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ESG factors in play; companies must take sustainability metrics seriously

The Business Times

SINCE the Singapore Exchange (SGX) mandated listed companies in 2016 to produce sustainability reports on a "comply or explain" basis, listed companies have been more proactive in publishing their reports.

According to the latest Sustainability Reporting in Singapore study by the National University of Singapore (NUS) Business School's Centre for Governance, Institutions and Organisations (CGIO) and Asean CSR Network (ACN), 48.2 per cent (or 327) companies listed on the mainboard and Catalist reported their sustainability practices before end- May 2018. This is a notable improvement from 186 before the new ruling. Unfortunately, the average quality of sustainability disclosures in the past year did not improve in tandem. Not surprising too, the top 20 with the highest level of sustainability disclosures is dominated by the large capitalised, blue-chip stocks like City Developments, CapitaLand, Singapore Telecommunications, Olam International and DBS Group Holdings.

Clearly, there is plenty of room for improvement in engaging external stakeholders to identify key environmental, social, governance (ESG) risks. Besides enhancing firms' transparency and reputation, ESG reporting enables them to identify opportunities to reduce operating costs and grow revenues through sustainable development, better governance and risk mitigation.

Besides, sustainability reporting is getting the attention of investors and increasingly becoming an important aspect of investment requirement. Larry Fink, CEO of BlackRock, the world's largest asset manager with US$6.3 trillion under management, predicted that in the near future, all investors would be using ESG metrics to determine the value of a company.

Many investment banking firms are already providing research and valuation analysis taking account of ESG metrics. One example is Morgan Stanley's Sustainable and Responsible Equity Research team, which enhances traditional financial analysis by taking into account ESG factors that are material to specific industries, including oil and gas - one of the most "ESG-heavy" sectors in the economy, given its high carbon footprint, overall impact on the environment, risks to employees, and potential social disruption.

In a study on investor funds flow and ESG factors, research firm Morningstar found that investors do consider sustainability factors when picking a mutual fund. They also pay the most attention to avoiding funds that score poorly in the rating system.

Regionally, Asia's government pension funds have been taking the lead to integrate ESG principles in their investment process too. Japan's Government Pension Investment Fund (GPIF), the world's largest pension fund with US$1.3 trillion under management, and South Korea's National Pension Service (NPS), have made significant allocations to ESG strategies, just to name a couple.

With ESG increasingly integrated into many large and influential investors' decision-making processes, companies must take sustainability metrics seriously. Those which choose not to uphold ESG standards are likely to fall off investors' radar.

In the words of Virginie Maisonneuve, chief investment officer of Eastspring Investments, a global asset manager with Asia at its core, such companies will face market forces and even international pressure as the stewardship of resources and environment impact larger audiences.