@ the IERP® Global Conference, October 2022
This session, although focusing on stakeholder and shareholder activism, revolved around the topic of ESG. The aim and intent of ESG is to create value. “When you look at the various reports, these tell you that when you think and plan ESG, you have to think about it in a way that solves problems, rather than creating problems which you then solve,” said moderator Ramesh Pillai. “You make money by solving problems, not by creating them. Secondly, when you implement ESG, you should do it in a way that creates long-term value for the organisation. This is particularly important when it comes to doing business with Small and Mid-size Enterprises (SMEs) or Micro, Small, and Medium Businesses (MSMEs) which don’t have distinct ESG practices.
Companies need to be encouraged to move towards more sustainable businesses from the ESG perspective. It’s about how to be responsible corporate citizens and how to create value by being responsible corporate citizens. Panellist ShareenDato’ Abdul Ghani, Managing Director of Sorga Innovation said that when she started her journey with investment entityKhazanah, the term ESG was not very well understood. Only the financial bottom line was recognised then, not the triple bottom line associated with ESG. “We had a lot of stakeholder and shareholder activism because Khazanah needed to get its portfolio companies to a certain level of understanding of what it was all about.”
This was necessary in the course of strategising for those companies then. But today, ESG is used widely although she opined that there was still some way to go before there is complete understanding of how to translate it into real action in the respective organisations. The framework and methods of meaningfully implementing ESG have evolved significantly and are clearer, since her Khazanah days, although there were still questions that needed to be addressed, such as how it will work in various business environments or in different country situations.“Sometimes stakeholders demand certain things of an investment entity like Khazanah and all its portfolio companies,” she said.
But shareholders have very set ways of thinking about profitability and may not be clear about how ESG could result in an upside. “We deal with so many types of stakeholders,” said Ralph Dixon, Director of Environmental Investments, YTL Corporation. “We have something called the Stakeholder Matrix to handle stakeholder interests. There are areas where you cannot compromise, such as regulators which are a key stakeholder group. You have to comply. But there are other types of stakeholders – NGOs, lenders, analysts, asset managers, employees, directors –whose interests need to be balanced as well.” He acknowledged that there was still a struggle to do this today.
To a question about how to persuade stakeholders to encourage them to move in the right direction, Shareen said that in the case of Khazanah, its leadership drove a lot of its thinking and strategies, together with a strong team to execute it. “Some of the challenges were internal as well,” she said. “We had to speak to the investment people (to convince them of ESG’s financial returns) because as an investment house, we were looking at financial returns. But Khazanah is the investment arm of the government so our stakeholder is the Malaysian people…it’s how we make money and the structures around it internally that were overlaid with ESG considerations.”
She added that the argument was that investments which did not include an ESG balance meant that regulatory requirements were not being considered, and the organisation would be missing out on potential opportunities. “It’s not just about financial returns. You have to look at all other elements that contribute towards it,” she said. “Once you can include financial and non-financial considerations into the discussion, the system comes in as a matter of course to execute those decisions.”A lot of activism also comes from culture, and there is therefore a need to comply in multiple jurisdictions simultaneously. How is this balanced?
Dixon said that while individual companies in the group were individually reported, subject to compliance in their respective jurisdictions, group reports were maintained. These deal with the rest of the compliance and regulatory issues as well as stakeholder engagement. This includes engagement with NGOs and employees on workplace issues and responsible products where they may not be regulated or are location-specific. “When we talk about a general approach to stakeholders such as NGOs, because there is no regulatory requirement, we deal with them on the basis of standards which we set,” he explained, citing a project that YTL worked on with an NGO to protect flying foxes.
What do risk practitioners need to do to persuade their boards to utilise ESG for value? “It has to be strategic and anchored in what your core business is,” responded Shareen. “Then you can move from philanthropy and CSR. For ESG, it’s actually hitting your business. You need people who are well equipped to look at the risk profile of the business, and where the opportunities are.” It’s not that CSR efforts are not important, she stressed. But it is valuable for organisations to understand what kind of impact ESG creates on the environment, and in the community and social space. “Understanding some of the things which you do have consequences…is important for an organisation,” she said.
Stakeholder engagement is crucial; it is now a mix between stakeholder and shareholder because the organisation exists in that environment. It is not exclusively about shareholders; there is now a dual role and organisations have to find a way to connect the two. Value creation thus becomes more meaningful. “You need to define value,” she said. “It’s not just money; value is bigger than that. Financial returns are one element of value but value creation can be defined by economic growth and environmental protection, among other things.” Dixon suggested increased engagement with supply chain partners to provide data but supply chain partners need handholding.
“You need to provide them with the tools, procedures and processes, and get them trained up to the right level,” he said. “We had to demonstrate, firstly, that we were doing the right thing. Then we had to design different systems, structures and processes to allow them to be incorporated into our systems. This engagement was more than just a supplier-customer relationship; it is deeper and more complex. It’s probably our most important stakeholder obligation now. Our suppliers and contractors have a lot more pressure, and a lot more in terms of challenges.”