Sustainability as a Business Strategy for Competitive Advantage
@ the IERP® Global Conference, October 2022
Ralph Dixon, Director of Environmental Investments, YTL Corporation, spoke about the growing significance of ESG in the current business landscape, and what organisations need to consider as they move to incorporate it into their development strategies. Having been involved with ESG since 2007, he noted that things have moved at an incredibly fast rate although initiatives took off very slowly in 2010, with muted response from industry; it was not a core issue. “But now ESG seems to be taking centre stage in boardrooms and risk management,” he said. “The acceleration of information has made it a more pertinent issue.”
Risks like workplace issues or issues connected with responsible products and services, however, are yet to be addressed. The acceleration in the mobility of information is changing the way we see and manage things. Reputational risk, damage and harm have become major issues. This, and other changes have given rise to issues like Greenwashing and a new one – Greenhushing, where organisations limit their disclosures in order to limit their risks. “If we don’t disclose our climate targets like our carbon, net zero or neutral targets, our workplace or supply chain policies, we cannot be held accountable for them at a future date,” he said.
But what is the significance of ESG in today’s corporate and business landscape, and how should companies incorporate it into their strategy to enhance their competitiveness? Strategy that incorporates ESG is important for the environment, society, governance and business. Research has shown that it can also improve capital cost by an estimated 10%, through efficiencies that reduce cost, improved relationships with regulators, talent acquisition and retention and staff loyalty. “One or two years is considered long tenure in a job,” Dixon said. “People move on. To hold them, you need to show that you have embedded ESG firmly into your culture and DNA.”
Companies already recognise this, and are taking sustainability into account when making purchasing decisions.One example he quoted was the company Patagonia, whose founder has chosen to donate his shares to charity, to focus on the business and philanthropic endeavours. “That was his additional effort to increase the ESG profile of Patagonia,” pointed out Dixon. “This will surely be regarded as a strong sustainability brand.” Stakeholders are beginning to indicate their preferences as well. Consumers are more likely to purchase from a company with a reputation for sustainability, or diversity and inclusion, which are also ESG-related factors.
They also believe that companies should be involved in creating ESG best practices. Closer to home, YTL’s joint CSR activity with the Lang Tengah Turtle Watch on Malaysia’s East Coast saw repeat customers – tourists who returned to the turtle sanctuary because they liked the activity. Additionally, employees have indicated a preference for working with companies whose beliefs align with theirs. IT giant Apple, for instance, has moved some operations to India because of workplace issues in China. Some stakeholders were even likely to discontinue relationships with organisations they perceived to be treating their employees, communities or the environment poorly.
Business strategies should thus incorporate economic, environmental and social factors into the organisation’s policies, practices and processes. Sustainability is becoming a major priority for businesses as well, with many firms prioritising this over financial success. Among their reasons for prioritising sustainability are the desire to recover from the pandemic, improve operational efficiency and lower costs. They also see it as a way to access capital and investments, and as something that will support their efforts to attract and retain employees. Overall, they see sustainability as very much a part of their measures to increase productivity and competitiveness.
The factors driving sustainability today are investor, consumer and regulatory demands, the need to attract and retain suitable talent, and increasing productivity. These are inextricably linked to the barriers which are preventing organisations from attaining sustainability. Many firms, already preoccupied with pandemic-related issues, find it difficult to keep up with new regulations and requirements. Strained finances, brought about by the pandemic, may exert influence over the decisions made by the board and management, away from the ESG direction, as the organisation becomes more concerned with rising costs, increasing disruption and continued uncertainty.
Firms which are intent on transforming sustainability into a competitive advantage, therefore, have to look concertedly at five main areas: stakeholder expectations; the organisation’s commitments; the most optimum way of infusing ESG into organisational strategy; creating value through innovation and technology; and communicating outcomes through appropriate governance and disclosures. Dixon illustrated these points with several examples from his extensive work experience that demonstrated how integrating sustainability practices into strategy not only reduced organisations’ negative impact on the environment but also produced a positive impact on the communities they operated in.
These actions resulted in better brand awareness, besides mitigating risks, and showed how collaboration between corporations and communities can drive change. Among the benefits of prioritising ESG, Dixon said, was lower overall volatility of the firm’s share prices. ESG is also seen as capable of improving employee satisfaction and attracting prospective employees. Moreover, consistent ESG reporting is effective brand management because it allows the firm to publicly align itself with values that affect perception of its brand. The tangible data of ESG reporting produces benefits such as a stronger company, more robust risk management and overall, a stronger brand.
Amid many success stories, however, Dixon said that there appears to be a recent decline in sustainable investments. “Sustainable investments have gone up, from about US$1 trillion in 2010, to US$12 trillion in 2019,” he said. “These are slowly coming off that very steep curve, starting to flatten out, because of ESG risk.” Blackrock, an investment, advisory and risk management firm, is stepping back and questioning if they actually need to be upfront about their ESG or sustainability credentials. But this has rebounded on them because they haven’t been able to meet some targets. That risk, to them, has been tangible.
“They’ve seen an outflow from those ESG funds,” he said. “Pension funds, for instance, have to be very focused on ESG, and decided to withdraw the funds because Blackrock missed targets – hence the trend towards Greenhushing as a way of not disclosing or setting targets. Instead, you just keep silent, and operate in a vacuum or void, not tell people the targets, and hope for the best. But we know that everything is going to become very transparent.” He acknowledged that there was currently confusion in sustainability reporting, and there was at present no global standard for it. “That ESG investment numbers are coming down is a clear sign that not meeting targets is a huge risk for firms,” he said.
He advocated consistency in approach, to avoid contradictory measures such as using traditional methods of energy generation like oil and gas, to power green efforts. Remarking that his company had been finding ways of producing cement and concrete more sustainably, cleanly and reducing emission since the 1990s, he said that this was responsible for their position as an industry leader today. This kind of investment in ESG practice has great significance, considering the rapid pace of change and accelerated global focus that is increasingly shaping markets, strategies and business environments now and in the years to come.