Awareness of sustainability as a business concept is not lacking among business leaders in Asia. Yet, many observers agree that the pace of change in adopting sustainable practices needs to be accelerated. One reason for this is that business leaders may not yet fully appreciate the specific benefits of improving their Environmental, Social and Governance (ESG) performance.
The simple answer is that sustainability, if done well, leads to competitive advantage. Industrial decision makers who get ahead of this learning curve are positioning their organisations to capture significant competitive advantage in the medium- to long-term. Here we present five drivers of sustainability action, with the aim of encouraging sustainability progress in the Asian business community.
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.
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?”
Every year in ASEAN and in other Asian markets important regulations are being introduced or strengthened. China is cracking down on environmental policy enforcement, Vietnam is proposing new environmental protection taxes, and Singapore is introducing their first-ever carbon tax.
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 adapt 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.
Changing financial environment
The growing influence of activist investors in regional stock markets is a notable financial trend. 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 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 per cent.
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 per cent 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 per cent and 32 per cent, 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.
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. Key resource scarcity can result in one of two developments: the price of the necessary supply may rise, or it may not rise.
A United Nations Environment Programme report, citing an earlier McKinsey report, showed that unsustainable industrial consumption patterns of metal, rubber and energy between 2000 and 2011 contributed to triple-digit price growth of those commodities.
This should be compared with a 2015 study that analysed unsustainable consumption of mineral resources (both scarce and abundant) between 1900 and 2013. This study found that 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, thus providing advance warning to market participants of a critical shortage.
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.
Human resources strategic benefit
Companies with a long-term strategic orientation are already very familiar with the challenge to attract and retain top management talent. 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. Companies that deliver good results in ESG performance will enjoy greater employee loyalty, lower talent acquisition costs, and increased access to employees with key skills.
Extra profit gain
Sustainability improves profitability at the product level, and in more than one way. Enhancing customer value by applying sustainable principles to sourcing ingredients, processing methods, and labor practices can lead to top line revenue growth—through accurate product labeling, for example.
Notable success stories from Unilever, Wal-Mart, and Levi’s, among others, demonstrate that sustainability is just as much about production efficiency as revenue 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 organisations 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 specialising in environmental, social and governance issues.
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