Asian regulators should take a more active approach in the ESG matters of boards, advising them on how to better address environmental and social governance challenges, according to recommendations from the Asian Corporate Governance Association (ACGA), an independent, non-profit membership organisation based in Hong Kong.

 

The published recommendations extend from adjusting codes of practice, to training and composition of boards. “That listed companies need support on ESG reporting seems incontestable,” the report said.

Jamie Allen, the secretary-general of ACGA, told Reuters recently that there has been “marked improvement in ESG standards in Asia over the past two years, but corporate governance mechanisms remain fragmented and connections between CG and ESG poli-cies are unclear, limiting meaningful ESG and sustainability efforts.”

Awareness and discussion of ESG issues have become increasingly promi-nent, with Asian governments increas-ingly prioritising these and developing rules to hold companies more account-able.

This has led to a change in board expectations too. Sven Stumbauer, a senior advisor at Norton Rose Fulbright, says that historically for most compa-nies and boards, the primary focus was on shareholder return, but things are changing.

“However, the emergence of envi-ronmental, social and corporate govern-ance (ESG) risks are forcing directors to give equal consideration to the impact a corporation has on society and the envi-ronment. Failure to seriously consider ESG issues could lead to directors misin-terpreting the risks associated with ESG, leaving a company unprepared and potentially amplifying the financial and reputational impacts on the company,” Stumbauer says.

While boards are reflective of a company’s approach, their ability to manage ESG matters may provoke changes in the make-up of these.

“Boards, through their risk over-sight role, satisfy themselves that the risk management policies and proce-dures designed and implemented by the company’s senior executives and risk managers are consistent with the compa-ny’s strategy and risk appetite, and are functioning as directed,” says Stumbauer, noting, that to effectively fulfil their fidu-ciary duties, board members must have appropriate composition and experience.

“Depending on the company and its board’s composition, I would not be surprised to see regulatory recom-mendations to potentially alter and/or expand the board’s composition at a particular company to ensure that the board’s oversight function is coordinated and comprehensive,” Stumbauer says of the recent ESG recommendations.

While Stumbauer says Europe and the U.S. have been leading the adoption of ESG standards and disclosures, “Asia is rapidly catching up.”

“While we may say that Asia lags behind the Western hemisphere, I would say there has been a greater aware-ness of ESG, and more companies are adopting sustainability and ESG prac-tices. ESG without a doubt has become an undeniable market force, regardless of geography. Those companies that will be more proactive in managing ESG now, will emerge as the ‘winners’ compared to those that focus on regulatory minimum standards and black and white compli-ance with them,” he notes.

One point of note raised by the Asian Corporate Governance Association was that a connection between corpo-rate governance and ESG policies are unclear, something Stumbauer considers concerning.

“The notion that there is a discon-nect between corporate governance (CG) and ESG in itself is troublesome and would suggest that some boards and companies still have a significant amount of catching up to do,” he says, adding that if there is a significant disconnect between CG and ESG, “this would imply that companies are limiting meaningful ESG efforts and potential value creation efforts.”

Beyond doing social good, there are plenty of compelling reasons that companies should prioritise ESG.

“A strong ESG proposition can create value since ESG makes finan-cial sense. From my experience, ESG can facilitate revenue (topline) growth, reduce costs, lower various regulatory and legal involvement, optimise capital expenditure [and] potentially increase employee productivity,” Stumbauer says.

In terms of developing a roadmap for regulatory mandates ahead, and ensuring a successful ESG strategy, companies should focus on five key areas, says Stumbauer. “First, there is baseline setting. The board and senior manage-ment need to agree on the definition of ESG and its importance to the company. Second, benchmarking: The board and senior management should determine which ESG risks and opportunities are of strategic importance. Third, integration: The risks and opportunities of strategic importance should be incorporated into the overall business strategy. Fourth, stakeholder management and commu-nication: The company should shape its key ESG messaging, relating to strategy, value creation and risk management to its various external stakeholders, like for example: customers, investors, key business partners and regulatory bodies. Finally: Sufficient oversight.”

“The company must ensure that the board has the right composition, experi-ence, structure and processes in place to oversee ESG,” he adds.

 

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