The backdrop to this is that businesses have always existed to create value, but what constitutes value continues to evolve. Where once it was narrowly measured in terms of pure profit, in recent decades this has broadened to include the full financial, social and environmental impacts of a business, from sourcing to production to disposal.
There have been two changes in recent years to this story.
First, having a clear Environmental Social Governance (ESG) strategy and programme, on how an organisation is a good corporate citizen, is no longer a broad ‘nice to have’. Today, how a company tells – and more importantly lives their ESG story - is not just a Public Relations exercise but is a very clear insight into how it operationally manages current and emerging risk.
For instance companies that are integrating innovation to address climate change or to enhance water efficiency are favourably viewed on how they are addressing current and emerging challenges. Increasingly, asset managers and pension funds are using ‘ESG’ criteria to vet a company’s strategy and business operations as part of financial fitness to compete.
The second change in ESG is that it’s no longer solely multinationals on the front-line of this societal shift – but has widened to include their entire ecosystem. This has coincided with recognition that 80% or more of a larger business’s environmental impact is located in its supply chain1.
What this shift means in practical terms is that these supplier businesses need to develop and integrate sustainability strategies if they are to remain within a supply chain in the future.
The good news is that it seems suppliers – many of whom are privately owned businesses - are in the right head-space to look at this topic. HSBC’s 2019 Navigator2 survey revealed that 81% of companies in Southeast Asia are projecting growth and 75% believe in delivering the United Nations Sustainable Development Goals.
I’m also seeing this trend emerge anecdotally when I speak to clients. Often the conversation highlights the values and the positive impact that business owners want to impart and the higher purpose they see in tandem with profitability.
But there is still some way to go in order to convert desire into action. A 2018 HSBC and East & Partners report shows that 24% of Asian respondents have an ESG strategy compared to 48% of corporates globally and 87% of European and UK companies.
Given European MNCs use Southeast Asian businesses extensively across a range of sectors – textiles, fast moving consumer goods, electronics, pharmaceutical, logistics, (commodities across all) - highlights that a dramatic gear change needs to happen amongst many local businesses. And the connectivity is growing.
I get it, but what do I do about it now?
Realising the need to change is half the battle but the next step is understanding what to actually do or where to start.
Here are some thoughts on how firms should be thinking about the sustainability agenda:
Yes, these measures will require some upfront investment to ensure you have the right practices in place, and are able to make the time and effort to develop or ascertain the business data to demonstrate this to the banks. But the result is worth it. Benefits include increased and improved access to finance including green lending, potential funding for capital investment by key suppliers, or wider supply chain finance programmes that peg suppliers financing rate to their sustainability standards.
Implementing changes to climate-proof business operations - the greening of a factory or office building, switching of a fleet of delivery trucks to electric, sourcing more sustainably-developed goods, or change consumption habits - takes time. Business strategies and product line-ups can’t be shifted overnight. But we can all at least start the process now, not next week, or next year. Failure to act now means the legacy of this generation may irreversibly be seen as one of failure.
Change is often gradual, then sudden. As engagement rapidly spreads from school-age activists around the globe to the boardrooms of the world’s biggest corporations, this feels like one of those moments. It will be those business leaders who adjust their purpose accordingly, and account for societal impacts across their supply chains, that will generate sustainable value over the long term for all.
A contribution piece by Philip Kunz, Head of Global Private Banking, Southeast Asia, HSBC Private Banking. A version of this piece was first published in The Business Times on 19th February 2020.
2 9,100 companies in 35 countries and territories, including the views of 2,299 businesses across SEA