Overview
On April 21st, 2021, the European Commission introduced the sustainable finance package, which includes the proposed Corporate Sustainability Reporting Directive (CSRD). This new directive significantly reforms and expands the reporting requirements compared to the previous Non-Financial Reporting Directive (NFRD). As a result, by 2023, nearly 50,000 companies within the EU will be required to disclose information on environmental, social, and governance (ESG) issues.
In response, the Hungarian Stock Exchange (BÉT) has recommended that all listed companies create an ESG reporting roadmap by the end of the year. To support this initiative, we have decided to release a series of articles that delve into ESG topics and provide guidance on how to effectively address these reporting requirements. (Deloitte, n.d.)
Environmental, Social, and Governance (ESG) practices are rapidly evolving and gaining traction globally, including within the ASEAN Member States. Driven by both domestic policies and international financial demands for greater transparency, ESG integration in ASEAN is dynamic and complex, presenting both risks and opportunities. More economically advanced ASEAN nations tend to have more sophisticated ESG regulations and governance structures. Each country showcases leadership in different ESG domains: Singapore excels in sustainable finance and carbon services, while Indonesia, Thailand, and Vietnam lead in the electric vehicle market. The Philippines emphasizes greenhouse gas emission disclosures for public firms, and Malaysia promotes ESG adoption among MSMEs. Cambodia and Lao PDR utilize sustainable bonds for development, Brunei focuses on expanding solar power, and Myanmar has improved environmental protection efforts. ASEAN is also advancing regional cooperation in finance, exemplified by the ASEAN Taxonomy for Sustainable Finance, which provides flexible regulatory frameworks. Collaboration extends to the energy sector, where ASEAN engages international partners for capacity building, knowledge sharing, and funding related to ESG practices. (Asia School of Business ASEAN Research Center, Malaysia Korea University ASEAN Center, Korea, 2023)
What is ESG?
Environmental, Social, and Governance (ESG) is a framework for evaluating an organization’s practices and performance on various sustainability and ethical issues. It helps identify business risks and opportunities in these areas. In capital markets, some investors use ESG criteria to assess companies and inform their investment strategies, a practice known as ESG investing.
Although sustainability, ethics, and corporate governance are generally seen as non-financial performance indicators, an effective ESG program ensures accountability and implements systems to manage a company’s impact, such as its carbon footprint and treatment of employees, suppliers, and other stakeholders. ESG initiatives also support broader sustainability efforts, positioning companies for long-term success through responsible corporate management and business strategies. (Sandra Mathis, n.d.)
Environmental
Environmental factors involve the consideration of an organization’s impact on the environment and the potential risk because of environmental issues such as climate change and measures to protect the environment. Example of environmental factors:
Energy consumption and efficiency
Carbon footprint, greenhouse gas emissions
Waste management
Air and water pollution
Biodiversity loss
Deforestation
Natural resources depletion
Social
Social factors address on how the organization treat people such as employee, suppliers, customers, and many more: The criteria examples are:
Fair pay including living wage
Diversity, equity and inclusion (DEI) programs
Employee experience and engagement
Workplace health and safety
Data protection and privacy policies
Customer satisfaction
Community relations
Support for human rights and labor standards
Governance
For Governance factor examine how company policies itself that focuses on internal controls and practices to maintain compliance with regulations, industry best practices and corporate policies. Examples are:
Company leadership and management
Board composition
Financial transparency
Ethical business practices
Regulatory compliance and risk management initiatives
Rules on corruption, bribery, conflict of interest, and political donations and lobbying
Why is ESG Important?
Aligning Business Commitment and Sustainability Goal with ESG Scores
Measuring and reporting ESG activity has become essential for organizations to demonstrate their commitment to sustainability. With evolving regulations, businesses face increasing pressure to accurately reflect their ESG activities. Recently, the European Union mandated that all large organizations, whether publicly listed or not, disclose data on the “impact of their activities on people and the planet” and any “sustainability risks they are exposed to.”
As organizations strive to improve their ESG scores, it is crucial that their data collection processes align with their business narrative and accurately capture their goals and values.
The Evolving Market for ESG Data Collection and Reporting
Businesses and investors are increasingly making strategic decisions based on ESG activity, emphasizing the importance of good ESG outcomes and scores. Studies indicate that sustainability initiatives can enhance financial performance through improved risk management and greater innovation. The COVID-19 pandemic highlighted that organizations with a strong ESG focus are less exposed to disruptions and have a long-term advantage.
However, ESG evaluation criteria vary significantly across rating platforms like MSCI ESG Research, Sustainalytics, S&P, Refinitiv, and Bloomberg ESG Data Services. The lack of uniformity in rating systems has been a significant challenge, impacting the reliability of these ratings. Recently, efforts to streamline data and make rating methodologies publicly available have marked a move towards greater transparency.
Increasing ESG Reporting in the Private Sector
Private companies are increasingly adopting ESG reporting due to new regulations and market pressures. ESG reporting has become a critical focus for C-suite executives, who are now more willing to allocate resources to improve their ratings and develop a solid strategy.
The Path Forward: Aligning Business Narrative with ESG Scores
Standardizing ESG reporting and enhancing transparency is vital. Rating agencies must ensure their scoring approaches accurately reflect an organization’s sustainability efforts. Organizations can build investor confidence by creating robust ESG strategies and being transparent about their objectives. This evolving landscape presents significant opportunities for ESG advisors to help businesses make commitments, design strategies, and improve ESG scores over time. (Why Is It Important for Your Organisation’s ESG Score to Accurately Reflect the Business and Sustainability Narrative?, n.d.)
Conclusion
Environmental, Social, and Governance (ESG) is a critical framework for businesses in ASEAN to navigate the evolving market demands and regulations. While each ASEAN member state has its own focus within ESG, regional cooperation on areas like sustainable finance taxonomy is fostering a more unified approach. Companies that prioritize ESG not only improve their environmental and social impact, but also position themselves for long-term success through better risk management, attracting investors, and building trust with stakeholders. The increasing pressure for standardized reporting creates opportunities for ESG advisors to guide businesses in aligning their sustainability efforts with a clear narrative that strengthens their ESG scores.
References
Asia School of Business ASEAN Research Center, Malaysia Korea University ASEAN Center, Korea. (2023). Wikipedia. Retrieved June 3, 2024, from https://www.sdgbrunei.gov.bn/media/qe0hsewj/esg-practices-in-asean-and-korea_final.pdf
Deloitte. (n.d.). Wikipedia. Retrieved June 3, 2024, from https://www2.deloitte.com/ce/en/pages/global-business-services/articles/esg-explained-1-what-is-esg.html
Sandra Mathis. (n.d.). Wikipedia. Retrieved June 3, 2024, from https://www.techtarget.com/whatis/definition/environmental-social-and-governance-ESG
Why is it important for your organisation’s ESG score to accurately reflect the business and sustainability narrative? (n.d.). Wikipedia. Retrieved June 3, 2024, from https://impact.economist.com/sustainability/net-zero-and-energy/big-question-esg-score?psafe_param=1&utm_medium=cpc.adword.pd&utm_source=google&ppccampaignID=21228634515&ppcadID=&utm_campaign=a.22brand_pmax&utm_content=conversion.direct-response.anonymous&
