ESG – Driving Organisational Performance and Long-Term Value Creation
@ the IERP® Global Conference, October 2022
“ESG is a phenomenon of rising expectations of businesses,” said panellist Kiu Jia Yaw, Co-Chair, The Malaysian CSO-SDG Alliance. “Where before on the dashboard of business, we focused on the bottom line, now there are many other issues to take care of and to learn or understand how all of these are linked and how they influence each other, from gender, human rights, environment to all types of things including inside and outside operations and the supply chain. How do we think about all this? It’s useful to step outside the business and cast eyes over the horizons. Look outside your sectors and market, and look beyond the economy.”
He pointed out that the reality is that the economy exists within society; and society, economy, business – all these social constructs – exist within the physical world. It is within these dynamics that businesses find themselves operating. Being aware of your place in society is then the key to whether the business will be competitive and be able to move forward. Kiu was the first of three speakers on the topic of how ESG can drive organisational performance and long-term value creation. The session was moderated by Shareen Dato’ Abdul Ghani, Managing Director of Sorga Innovation, and focused on what ESG concerns and connections should be top of the mind for leaders today.
Jessica Cheam, a Board Director of Singapore firm ComfortDelGro, and Edey Suresh, Director of UN Global Compact Network Malaysia & Brunei (UNGCNMB), were the other two speakers. “The principle of leaving no one behind requires businesses to evolve into more mature entities,” Kiu said, adding that the focus on a single bottom line was fast fading. “Being aware of its place in society is key to whether the business will be competitive today, and moving forward. It’s not a passing trend; it will only intensify. How you draw value from a more conscious workforce and more engaged customer base, depends on how you connect the dots in the reality you face now.”
As the chair of her company’s sustainability, risk and audit committees, Cheam remarked that the intersection between risk and sustainability was of growing interest to directors on boards everywhere. “The purpose of business in Milton Friedman’s era was to maximise profits for shareholders,” she said. “Many externalities were not reflected in the balance sheet – a lot of exploitation of society and natural resources – without proper accounting.” Businesses are not taking cognisance of the real issues that they are facing. But creating value for organisations is really about more growth, more trust, lower costs and less risk; it’s not about CSR or doing charity.
It’s also not personal; it’s business, she stressed. “A lot of the enterprise value of organisations today is intangible,” she pointed out. “We used to see that financial capital made up the bulk of a company’s enterprise value but, over the years, this has come down. Instead, the intangibles like goodwill and how you look after your customers, your suppliers, your reputation, trust and brand equity – these are what is being accounted for in your company valuation today.” CFOs are starting to think about how to put a value to natural and human capital when making decisions. Companies therefore have to decide where they want to focus their efforts, whether it’s people, society or the planet.
It’s a matter of what stakeholders’ priorities are. Boards and management have to understand what they need to prioritise, and what the impact of this is likely to be. Cheam’s comprehensive presentation covered the role of innovation and technology, investment opportunities and world benchmarking, among other issues. “When there is external validation for your organisation, you start to see the ESG benefits – in premiums, stock price, improved stock portfolios – and institutional shareholders will be convinced that the board and management are thinking about future-proofing the business, and are putting in place a strategy that is value-rich,” she said.
She also urged risk managers to seriously consider how they should be managing climate risk; how they are thinking about it as an emerging risk; disclosure and planning. Stressing that the sustainability agenda is here to stay, she said that whether they liked it or not, organisations were being scrutinised by both the rating agencies and the public. “You can’t hide behind not disclosing,” she cautioned. “A better strategy will be to handle it. Boards will be under pressure to understand ESG risks, and how to integrate the sustainability agenda into core business strategy.” The panellists provided several examples of sustainability success stories, based on their experiences.
Edey Suresh cited the example of a port which set structures and systems in place in order to increase the number of women in their workforce, not just in the office but outside as crane operators, for instance. These measures included alternative plans for pregnant workers who were unable to continue working under normal circumstances; the programme allowed for a switch in job functions or employee retraining. The organisation found that this sort of plan actually embraced ESG values, enhanced employee performance and organisational culture as well. Kiu addressed the organisational psychology aspect which could affect the resilience of the business.
“I think if we are free of the anxiety of being held to account over things which we may be forgetful about, or are not paying attention to, we tend to perform much better,” Kiu said. “We also get into a mindset which is more innovative and creative. When an organisation aligns what it believes with what it says and does, that alignment has a profound effect on the humans connected with the organisation, including customers. Businesses which are responsible are able to develop trust among customers because it communicates with them on quality issues.”The next question was how to strengthen value creation strategies to be able to identify business opportunities in ESG challenges.
Cheam said that value creation starts with the board and management setting out the appropriate strategy. “When we talk about business opportunities, this is really where the crux of the issue is,” she said. “It’s about whether the business is solving a problem while making financial returns on time. If it’s not, then it’s worrying because in the near future, you’re going to be outdated or irrelevant because the world is evolving. In terms of identifying business opportunities, you need to look at where the pain points of your industry are, and how to solve them. (For instance) Can you provide a service which is valuable? It’s a journey which involves the entire organisation to be involved.”
It requires a lot of upskilling to equip ourselves appropriately with knowledge and skillsets. There are a lot of resources available, she assured the audience, including many organisations which offer step-by-step guidance. It was imperative, however, for organisations to be proactive about pursuing the matter. On how to convert intangibles into financial facts to convince management, Cheam said that intangibles were really the cost or opportunity of doing business. “If you talk about reputational damage or risk mitigation, that’s where your intangibles lie,” she said. “If you are thinking about sustainability only from the compliance perspective…you are not taking advantage of what kind of value you can create.”