Awareness of Environmental, Social and Governance (ESG) issues has reached a tipping point in the Asia Pacific region, driven by both purpose and practical considerations. The rise of ESG has significant implications for how organisations work – as well as talent and leadership, investment, and governance.
Around the world, companies recognise the importance of investing in ESG strategy. It opens up greater access to capital, markets and talent – because investors, customers and future employees are all demanding change. Korn Ferry research reveals that companies are driven by purpose post compound annual growth rates of 9.85%, compared to 2.4% for the overall S&P 500.
Until recently, however, relatively low levels of understanding and adoption had seen the Asia-Pacific (APAC) region fall behind North America and Europe in its ESG performance. Many businesses in Asian markets only began reporting on ESG practices in 2018. And regulatory enforcement – such as for pollution, waste, safety or privacy – has been limited or fragmented across jurisdictions.
In its 2021 ratings, leading global financial analysis provider MCSI reported 31% of APAC organisations are ‘laggards’ compared with 20% across the Average Country Weighted Index (ACWI). But it also noted a significant shift. The rate of improvement in the average ESG Score for MSCI APAC Index was faster than the MSCI ACWI Index between 2018 and 2021. This means Asia is catching up fast, despite the hard-hitting effects of the pandemic. Even the worst-performing sectors are starting to improve ESG practices.
The level of awareness and action varies between countries, due to both regulatory and cultural aspects. For example, 59% of Australian companies told a 2021 Baker Mackenzie survey they have increased focus on sustainability – with Singapore, at 58%, close behind. That compares with just 22% in Thailand and 36% in mainland China. There are differences between sectors too. Technology and healthcare organisations seem to be approaching ESG with a greater sense of urgency than those in energy, mining and infrastructure.
There is another lens from which to view ESG awareness and action, and that is the trigger for ESG leadership. We see four motivations driving change in Asia-Pacific organisations.
1. Purpose-driven ESG leadership
Leaders have reacted in two distinct ways to the pandemic. Some doubled down on ‘survival’, putting ESG on the back-burner. Others grasped something more profound from the crisis.
With unimaginable scenarios resembling ‘doomsday predictions’ of science fiction, the pandemic provided a lived experience for all of humanity. And some leaders wondered if the pandemic might only be the trailer, with the feature film ‘Climate Change’ releasing sooner than we thought.
Increased flooding and extreme heatwaves continue to confirm this hunch. There is also an awareness that regulations are evolving quickly. It’s not surprising, therefore, that 46% of business leaders in the Asia Pacific say they are approaching sustainability issues more seriously than before the pandemic.
There were certainly purpose-driven ESG leaders before the pandemic. Their numbers are increasing as a result of it. Since they have a reputation on the global stage, they know if they act others will follow.
The three other triggers for ESG leadership are in response to stakeholder demands. Because something is changing – and it’s happening outside these organisations. The tables are turning. Shareholders are demanding answers. Customers are expecting transparency. Future talent want their employers to take a stand.
These companies combine purpose and practical considerations to pursue ESG goals more aggressively.
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2. Financial capital is actively seeking ESG leadership
Socially responsible investing is becoming mainstream in the region, growing 79% in the Asia-Pacific according to the MSCI 2021 Global Institutional Investor survey. And when it comes to M&A transactions, 90% of respondents to the Baker Mackenzie survey say ESG is part of the discussion – and almost one-third say it is central.
Globally, investors increasingly see ESG performance as an indicator of broader risk management capability. Links to value and valuations are becoming stronger.
For organisations aligned with global capital markets and institutional investors, as well as those linked to progressive sovereign wealth funds and other reputed long term investors in Asia, ESG is on the table.
3. Global supply chains demand ESG leadership
From agriculture to manufacturing, Asia-Pacific companies play a big role in global supply chains. Those who fail to address buyer market requirements risk losing business. For example, palm oil production has long been under environmental scrutiny, while the social risks behind apparel manufacturing ‘sweatshops’ are in sharp focus. Access to large buyer groups in the west can be significantly impeded without a strong ESG strategy.
4. Attracting, retaining and unlocking talent requires ESG leadership
The next generation of future talent is actively seeking a strong sense of purpose in their employer. Prioritising ESG can also be seen as an indicator of company values and behaviours – that you are forward-looking, dynamic and prepared to do things differently.
What you can do: Put people at the heart of ESG
For these four types of leaders, ESG needs to be approached as a journey of transformation – and it will only succeed if your people believe in it and are fully committed to the journey.
Our studies show the two most important factors behind any successful change program are senior manager leadership and organisational culture. That’s why Korn Ferry believes in a radically human approach to transformation – because people are the key to delivering successful ESG and sustainability outcomes.
So what does that mean at a practical level for the way organisations and people work? Start by asking these five questions of your business:
5 critical questions you must answer
1. How important is ESG to us?
Why are you doing this? Purpose-driven organisations are more successful, so knowing ‘why’ you want to be more sustainable and aligning this with your organisation’s purpose is a critical first step. How are you combining purpose and practical considerations here? What makes the ESG agenda mission-critical, not just important?
2. How does our board need to evolve?
The board needs to oversee, enable and support the delivery of your ESG strategy – and treat it as a strategic business imperative in its own right with a robust governance and reporting process. With shareholders and regulatory bodies putting your company’s sustainability and risk profiles under increased scrutiny, consider whether you need ESG metrics embedded in your executive incentive plans. This is critical in the face of active investor pressure. For large and progressive multinationals, this level of board involvement sends strong signals.
3. How do we attract, develop and retain the leadership, talent and skills we need?
These are the people who will drive your ESG strategy and outcomes. Leaders need a deep understanding of the impact your organisation has on society and the environment, and the ability to rally the entire workforce around a collective purpose. Regardless of the reason for your ESG acceleration, that may mean re-thinking traditional leadership models, and sourcing and developing talent with the right knowledge and skills for change.
4. What should our structure, work and platforms become?
This is the way you organise to deliver an ESG strategy. This has two dimensions. Firstly, the structure of the ESG function itself – should it be centralized or subsumed under business divisions, for instance? Secondly, how the overall organisation structure or even the operating model of the business needs to evolve. For instance, circular economy business models may involve changing the business from ‘product’ to ‘product-as-a-service’. This will need an organizational structure that provides a safe space for experimentation, incubation, prototyping and piloting of innovations. In the scale-up phase, this requires operating model redesign. In other cases, the ESG agenda may not require business model changes. For instance, where energy efficiency is a key pillar, the need may simply be work and role redesign. But even then, the scale of the effort will likely be huge. In all cases, skills to support a more collaborative approach will be needed.
5. How do we create the right culture and mindsets?
This is essential for engaging all your people and reinforcing the right behaviours. Culture is the way things get prioritised and done – and this may mean changing underlying attitudes and beliefs. It’s important to give all employees the opportunity to get involved. Generating this involvement is particularly important if attracting and retaining talent is a priority.
Korn Ferry is working with organisations across the region to help them work through these five questions. For example, we have identified the core competencies, traits and experiences a Chief Sustainability Officer needs, and can carry out team assessments and behavioural and structural interventions to make these collaborative functions work.
Addressing these five questions will require fundamental changes across an organisation. And you can either choose to make that change happen – or have it happen to you. Because every organisation that recognises the need to combine purpose and practical considerations is now on this journey, whether they realise it or not.
To learn more about a people-focused approach to ESG strategy, download our white paper