brands will enjoy greater employee loyalty, lower talent acquisition costs, and increased access to employees with key skills. Good results in ESG performance can become an influential part of the story a company will tell about their employer brand.
iv. Growing Resource Scarcity Pressure
Lack of access to key natural resources is one of the classic reasons that companies would choose to shift toward more sustainable practices. Major supply chain disruptions can result in a wide variety of negative outcomes for a business, from dissatisfied customers to bankruptcy. When considering the scenario of key resource scarcity, businesses can predict one of two developments: the price of the necessary supply may rise, or it may not rise. There is evidence for both results to be found in different industries.
A United Nations Environment Programme report, citing an earlier McKinsey report, showed that prices for metal, rubber and energy increased 176%, 350%, and 260% respectively between 2000 and 2011. These increases were directly and indirectly related to unsustainable industrial consumption patterns. Evidence for the alternative outcome can be found in the mining industry. Researchers from Utrecht and Wageningen Universities in the Netherlands published their results of a detailed comparison of scarce vs. abundant mineral resources in the period between 1900 and 2013. They found that there was no advance warning of the depletion of a specific mineral signaled by rising prices of that mineral.
Essentially, the free market’s pricing mechanism did not function in the way many would expect it to – by raising the price of a resource in short supply. More importantly, lack of advance warning of resource depletion may result in a failure to conserve resources at reasonable levels for future generations. Companies with sensitive or insecure supply chains can be found at the forefront of the shift towards circular economies. This is perhaps the best example of sustainability and competitive advantage being one and the same.
v. Extra Profit Gain
The question has long been asked: “Will consumers pay more for eco / green products?” A review of research from the EU, USA and Asian markets, covering a variety of industries, indicates a strong ‘maybe.’ Companies blessed with forward-thinking, heavy-pocketed customers should focus on delivering maximum value to those customers based on that market’s demand for sustainable products.
Similarly, companies in highly competitive mass market industries can win customers by delivering real value in a sustainable way. The difference lies in the degree of innovation required to achieve a breakthrough in value delivered. Some companies have seen revenue growth by simply relabeling their product, while other companies need to make fundamental changes throughout their supply chain and production processes.
Notable success stories from Unilever, Wal-Mart, and Levi’s among others demonstrate that sustainable production methods are just as much about production efficiency as they are about market share growth. When considering the role of sustainability in improving the first bottom line, leaders must be sure to examine the profit equation from all angles, so that no opportunity to employ sustainable principles is overlooked.Then, Why Not Sustainability?
Institutional inertia is a strong force that prevents large organizations from making significant changes in a short time, or perhaps from making any change at all. One way to overcome institutional inertia is strong, determined leadership with vision and the desire to improve the company in the long run. After careful consideration of the long-term, fundamental trends affecting a business, a decision to gain competitive advantage by improvement in ESG issues, even just one, will make good business sense. In the not-too-distant future, business owners, executives, employees, suppliers and even customers will all look back and ask “Why didn’t we do this sooner?”
Michael Chance is Senior Lecturer at Amity Global Institute, Singapore.
Sun Xi is founder and CEO of ESGuru, a Singapore-based consultancy firm specializing in environmental, social and governance issues.