Why ESG is a Must for Our Common Future
by Niven Huang Regulations for driving ESG implementation by companies have evolved much more rapidly worldwide. However, the development of walking the talk on ESG is much slower than expected, especially in the embedment into business model and operation, global supply chain management, corporate finance and asset management. Compliance oriented mindset keeps ESG at a superficial level in a company, instead of strategic level in the Board and Executive Committee. Asian businesses are focused on ESG related certifications rather than being solution providers to support a global systematic transformation toward sustainability. This has to change. Companies should start looking inward through the lens of sustainability and peer into every component of their value chain to see which of their practices may be contributing to social injustices or further environmental degradation. From there, they can take corrective measures that not only contribute positively to sustainable development but can likewise have a fruitful impact on their growth prospects. We are living in a smaller and smaller planet, consequently, you affect me and I affect you. Everyone has to buy-in the root causes why ESG is a must. According to WEF’s Global Risks Report 2024, of the global top ten risks for the next ten years, five are environmental and two are social. From a climate change perspective, we are facing the challenge of higher financial impact than ever because of extreme whether events and transitioning away from fossil fuels in energy systems. It is inevitable to price carbon via domestic carbon reduction scheme and Carbon Border Adjustment Mechanism (CBAM) in the international trade. The cost of inaction is much higher because of the climate urgency. From a nature resource perspective, Earth Overshoot Day 2024 falls on July 25. Earth Overshoot Day by Global Footprint Network marks the date when humanity’s demand for ecological resources and services in a given year exceeds what Earth can regenerate in that year. We need more than 1.75 Earths to feed 8 billion people. But the dilemma is that we just only have one planet. We are obliged to enhance resource productivity and circularity. From biodiversity and eco-system perspective, all businesses depend on nature and its services either directly or through their supply chains, and those businesses that are highly reliant on nature are considered ‘most at risk’ from the consequences of nature degradation and biodiversity loss. Nature’s contribution to the global economy is estimated to be US$125 trillion per year, while over 50 percent of the world’s GDP (US$44 trillion) is moderately or highly dependent on nature and its services. Nature degradation and biodiversity loss affects resources, supply chains and community wealth, decreasing the value of assets and investments and bringing considerable financial risk. Conversely, the transition to a nature-positive economy is estimated to create around 400 million new jobs and generate US$10 trillion in annual business value. Yet, investors, businesses and policy makers continually fail to recognize nature’s true worth in their decisions and practice. In order to continue to survive and thrive, we need to protect and regenerate our natural assets. From a fossil fuels transition perspective, COP28 in Dubai finally initiated the journey of phasing out fossil fuels and phasing in new climate economy after twenty-eight years of global climate negotiation. Our resilient future is dependent on all industries’ transformation towards low carbon and circular with social purpose. Companies and businesses should operate with long-term perspective, with balanced interest among stakeholders instead of shareholders primacy. The performance evaluation should be based on triple bottom line (environmental, social and economic), true cost and true value. Internalize environmental and social externalities into corporate value chain will become new norm for doing business. Early actions guided by a strategic ESG roadmap on material issues can help companies build up a concrete foundation and ESG corporate culture for effectively balancing profitability with sustainability. ESG actions should be prioritized depending on materiality identification and relevance to core competence. An effective management system, linking senior executives’ compensation with ESG KPIs, assures a robust process for monitoring such a balance. A top-down approach from Board governance is needed to guarantee bold, targeted and decisive action in favor of sustainability. ESG is not only the cost, but also investment for future profitable business. Believe it or not, mother nature and global stability will be our ultimate KPIs to tell us whether we do have the ABILITY enough to sustain this planet. |
About the Author Dr. Niven Huang has been a pioneer in ESG and corporate sustainability for more than twenty-five years. Before joining KPMG, he was the Secretary General of the Business Council for Sustainable Development in Taiwan (BCSD-Taiwan, affiliated to WBCSD) for 16 years. He is also an associate professor of MBA and EMBA programs and sits in the jury panel of Asia Responsible Enterprise Awards since 2015. |
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