~ Archive for sustainability ~

Social issues caused by loan sharks and how it could be combated by cooperatives supported by technology, in addition to an Environmental, Social and Governance (ESG)-focused supplier management programme

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Photo by Tima Miroshnichenko

 

Written by Zeng Han Jun

The pandemic has left many people without proper means of survival in many countries. Several countries have turned to borrowings so that they could extend handouts to businesses and people. Some countries have begun to study the possibility of tendering out large construction projects to create new infrastructures and jobs. Massive reorganisations are taking place at the international and domestic levels. 

 

A few cities are focussing their efforts on international trade through online platforms and repositioning with a blue and green economy because their traditional means of livelihoods might be disrupted in the near future. A small number are readying some of their industries as if preparing to pounce on new opportunities. In short, it is dizzying to see so much action within such a short period, more so when the pandemic has exposed weaknesses of many personal decisions, sectors and governance systems. 

 

One particular issue stood out glaringly for me during the pandemic, i.e. Loan Sharks.  Loan sharks usually provide financing services to those from the lower-income group. These people usually do not have stable income and also do not have proper documentation to obtain loan from a traditional bank. This is where loan sharks will step in to value-add. 

 

Just to share a little about my undergrad experience; I worked as a part-time credit officer at Standard Chartered Bank throughout my university days and my work involved performing credit analysis for the consumer branch and later I helped out with the administrative work for the credit risk covering the industries. At the end of that stint, I found out that money lending is not really that easy because it is a challenge for the money lender to ensure that the borrower is able to pay up. 

 

To this, the credit officers might have to ensure that they have liens over some form of assets that are held by the business or individual. In case the business or individual is unable to cover the loan payments over a certain period (usually three months – we used to refer to it as three buckets), the bank will be able to exercise their rights to claim these assets and recover at least a part of the debt. Additionally, we were also instructed to pore over the cash flow records of the businesses or individuals and ensure that only borrowers with healthy cash flows are eligible for loans. Naturally, loan applicants who are working in certain stable professions, were the safe ones to endorse for lending. 

 

I used to think that credit officers are at the short end of the stick. Later I found out that somehow or rather everyone is at the short end of the stick because ultimately, private enterprises are not charities and every department has bottom lines to meet and positions to secure. Even charities have KPIs, returns and positions to secure! Some loan applications seem like “there’s more than meets the eyes” so we need to call up the frontline sales officer to explain about the situation and maybe get them to obtain more documents from the customers. 

 

We often get back an earful from those front-office lots, about how they are bringing in the business to the bank and sustaining the salaries of those like us.  And that we are just sitting by the phone, mouthing no to everything without a single idea of how the real world works. At the other end of the table, my supervisor will warn that if we let a bad apple in, our head will be on the chopping boards, not her fault and also not the front-line sales officer’s fault. I was just an undergrad part-timer! Luckily back in those days, we had vending machines that provided free drinks to cool us off from these ordeals. 

 

So the lesson from this experience (for myself) is that; getting a loan from a bank is not as easy as one might have expected, and this is even when the loan applicant already has the full set of proper records. A lot of effort is spent on verifying the sources of income, assets and existing debts, all of which depends first on having proper documents. 

 

So what about those without proper records or from lower-income groups?

 

Well, they mostly turn to loan sharks. 

 

When I was serving my national conscription as a law enforcement officer, I spent about one year as a uniformed patrol officer and later had to be transferred away to assist with the plainclothes operations for another year. We supported very deep operations against anti-vice activities, illegal immigrants, gambling activities and also, loan sharks activities. At that time, I already thought that loan sharks are a very troublesome group of people. 

 

Loan sharks.  

 

The fact is; these loan sharks provide financing service to those without proper cash flow records and usually to those who belong to the lower income group or maybe even illegal immigrants. They charge interest rates beyond what the banks offer because the risk that they undertake is very high. In some instances, borrowers often have nothing else to their names except their lives. Sometimes, the borrowers have to borrow even more money to pay off the interest incurred from the earlier debts and this might trap the borrower in the debt cycle forever. 

 

Depending on the situation, some borrowers might end up becoming labour for the loan sharks, as a means to pay off the debt. In others, a few borrowers end up committing suicide. For example, in some societies, farmers borrow money to buy seeds in hope that they can sell the produce for a profit later. However, the resulting crops might be paltry because of poor weather conditions, poor farming techniques, poor soil condition or maybe a mixture of these conditions. Unable to pay their debts and stuck in an infinite debt cycle, some hang themselves and sadly, a few turn to selling their children to finance a little of their debts in order to survive. 

 

It’s heart-breaking. 

 

Companies could unknowingly tap onto this pool of workforce or exacerbate this problem in some ways when they procure products and services, which is why it is very important to include responsible sourcing as part of a Environmental, Social and Governance (ESG) – focused supplier management programme. Responsible sourcing is a method of approaching sourcing and supply chains. It occurs when a company actively and consciously sources and procures products and services for its operations in an ethical, sustainable, and socially-conscious manner. This means that an organisation must ensure that its business practices – both within its own corporate walls and throughout its supply chain – have no negative impact on the environment AND the people. 

 

Working through the supplier management programme is one way to lessen the social effects from loan shark lending. 

 

Other than that, I am suggesting another approach, a more hands-on and albeit more difficult one. It’s more like a long-term Corporate Social Responsibility (CSR) project that underpins its approach with support from right-sized technology and the idea of setting up a cooperative ecosystem. 

 

As written on Wikipedia, it stated that cooperatives are:

A cooperative (also known as co-operative, co-op, or coop) is “an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned enterprise”. Cooperatives are democratically owned by their members, with each member having one vote in electing the board of directors. Cooperatives may include:

1. businesses owned and managed by the people who use their services (a consumer cooperative)

2. organizations managed by the people who work there (worker cooperatives)

3. multi-stakeholder or hybrid cooperatives that share ownership between different stakeholder groups. For example, care cooperatives where ownership is shared between both care-givers and receivers. Stakeholders might also include non-profits or investors.

4. second- and third-tier cooperatives whose members are other cooperatives

5. platform cooperatives that use a cooperatively owned and governed website, mobile app or a protocol to facilitate the sale of goods and services.

 

In the case of farming, a farming cooperative manages a number of interconnected activities such as production planning, growing and harvesting, grading, packing, transport, storage, food processing, distribution, and sale. This type of cooperative can also be formed to promote specific commodities such as various types of spices, vegetables or shrimps, etc. It is better to structure cooperatives according to the range of commodities that are being farmed within a region. This so that the farmers who are better at producing certain products, could share their best practices with the rest who may not be performing as well. 

 

When farmers band together like this, they also enjoy synergies such as having the ability to promote their product together which in turn improves their bargaining power and hopefully leads to better profits. Farming cooperatives can also be formed by small businesses to pool their savings and gain access to capital, acquire supplies and services, or market their products and services.

 

Members could contribute to the cooperative’s operations and growth by:

  1. Membership fees that are paid once or on an annual basis; 
  2. Service fees, for example, are member contributions with no individual ownership attached; 
  3. Capital contributed by members; 
  4. Individual members make deposits with the cooperative that can be used for business purposes; and
  5. Members can receive deferred payment for a portion or all of their produce delivered to the cooperative.

 

Cooperatives also frequently use external sources of funds to run their operations or finance investments, in addition to institutional and member capital. Non-member sources of funds could include other cooperatives or commercial banks, suppliers, government or donor agencies, and so on. External funding can be provided in a variety of ways, including grants, short-term loans, long-term loans or trade credit provided by a supplier. In fact, forming a cooperative and then using the pooled money to buy some assets, can improve its gearing ratio. This means that the cooperative might be able to borrow money at a lower interest than if one were to borrow directly from a bank.  

 

Once the cooperative is set up, they are in the best position to lend money because they understand the issues within the farming community. The members who are better at farming, could help to share best practices and also determine if a farming idea is viable for financing. Surely one would listen to those who have had more experience or performed better than oneself right?

 

Right?

 

On the technology front, I am not suggesting for even more advanced technology. On the contrary, I wished that technology companies could take a step back and cater to the rest who may not be able to catch up. I had the good fortune to visit a rural farming community in India before the pandemic started. From this experience, I learnt that the people who are living in the rural areas need simple 3G enabled phones, 3G internet network, software or online marketplaces that can be supported by 3G internet and a logistic ecosystem that would work with all these components. They need these systems in place so that they could communicate with the potential buyers who may be located out of town and receive payments for the service rendered. The technologies could be introduced through the cooperatives. 

 

Once they are able to receive money from new sources of buyers, they could again pool the money into the cooperatives. Cooperatives are also good training places to nurture the local people into administrative positions such as investment, finance, corporate development, marketing, and encourage the community to work together. All these work together to make the community a better supplier for most buyers. Also, buyers can also nurture new sources of supply through cooperative arrangements and mitigate any supply-side risks. 

 

With these options in place, people from the lower-income groups will have financing alternatives other than turning to loan sharks. To be honest, cooperatives are not new and have been used to extract lower-income communities and even public officials from the grasp of loan sharks in some societies. Together with technology, it could even uplift the lives of the vulnerable and help them to secure better livelihoods.   

 

References

Malay Mail. (2020, November 15). ‘Strangled by debt’: Coronavirus deepens Cambodia’s loan crisis: Malay Mail. Retrieved from Naheed Ataulla & Anand J / TNN / Updated: Jul 27, 2. (n.d.). How loan sharks pull poor farmers into a debt trap: India News – Times of India. Retrieved from Yasmina Hatem, L. D. (2021, January 07). India has a farmer suicide epidemic – and farmers are protesting new laws they fear will make things worse. Retrieved from  -->

Putting People at the Heart of Environmental, Social and Governance (ESG)

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Photo by Alexander Suhorucov

Written by Zeng Han Jun

 

Enabling a people-first approach in all aspects of business, is one of the pillars that promotes and enhances Environmental, Social and Governance (ESG) values. If carefully utilised, it can build trust among the staff members, serve as an important tool for handling feedback internally and act as an enabler for attracting more business and talents. 

In a way, smaller companies have it easier because most of their operations are within the span of control of the senior executives. It becomes more challenging when the oversight goes beyond the span of control due to factors like growth of operations, work extending to different geographical locations, tasks becoming more complex, increasing administrative processes, etc. 

Inefficiencies and informal work processes could unknowingly leeched onto official work processes, and all these could translate to unnecessary and unexpected increases in business cost.  In a recent example, a company had extended its direct distribution network to another foreign country. Shortly after that, one of their local senior managers started to make use of the company’s distribution network to distribute his own products. The local senior manager’s act was found out later because one of the staff members complained about it. 

In this case, it was the people’s trust in the company’s system, company’s strong investment in its people, and the transparency in communication between all levels that allowed for a swift and clean end to this.  

This is not new. Variations of similar situations could happen in different sectors. Let me just cite another recent example. This case is not about bad corporate governance within business processes but concerns with basic human rights in the workplace; A senior manager in another company was verbally abusing his staff members and behaved inappropriately with them as well. Following his actions, one of the staff members set out to record the senior manager’s behaviour on her handphone and uploaded the video on a social media platform. The video became viral and people started boycotting against the company’s products. 

In this case, it was the lack of trust in the company’s system, company’s lack of investment in its people and lack of transparency in communication between all levels that led to this unfortunate event.

I felt that it was important to spend some time to think about both cases; why it happened the way it did, what the companies had done to produce such outcomes, how did the outcomes affected both companies and if the outcomes were negative, what could the companies do to improve?

In the two examples that I have surfaced earlier, the outcomes were triggered by releases of information. In the case of the distribution company, a staff member provided feedback to the senior management. In the second case, the staff chose to stay clear of the company’s internal feedback procedures and relied on social media platforms to whistle-blow on the senior manager’s abusive behaviour. 

Technology has made it so easy to share information, to the point that it has become increasingly challenging for companies to control information flow. Additionally, the growth of supposedly neutral websites and applications makes them far more appealing as platforms to air feedback anonymously. Companies must work harder to convince their employees to stick to guidelines and use the company’s feedback mechanisms. 

A feedback mechanism can be as simple as providing an email address that staff members can send their feedback to. Some companies establish clear guidelines for handling feedback and encourage their staff to stick to it. Those who fail to stick to the guidelines, may face drastic measures. Others help their employees feel like they are part of the company so that they feel responsible for the company’s well-being. 

The latter approach is what I called putting people at the heart of ESG. Ensuring a people-first approach towards staff members so that they would in turn adopt a company-first approach towards the business. 

I organised three key ideas that underpin the people-first approach: 

  1. Trust in the system; 
  2. Investment in people; and 
  3. Sufficient transparency in communication between all working levels.

Trust in the system

Companies can have the best system in place to handle feedback but does the staff member trust the system enough to make use of it? Do they believe that their feedback will be considered and fairly dealt with? If not, the staff member might resort to external platforms to air their grievances. Winning the trust of staff members is not an easy task and can only be established through repeated positive actions. In fact, nothing beats walking-the-talk because it is very difficult to dispute the facts. 

Well, even though it is very difficult to dispute facts and data, it is still wise to adopt a human-centric approach when working with data. Strangely, the use of facts and data can result in unexpected negative outcomes if handled in the wrong way. That is why many companies use data to showcase their achievements and additionally seek consensus with their employees before including that information in the ESG report. 

For example, when using a data chart to show the increasing trend of learning opportunities for staff, some companies are also including surveys of employee’s satisfaction with the learning opportunities, their perception of access to such learning opportunities, their perception of the fairness in allocating these learning opportunities, etc. 

People engagement combined with concrete data can lead to very meaningful insights. In reality, it is challenging for a very small number of people to publish less-than-stellar results but that is what transparency is all about. It forces one to acknowledge the current position and then commit to continuous improvement. This is the first step to building trust. It is very difficult to shake the foundation of a company that has earned its social capital through organic trust building..   

Investment in people

The key is to make the staff feel like an important part of the company. Invest in people so that they are invested in the business. People who are invested in the business, are genuinely concerned about the business. Training opportunities, new projects, new portfolios, etc are just some of the many ways to invest in people. In my first example, the local senior manager’s misuse of the company’s resources was surfaced quickly because a staff member felt that it was his responsibility to escalate this issue to the management. Obviously the company invested enough in this staff member for him to respond in this way. 

Companies should try their best to provide sufficient training on identifying bad corporate practices, encourage employees to use internal feedback mechanisms and provide the reasons for staff members to believe in the integrity of the system. The staff members must be sufficiently invested in the company to be bothered with providing any feedback. Investing in people is about putting people at the heart of ESG. 

Sufficient transparency in communication between all levels

This is an extremely tricky topic and must be handled with utmost sensitivity. Most would agree that transparency is good and want it in communication at all levels. Easier said than done. Let me explain why. 

Some managers maintain control, prevent information overload and help the team to focus on the tasks at hand by allowing staff to access only relevant and sufficient information, and encouraging communication to take place within allowed parameters. For example, staff only need to access enough information to perform their work. Reports should be directed at the next higher level and the immediate supervisor has to decide whether or not the information should be released in its entirety to the next higher level. This is to prevent “skip-level” communication. It is an important management technique that has worked well for many large organisations, especially those that span across different geographical locations and employ people who possess diverse skills with large variances in expertise. 

Nowadays, it is common for the younger generation of workers to celebrate the flat company structure, preferring its open structure that allows for quick decisions, open communication and equal collaboration. A few younger workers are even ditching hierarchical company structure to work in flat company structures, simply for its open and flat work environment. Then again, it is not realistic for every company to adopt a flat company structure like what some technology companies have done. We have to accept that hierarchical company structure will continue to exist and expect to work with it for quite some time. 

Many studies have showed that open communication across all levels within a hierarchical company structure, actually incentivises the manager to hire workers who are less qualified and less productive than himself. Managers are also human, and they are also afraid that open communication might cause them to be displaced by their subordinates who may be equally or even better qualified. 

To this, some companies actually restrict skip-level communication (conversations between subordinates and senior management) and this is to encourage managers to hire well-qualified workers. Other methods include promotion by seniority, giving superiors employment guarantee or promoting employees into other business units (Raith, Friebel, 2001). 

Even the popular open-door policy has proved to be disconcerting to many managers who have substantially much control over their workers. Because of this, some managers are extremely concerned about their subordinates’ conversations with senior management and how it might affect the managers’ working relationships with the subordinates.   

The funny thing is, and well-documented in many studies, that high performers are attracted to a work environment that promotes open communication (Martel, 2003). This is also one of the reasons why some technology companies have gone all out to attract the best talents by ensuring transparency in communication between all levels and adopting a flat hierarchical company structure. 

Transparency in communication between all levels is a very tricky topic and the solution must be carefully crafted according to the situation on hand. It is significantly much easier to pull this off in a flat company structure that employs staff who are used to such management style. As for a hierarchical company structure, it is important to enable sufficiently open communication, enough to allow for feedback but not so much that managers lose their authority to carry out their work. Careful balancing is required because tipping on either side will result in bad politics within the organisation. 

People are the company’s greatest strength and adopting a people-first approach is to amplify that strength. The foundations to building a people-first organisation is to; (1) help staff members to trust the system, (2) invest in people so that they adopt a company-first approach to their work and (3) foster an environment for sufficiently open communication between all levels. A people-first approach is to put people at the heart of Environmental, Social and Governance (ESG) values and is one of the keys to building a competitive company. 

References

Martel, L. (2003). Finding and keeping high performers: Best practices from 25 best companies. Employment Relations Today, 30(1), 27-43. doi:10.1002/ert.10072

Raith, M. A., & Friebel, G. (2001). Abuse of Authority and Hierarchical Communication. SSRN Electronic Journal. doi:10.2139/ssrn.280010

The Development of Environment, Social and Governance (ESG) Criteria and What This Means for Businesses in the Future?

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By Zeng Han Jun

 

Development of ESG criteria

Governments are increasingly incorporating Environment, Social and Governance (ESG) criteria into mandatory financial disclosures as part of their efforts to achieve net zero carbon and contribute to the United Nations’ Sustainable Development Goals (SDGs). What does this mean for businesses, though?

Over 20 years ago, ESG principles were established, primarily to support selective investment and as criteria for reporting sustainability credentials. ESG disclosures were previously voluntary. Companies used them to differentiate themselves and add value to their businesses for investors and the general public.

Following the Paris Agreement (2015), governments have implemented policies to reduce carbon emissions and contribute to the SDGs. Among these regulations is the requirement for companies to make ESG disclosures.

ESG policy to drive the nett zero transition

For example, the European Commission has published or revised regulations aimed at incorporating sustainability into its financial policy framework. Regulation 2019/2088 on sustainability related disclosures requires banks and its financial advisers to disclose ESG information to their customers, and Regulation 2019/2089 (also known as the Low Carbon Benchmarks Regulation) aims to improve transparency and consistency in low carbon indicators.

The EU Taxonomy Regulation, enacted in 2020, contributed to the establishment of an EU classification system for sustainable activities. Furthermore, Directive 2014/95 requires large public interest companies to publish reports on their environmental protection, social responsibility and employee treatment, respect for human rights, poor corporate governance and diversity on company boards.

In 2017, the Task Force on Climate-related Financial Disclosures (TCFD) issued its final recommendations on reporting on climate impacts and action. It established a framework for businesses to create more effective climate-related financial disclosures using existing reporting processes, allowing for more reliable cross-market comparison.

New Zealand was one of the first countries in 2020, to commit to mandatory climate risk disclosures that are aligned with the TCFD recommendations for publicly traded companies, large insurers, banks, and investment managers.

The 2019 Streamlined Energy and Carbon Reporting Regulation (SECR) in the United Kingdom also introduced mandatory disclosures related to energy consumption, greenhouse gas (GHG) emissions, and energy efficiency actions for selected companies as part of their annual reporting.

Singapore also published its sustainability reporting framework in 2021, with climate disclosures playing an important role in transforming finance for a greener future. Singapore has been building the green bond market for years, including under a “Sustainable Bond Grant Scheme” from 2017 that has propelled the issuance of almost USD$8.3 billion in green, social, and sustainability bonds. That included a $1.1 billion set of green bonds issued in 2020 by Star Energy Geothermal Group, used in part to finance geothermal energy generation facilities in West Java, Indonesia.

The impact of mandatory ESG disclosures on businesses

Companies will face increased scrutiny regarding the sustainability of their activities in the future, as well as due diligence, with ESG criteria serving as a key requirement for investment decisions. Companies must measure and manage their environmental and social impacts, as well as have in place a governance structure to support this, in order to comply with mandatory ESG disclosures.

Although this may be overwhelming for some businesses that have not yet embarked on the sustainability journey, focusing on these aspects now can help businesses mitigate future compliance and climate risks. Companies should view incorporating ESG criteria as an opportunity to improve their businesses, create positive impacts in their value chains, and improve investor relations, not just any desktop exercise.

Companies should evaluate their businesses and create a roadmap for incorporating ESG criteria into their operations. While this will almost certainly necessitate short-term investments, it would almost certainly provide long-term value. Some research have showed that companies that have incorporated ESG into their operations consistently outperform their peers and may even benefit from lower-cost financing. Investors, for example, are becoming more aware of the risks that climate change can impose on traditional financial assets, and they may be willing to accept a lower return on investments linked to more sustainable activities.

What comes next?

Businesses should begin to think how they should embark on their ESG journey and gradually adapt and prepare for the more stringent disclosure regulations. They must also anticipate the higher level of rigor that investors and financiers will emphasis during due diligence. Integrating sustainability into corporate practices and reporting today would ultimately increase business value and allow businesses to contribute to a more sustainable future.

Environmental, Social and Governance (ESG) Advisory as Value-Added Service for Banks and Financiers

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By: Zeng Han Jun

A study was conducted in 2021, on the mission statements of 122 publicly listed companies from countries including Estonia, Poland, Hungary and others. It tried to show how these companies’ mission statements changed from 2012 to 2021 and it clearly showed that there is a inclination towards/ away from using certain terms. I reformatted it in a table format for easy reference:

Higher Usage (Weightage) Lower Usage (Weightage)
Responsible (+7) Shareholder (-10)
People (+7) Position (-9)
Innovation (+5) Profit (-8)
Community (+4) Lead (-6) 
Society (+3) Consumer (-6)

 

Other interesting terms that are becoming increasingly popular are: Sustainability (+1), Long-Term (+2) and Environment (+2) (Zumente, Bistrova, 2021). 

Broadly speaking, it seems like there’s a growing shift in that part of the world towards the Environmental, Social and Governance (ESG) branding, especially the part on Social. The study did not touch on the operational aspects therefore it is impossible for us to form any opinions on the operations.

I also noted that in 2018, the Governance & Accountability Institute revealed that 86% of S&P 500 firms released sustainability or corporate responsibility reports, compared with just under 20% in 2011 (GA Institute, n.d.). The gradual change in branding and reporting is somewhat evident. Well at least to me, it indicated that there is a growing awareness of ESG issues and challenges. It is good enough for me to learn that corporations have started to shore up their images. By right, it should be natural for these companies as the next step, to re-engineer its operations to meet ESG standards. A lot of people talk about “Green Washing”. “Green Washing” is like keeping a good, nice and green façade while the same toxic culture and pollutive operations persist. Based on the study, I am unable to derive more information about this therefore I cannot comment on this. 

Anyway, I have another thought to share; The younger generation are brought up differently. Technology is an essential part of their lives. Communication is instant and information sharing is… happens at quantum speed. Remember, these same people will be part of the future workforce and they are a group that do not suffer injustice easily. A bit of wrong doing here and some covering up there, usually end up becoming viral in the most popular social media platforms. This usually does not end well for the corporations’ stock prices and earnings. 

Additionally, many of these younger people live in clouds of digital tribes. People from all corners of the globe gather digitally in these tribes, for their hobbies such as photography, certain computer games, food, etc. Races, languages and religions might not matter that much when it comes to such associations. More important is the shared interests and hobbies that eventually lead to forging increasing empathy among geographically far-flung communities. I am certain that gamers from around the world are still gathering digitally for their latest runs/ practices of DOTA 2, League of Legends, Starcraft or whatever computer games that they have been playing prior to the pandemic, even when countries are closing their borders to prevent the spread of the Covid-19 viruses. 

The thing is, ESG isn’t exactly new. Similar concepts have been floating around for the past two decades or so but in recent years, growing awareness of environmental and human management issues have been quite instrumental in enveloping various terms like Responsible, Sustainable, etc under the broader umbrella of ESG. In a way, this new incarnation might help the industry to focus on what truly matters, in order to steer our ecosystem onto the sustainable development pathway. 

Then again, I need to remind myself time and again that ESG standards assess businesses and investments from an environmental, social, and governance perspective. No matter the scenario, there will always be the early adopters who are usually few in numbers. A large number of the remaining pack will adopt a wait-and-see approach. Some will not even know what is happening. When the wave comes, many will again be playing the catching-up game and initially get a low ESG score. 

Now, a low ESG score does not mean that the lenders, financiers and investors need to drop that business from the balance sheet. In lieu of that, this group of commercial entities are in the best positions to act as chaperones, advisers or consultants to improve the firms’ ESG scores and mitigate ESG-related risks. 

Mainstream banks are in a good position to assume this front. Their exposure to the entire market segment stretches from the micro to large caps and across all industries. This can mean two things to me at this point of writing: a risk or an opportunity. If you are the risk manager type of personality, you might perceive that banks are now exposed to the full range of risks from ESG challenges. Flip it around and it could be an opportunity to further value-add to the customers’ businesses by providing ESG advisory services. This line of business could even lend itself as an additional anchor to diversify value-added services, mitigating risks during times of digital upheaval.   

Advisory has always been about delivering values. ESG advisory even more so during these times, helping customers to deliver better long-term sustainable profits.  It is a win (Bank) – win (Customer) – win (Environment and Social) situation. Certain groups of bank employees could be identified and retrained in ESG advisory. They must be encouraged to understand the greater purpose behind the ESG drive. It is not just about the increasing number of investors and financiers who want to align their money with these ESG values, but more about the greater benefits to the larger ecosystem. The idea of contributing to the greater good could sometimes even be invigorating for some people. Well, ESG standards ultimately are about earning the money without causing negative impacts, right? 

Some food for thought. 

References

Navigating the Way to Sustainability. (n.d.). Retrieved from Zumente, I., & Bistrova, J. (2021). ESG Importance for Long-Term Shareholder Value Creation: Literature vs. Practice. Journal of Open Innovation: Technology, Market, and Complexity, 7(2), 127. doi:10.3390/joitmc7020127

 

Environment, Sustainability and Governance (ESG)-certified Business Hubs to Support Continual Innovations within the Small Business Community in the Post Covid-19 Era

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By: Zeng Han Jun

Key Takeaways

  • Growing interest in Environmental, Social and Governance (ESG) issues and the opportunity to shape corporate behaviour as evidenced by the increasing number of ESG frameworks; 
  • Businesses are also progressively aware of the importance of ESG standards because of how it could affect investments and cost of financing; 
  • Private sector does not operate in silo because many business processes are highly dependent on the larger ecosystem;  
  • Studies have shown that new business regulations might reduce the number of smaller businesses. Smaller businesses have advantages in innovating;
  • Creation of an ESG-certified business hub that already meets most of the ESG criteria. Bankers and financiers work with hub councils to allow pre-approvals for loans to businesses that have decided to set up operations in these ESG-certified business hubs;
  • Pre-approvals could also be worked out for other types of debts or capital that require adherence to ESG standards; and
  • This concept could help to drive up rental occupancy.

Overview

There is no denying that the Arctic ice cover has reduced drastically over the past 20 years (Johannessen, Miles, Olsen, Bengtsson & Myrmehl, 2003) and research has shown that there are strong correlations between the changing ice cover, global weather ecosystem and environmental impacts (Vihma, 2014). Given the potential environmental impacts, international organisations and governments around the world are stepping up to improve the awareness of sustainability and actively engaging the business community to include ESG criterias as integral parts of their business operations. Regretfully, many consumers are still having short-term focus on self-related benefits (Tasci, 2017) therefore more effort certainly is needed moving forward to improve awareness. 

Multitudes of ESG Frameworks

While international organisations and governments are busy at organising awareness programmes, many are also busy at developing new ESG frameworks in the hope of guiding companies along the sustainability path. According to an interview that was given by PWC Malaysia, their team had counted over 300 different frameworks, guidelines and standards on sustainability, and over 700 indicators (Ng, 2020). The explosion in the development of ESG frameworks can certainly dazzle even the most experienced buffet consumer. 

The competition among the ESG frameworks are intense, each vying for market share and trying to extend coverage beyond existing markets. It is almost impossible to predict if there will be a single ESG standard or several dominant ones, but it is clear that market sentiments are changing and ESG issues are increasingly relevant to businesses. In a recent survey that was conducted by Mckinsey, it showed that almost 75% of institutional investors wanted a single sustainability standard, with 85% saying this is needed to be able to allocate capital more effectively (Bernow, Godsall, Klempner, & Merten, 2019). This is why ESG issues are increasingly becoming more relevant to businesses. Businesses are increasingly being judged by how they handle ESG issues and this affects their ability to attract investments and their cost of financing (Raimo, Caragnano, Zito,Vitolla & Mariani, 2021).

New Business Reporting Standards Affect How Firms Organise Themselves

Businesses do not work in silo by themselves. Instead, their business decisions and operations depend to a large extent on the larger ecosystem where they have chosen to site in. Many studies have increasingly concluded that businesses and governments are closely linked therefore, close collaboration between the two parties could help to accelerate growth (Schneider, Evans, Silva, Chandler, Amatori, & Hikino, 1998). Strict adherence to ESG standards requirements is a matter of time and as with all types of regulations, it increases the cost of doing business. Some studies have suggested that regulations are fixed costs therefore businesses that are employing more than five to nine employees, tend to expand their businesses with the level of regulation. The number of businesses that are employing one to four employees, are likely to decrease with the level of regulation ( Calcagno & Sobel, 2013).

Different countries have different metrics to determine the size of businesses but most define a business size of one to four employees as that of small or micro businesses. Whether small businesses play an important part in innovation has been a subject of debate for many years and I am not going into that. However, it is clear that smaller businesses have the advantages in innovating. Smaller firms do not necessarily have the bureaucracy and silos challenges usually faced by larger firms, however; employees’ resistance to change and the mentality of “not invented here” would still be an issue regardless of firm’s size (Barham, Dabic, Daim, & Shifrer, 2020).

From this, we could deduce that there is the probability that the number of smaller firms would reduce when business reporting standards become more stringent. On the other hand, there is also the chance that the larger firms become even larger as they absorb more employees to tackle the new work that is generated by the new business reporting standards. Eventually, sources of innovations would spring more from the larger firms and this scenario does have some implications on the dynamics within the business environment. 

ESG-certified Business Hubs 

Clearly, a smaller firm would have less resources on hand and could face more challenges when trying to adhere to the new business reporting standards. This might affect their cost of doing business, raise the bar in attracting investments and increase their cost of financing/ debts. Investors, bankers and financiers will scrutinise these businesses, subjecting them to higher standards before releasing the much-needed funds. 

One idea is to create an ESG-certified business hub with high environmental and society standards already in place, for example:

  1. Substantial percentage of the electricity sources within the ESG-certified business hubs are derived from renewable energy; 
  2. Waste management systems within the ESG-certified business hubs encourage whole-of-system recycling efforts. Employees just have to follow disposal instructions to take part in recycling efforts; 
  3. High employment regulations that adheres closely to the society part of the ESG equation; 
  4. Low carbon emission and/ or carbon neutral technology housed within the ESG-certified business hubs that can be easily leverage by the businesses for their research and development (R&D) and business operations; 
  5. Electric charging stations that are evenly distributed within the ESG-certified business hub to facilitate the usage of private and public Electric Vehicles; 
  6. Risks mitigation measures are put in place within the ESG-certified business hub to reduce risks from climate risks and other types of foreseeable crisis; and
  7. Others

Businesses that choose to set up their operations in such ESG-certified business hubs, should automatically fulfil some criteria of the E and the S parts of the ESG standards. In fact, banks and financiers should also consider working with the business hub council to develop pre-approvals for loans to the businesses that had decided to set up their operations in the hub. Or at least fulfil some parts of the ESG checks that are required for the commercial loan so that businesses have less paperwork to deal with. This reduces the need for lengthy and complicated ESG checks. Pre-approvals or partial pre-approvals could also be adapted for other types of debt or capital that require compliance to some form of ESG standards. 

Such arrangements have several advantages. Firstly, businesses can focus more on their products and services, and on improving their management/ governance. Secondly, environmental and sustainability initiatives could enjoy economies of scales and hub councils might be able to charge a premium for top-of-the-line facility management. Thirdly, the hub council could make the environmental and sustainability data transparent, which could serve as a good information source for external auditors, bankers and financiers to continually allow for the pre-approved loan arrangements and also makes for good marketing as well, if the district is managed well. Lastly, this concept could help to drive up rental occupancy. Businesses that want to secure pre-approvals/ partial pre-approvals for their debts and capital, and be automatically certified for certain parts of ESG standards, will want to take up occupancy in this type of ESG-certified business hubs. 

Such arrangement does not only benefit the small and micro businesses. Larger companies understand how bureaucracy can stifle innovations and have resorted to creating smaller business entities to spearhead innovation initiatives. Such ESG-certified business hubs can also house the newly spinoff corporate entities so that they could benefit from the loan pre-approvals amongst other business benefits, and also entrench itself in the cradle of innovation and sustainability.

The concept can be adapted for use beyond a hub. It can also be adapted for use in a village, town, district, province, state or even the entire country. The idea is to create small achievable wins that edge the community or society towards bigger victories in the future.  

 

References

Barham, H., Dabic, M., Daim, T., & Shifrer, D. (2020). The role of management support for the implementation of open innovation practices in firms. Technology in Society, 63, 101282. doi:10.1016/j.techsoc.2020.101282

Bernow, S., Godsall, J., Klempner, B., & Merten, C. (2019, August 08). More than values: The value-based sustainability reporting that investors want. Retrieved from Calcagno, P. T., & Sobel, R. S. (2013). Regulatory costs on entrepreneurship and establishment employment size. Small Business Economics, 42(3), 541-559. doi:10.1007/s11187-013-9493-9

Innovation And Size Of Firm. (2012). The Economics of Industrial Innovation, 237-251. doi:10.4324/9780203357637-20

Johannessen, O. M., Miles, M. W., Olsen, A., Bengtsson, L., & Myrmehl, C. (2003). Arctic climate change—will the ice disappear this century? Elsevier Oceanography Series Building the European Capacity in Operational Oceanography, Proceedings of the Third International Conference on EuroGOOS, 490-496. doi:10.1016/s0422-9894(03)80077-6

Liberto, D. (2020, December 14). Small and Mid-size Enterprise (SME) Definition. Retrieved from Murray, S. (2021, May 14). Measuring what matters: The scramble to set standards for sustainable business. Retrieved from Ng, J. (2020, December 17). Cover Story: An alphabet soup of ESG standards. Retrieved from Raimo, N., Caragnano, A., Zito, M., Vitolla, F., & Mariani, M. (2021). Extending the benefits of ESG disclosure: The effect on the cost of debt financing. Corporate Social Responsibility and Environmental Management. doi:10.1002/csr.2134

Schneider, B. R., Evans, P., Silva, E., Chandler, A., Amatori, F., & Hikino, T. (1998). Elusive Synergy: Business-Government Relations and Development. Comparative Politics, 31(1), 101. doi:10.2307/422108

Tasci, A. D. (2017). Consumer demand for sustainability benchmarks in tourism and hospitality. Tourism Review, 72(4), 375-391. doi:10.1108/tr-05-2017-0087

Vihma, T. (2014). Effects of Arctic Sea Ice Decline on Weather and Climate: A Review. Surveys in Geophysics, 35(5), 1175-1214. doi:10.1007/s10712-014-9284-0

Sustainable Urban Development is the Key to the Continual Success of Southeast Asia Region

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By Zeng Han Jun (hjzeng@alumni.harvard.edu)

The sudden emergence of the Covid-19 pandemic has transformed the way that many of us perceived issues like working arrangements, commute options, housing needs amongst others. Still, the fundamental needs for affordable housing, environmental, social and governance (ESG) awareness and actions remain part and parcel of modern life in and beyond the cities. Governments, together with the Non-Government Organisations (NGOs) and private sector must embrace an open and collaborative approach to tackle some of the most challenging issues of our times, for example, the provision of a sustainable urban environment that allows for healthy socio-economics dynamics. 

From what I have seen, learnt and discussed with various organisations, I firmly believe that two important foundations were put into action during the Covid-19 period that could empower collaborative actions towards sustainable urban development and growth in the Southeast Asia region.  

First, the Southeast Asian countries came together and signed the Regional Comprehensive Economic Partnership (RCEP), which is a free trade agreement between the ten member states of the Association of Southeast Asian Nations (ASEAN) and its six Free Trade Agreement partners i.e. Australia, China, India, Japan, New Zealand and Republic of Korea . ASEAN comprises countries like Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

The RCEP marks ASEAN’s biggest free trade pact to date, covering a market of 2.2 billion people with a combined size of US$26.2 trillion or 30% of the world’s GDP. While it is largely being perceived as an economic partnership, studies have shown that the economy does affect the environment to a certain extent, which is why there are growing interests in promoting and activating the circular economy model to enable more sustainable and environmentally-friendly growth. 

With the RCEP, quotas and tariffs would be eliminated in over 65% of goods traded and this might improve market access. Business dealings would be made predictable with common rules of origin and transparent regulations which is always one of the top concerns for any potential investors. Apart from this, it also presents an opportunity to shape business policies to be more in line with environmentally-friendly practices and equitable social growth. A more holistic approach would encourage more firms to invest more in the region, including building resilient supply chains and services that could mitigate ESG-related risks and generating jobs that are grounded on strong meritocratic principles. 

Second, city mayors are stepping up with their experiences in working with international organisations on ESG-related projects. For example, Pasig City Mayor Vico Sotto from the Philippines, stepped up to initiate the ‘mobile market’ where city residents could purchase fresh goods right from their vicinity. This initiative encouraged people to stay home as the ‘mobile market’ is accessible. This reduced logistics transportation thereby reducing carbon emission and also helped in activating the local market. These upcoming mayors are well-positioned to understand the benefits of responding to global trends and commitments such as climate change, changing human behaviors and other ESG-related issues. 

Some of the more progressive countries within the Southeast Asia region, have emphasised on underpinning their forward policies with the sustainable development pillars. Cities must continually keep up and work towards creating a place to live, work and play and this has clearly become an even more important concept during the Covid-19 pandemic. During the pandemic, many already observed that global talents can continue to contribute productively from anywhere in the world therefore, do not really have the need to seek out places for work. To attract global talents, the main differentiator would be to create an environment that has high quality of life and also be climate-risks resilient. 

Apart from this, the attention is also once more again on urban areas and the mixed-use planning of these locations. Studies have also shown that people’s travelling behavior has changed under the lockdowns that were imposed during the Covid-19 pandemic. Demand for travel has reduced and that people will travel less by public transport. Walking and cycling can be important ways to maintain satisfactory levels of health and well-being. This will change the way urban planning is traditionally planned and unfolded. This entails a discussion with urban planning professionals and other stakeholders on urban density, open spaces and the demand for affordable housing.

My work with planners and finance firms from the region and beyond, revealed that there is a growing interest in the terms “Resilience” and “Climate Risk” and it is mainly driven by issues stemming from climate change. One common topic is to develop strategies to sustain the functioning of urban communities, business operations, supply chain operations amid stresses and disruptions that might occur due to climate change. A good number of cities around the globe are improving in this area and more Southeast Asian cities should certainly do more in this area too.  

Sustainable urban development is no easy task. Execution requires coordinating and communicating with stakeholders who sometimes do not see eye-to-eye on certain issues and it calls for a lot of skill and persistence to pull projects through. This is especially so for places where the administration has to take into consideration the rural areas and smaller communities, and how these communities seamlessly integrate with the changes of the urban and major cities.  

Keeping sustainable urban development on track entails setting out clear guidelines with hawkish monitoring. The mantra is to adopt a Whole-of-system approach whereby all arms of urban development work hand-in-hand and not against one another, while keeping the big picture in mind. Uninterrupted lateral and vertical communication is one of the key enablers to actualising the Whole-of-system approach, with proper mechanisms in place to review and adapt to new information. New information may sometimes require novel adaptation and is absolutely critical to fostering a city that flourishes.  

Sustainable urban development is not the only option moving forward but with many environmental indicators trending south at the moment, it could be the only logical pathway to Southeast Asia region’s future. 

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References

(n.d.). Retrieved from ASEAN hits historic milestone with signing of RCEP. (2020, November 26). Retrieved from Morais, L. H., Pinto, D. C., & Cruz-Jesus, F. (2021). Circular economy engagement: Altruism, status, and cultural orientation as drivers for sustainable consumption. Sustainable Production and Consumption, 27, 523-533. doi:10.1016/j.spc.2021.01.019

UNUniversity. (n.d.). How Cities in South-East Asia Are Acting on the SDGs Ahead of Their National Governments. Retrieved from Vos, J. D. (2020). The effect of COVID-19 and subsequent social distancing on travel behavior. Transportation Research Interdisciplinary Perspectives, 5, 100121. doi:10.1016/j.trip.2020.100121