Zeng Han Jun is advisor to several companies around the globe and devotes most of his time to people, causes and organizations that make the world a better place.
Why are Environmental, Social and Governance (ESG) important for boards?
Well, it all boils down to the basic principles: company’s board is accountable for providing supervision over the business’s risk management procedures. Failure to seriously consider ESG issues could lead to directors misrepresenting the risks associated with ESG, leaving the company unprepared when an event happens and amplifying the financial and reputational impacts on the company. To be really honest about it, ESG concerns may pose significant hazards to the firm in the same way as other risks such as credit risk or market risk do. Boards must be assured that the firm is not too exposed to these risks, or at least have in place a mitigation plan.
What trends are you seeing?
Organisations that administer ESG standards are consolidating, which is exactly what the market wants. In addition to that, there will be new ESG standards that will cover specific sectors. I am helping to review some of these standards now and I can say that it will be very useful for financiers, investors and auditors who may not be familiar with certain sectors. Investors are incorporating ESG risk elements into portfolio construction, investment analysis and decision-making, service provider selection and engagement objectives. Then again, ESG standards are not only affecting just the finance and investing domains. It is extending to other areas such as policy making and urban planning as well.
How do you think advisors and boards can work together to integrate ESG into business operations?
Well, there will always be a chance for differences in ideas between the boards and the advisors. Sometimes it might even result in clashes of personality on both sides. No matter what happens, it is important and professional to maintain a healthy dialogue, to keep the conversation going so that we are able to promote mutual understanding or agreements among boards, service providers, investors, etc. One useful idea would be to bring more clarity to the recommendations for example, by using case studies and scenario analysis. Help the board to understand the risks through these methods and try not to keep harping on ESG standards as regulations that must be aligned with. While, it is certainly important for companies to be aligned with ESG standards but we need to seek mutual understanding among the board first.
Do you see more active engagements in ESG issues now?
In recent years, there has been a continuous growth in investor and business commitment to ESG values. Many companies have started to appoint Chief Sustainability Officers to facilitate the integration of ESG values into business operations and to facilitate the conversation among the ESG experts, ESG specialists, portfolio managers, Chief Financial Officers, Chief Operating Officers, Chief Human Resource Officers, Chief Marketing Officers and Chief Executive Officers. Companies understand that business operations could be disrupted in the long run, financing cost could increase, staff skill could be rendered obsolete and they want to mitigate these risks as best as they could.
What other complaints or problems exist?
Some market players suggested that investors are mindlessly following their consultants’ suggestions. Apart from this, some companies are under a lot of pressure because they are exposed to a lot of ESG-related risks. As much as they want to mitigate the risks quickly, this issue cannot be flipped like a switch and everything becomes alright. Changes in business strategies always affect existing investments and human resources as well. It involves livelihoods therefore we need a multi-phased approach to easing the company onto the ESG pathway.
What does the future hold?
Active ownership is becoming increasingly important to a substantial segment of the investment community. The younger generation is increasingly aware of how their choices could impact the environment and people’s lives. They actively avoid companies that have bad corporate governance and also steer clear of products and services that have negative impacts on the environment and livelihoods. They are able to gather support quickly from each other, from all corners of the globe through social media platforms. They sign online petitions to voice their concerns. All these could have negative impacts on the company’s earnings if issues are not managed well. It is the responsibility of corporate representatives, whether board members or executives, to be on the cutting edge of knowing how investors view ESG risks. Anyway, it is going to be a learning journey for many companies and I look forward to connecting with like-minded people on Linkedin, to keep in touch with the community on these issues.
Thank you so much for your time Mr. Zeng Han Jun.
