Integrating ESG into Business Models
@ the IERP® Global Conference, August 2023
In this session, moderator Dzafri Sham Ahmad, former Non-Independent Non-Executive Director of Bintulu Port Holdings Bhd, was joined by three panellists: Datuk Noripah Kamso, Chairman, Arabesque Malaysia; Datuk Nik Hasyudeen, Non-Independent Non-Executive Director, Bank Islam, and INED, Petron Malaysia; and Aida Mosira Mokhtar, Independent Non-Executive Director, MIMOS Bhd. Together, they discussed the issue of ESG from the point Board’s perspective. Acknowledging that there were several trends that were triggering – and were triggered by – ESG, Aida said that these were making it imperative for ESG to be integrated into business models.
“The investor emphasis is on ESG and the triple bottom line: People, Planet and Profit,” she said, adding that increased engagement with stakeholders – customers, suppliers and communities – was necessary in the current environment. Companies which take ESG seriously tend to have better risk management as well, and a higher degree of financial sustainability. This makes them more sustainable as investments. Describing sustainable finance as a side effect of ESG, she said that such companies also tended to have better controls and processes in place, for more robust governance. “Unless you are clear about ESG, you will follow what others think or do,” cautioned Nik Hasyudeen.
“Business is set up to make a profit,” he continued, adding that it was not just about making money, but doing what was right. The crux of the matter was to get the governance – the ‘G’ – right. Asked what ESG model would best suit business, Noripah offered some factors for consideration, based on her experience in the banking environment. The fiduciary responsibility of banks was a heavy one, she stressed. Their ESG model would necessarily have to look at disruptors like technology, particularly fintech, for instance. Banks, having the voice of authority, were also gamechangers. She advocated the more comprehensive use of technology to support this, and the elimination of human bias from the business models chosen.
“The business model has to be predictive,” she advised. “But the overarching factor about the business model is leadership. You need bold, balanced leadership with purpose.” Failure to address all these will lead to unintended consequences and distortions, she cautioned. What other enablers are critical to spurring the maturity of the business that will allow it to embrace ESG? All these things take time, and the commitment from the Board and management to make it happen, Nik Hasyudeen said. “It will not happen overnight,” he stressed. “We are living in the era of Facebook and Tik Tok, where things are supposed to happen immediately. When it comes to ESG, it will take a longer time.”
Board and management must be able to conceptualise what they want, articulate the story line that they are pursuing, and demonstrate that things are happening. This requires the collaboration of Board and management. Simultaneously, technology needs to be seriously considered. At the end of the day, ESG has to be commercially sensible. Everything has to be properly synchronised. Board and management must work together, and be able to tell their story well and show that there is progress – or you will be continually questioned, and be unable to move your agenda.
Sharing firsthand experience, Aida said that the state of readiness or awareness of ESG, and the willingness to embrace it, was sometimes lacking. Despite the growing buzz of ESG, not many companies knew exactly how to do it, and perceived it as not being important. In many cases, ESG was relegated to the HR function. But “not enough people who know about ESG are able to do it,” she said, adding that ESG needed commitment from management; however, “The tone from the top comes from the Board.” On how to integrate ESG into an organisation’s business model, she advocated first raising awareness, then determining metrics, and setting up KPIs.
Research has shown that better ESG will give better financial performance, she said. “There’s actually a positive correlation. We also have to remember that the market does not exist in a vacuum…No planet, no profits,” she added. How then to balance non-financial, financial and green obligations? She advised conducting an ESG impact analysis or assessment “of everything we do that will look at whether it will generate the desired returns.” Queried about how banks manage ESG matters, and how they encourage their clients to embrace ESG, Nik Hasyudeen said there hadve been a lot of developments in the banking sector which supported this.
There hads been a lot of initiatives in terms ofto ensureing that banks contributed positively. “There are a lot of things that banks must do,” he said. “The most important thing is that, the sooner you adopt the idea that you have to do good, to ensure that your company must do good – that’s the kind of idea we need to float with our customers. You start to see that together, you need to do something…it’s about commitment from management.” He advised commitment, and innovation, to achieve the aims that have been committed to.
On the application of artificial intelligence (AI) to ESG matters, Noripah cautioned that if the data was wrong, everything else would be as well, although technology, when applied in real time, had the advantage of eliminating bias and supporting financial inclusion, but again – the data has to have integrity. “AI is going to be mainstream,” she said. “Data is the new oil.” Nik Hasyudeen emphasised that ESG must be developed from the inside out as it was a reflection of what an organisation considers the right thing to do. Aida agreed, adding that it can be seen by all stakeholders and will allow the organisation to succeed.
ESG is no longer a nice-to-have; it has become a necessity for companies which want to be seen to be doing the right thing. “ESG is inside out,” said Nik Hasyudeen. “It is what you think is right, rather than what people are telling you is right. That will help you to sustain the process, and enable you to demonstrate what it really is.” Aida agreed, describing ESG as a journey that requires commitment from everyone. “You have to think about what matters to the company, how you need to do good, and how to do better,” she said. “Once it can be seen by all stakeholders, it will translate into better profits for social good.”