Articles Governance

Sustainability needs to move high up the board agenda

A survey reveals ESG issues are discussed in only a fraction of meetings. Some vision and purpose are urgently required.

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Sunil Puri

Senior Vice President, Research & Engagement @ Stewardship Asia Centre

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Posted 08/07/2024

Recent developments in Singapore show that turning up the heat on companies to adopt environmental, social and governance (ESG) strategies for a sustainable future is well under way.

Companies in the financial, agriculture, food and forest products, and energy sectors will be required to include climate-related disclosures in their sustainability reports under a phased-in scheme that kicked off in June. It will even become mandatory for large non-listed companies from the 2027 financial year – making Singapore the first country in Asia requiring such disclosures from non-listed companies.

The push for a socially responsible business environment can also be seen by the fact that the three local banks – UOB, DBS and OCBC – have adopted a 2050 net zero carbon emissions target, along with Singapore Airlines (SIA) and Keppel Corporation.

Then there’s the Singapore Green Plan 2030 strengthening the country’s commitments under the United Nations’ 2030 Sustainable Development Agenda and Paris Agreement, including the net zero emissions aspiration and the goal of growing a green economy.

But these measures are no cause for resting on Singapore’s sustainability laurels just yet.

Despite calls from investors, policymakers and the public for concrete action on the biggest challenge that humanity faces, sustainability often fails to secure a top spot on the agendas of corporate boards. In Singapore, as with the rest of South-east Asia, only a fraction of boards discusses sustainability in every meeting, with many addressing it infrequently or not at all throughout the year.

In a survey by non-profit agency Stewardship Asia Centre (SAC) where I conduct research, 43 per cent of respondents in Singapore said that their boards either never discuss sustainability or do it once a year, often when the board brainstorms about strategy and planning for the subsequent year.

The study, Boards As Stewards Of Sustainability, covered over 700 board directors in for-profit public, private, and state-owned enterprises in 11 countries in the Asia-Pacific, and evaluated the role of board directors in the region in driving the sustainability agenda. The Singapore sample set came in at under 10 per cent of the overall Asia-Pacific sample.

There were further insights that showed boards focused on the details of risk and complying with regulations amid the business of maximising profit, rather than having a vision of accommodating people and profits.

Overall, the data suggests that boards in the Pacific region (Australia, New Zealand and Japan) are further ahead in their intentionality and intrinsic motivation to drive decisive action on sustainability. On average, they spend more time discussing sustainability, and more boards consider it central to their overall agenda, as compared with boards in South Asia or South-east Asia.

Boardroom blues over going green

Boards in Singapore spend most of their time looking at historical financial data, risk management and regulatory compliance. Little time is spent on discussing sustainability, talent/leadership, and culture, according to the SAC survey.

Like the rest of the Asia-Pacific, while board directors in Singapore aspire to spend more time on new frontier responsibilities such as strategic innovation, sustainability and talent/leadership development, they are constrained by board agendas that are dominated by compliance and financial management matters.

While 29 per cent of responding board directors in Singapore (and 33 per cent pan-Asia-Pacific) highlighted that organisational purpose is the No. 1 motivator for them to embrace sustainability, boards are rarely able to drive decisive action on that front. This is mainly owing to different ways in which intent and ability interplay in boards.

Intent refers to the mindset, values and purpose that boards demonstrate in genuinely tackling global challenges while creating value for all stakeholders. Ability, on the other hand, entails the capability of boards to integrate sustainability into the business strategy while possessing the necessary skills, leadership, governance and processes to drive the sustainability agenda effectively.

Boards with the right intent and ability prioritise sustainability as a core value, recognising the interconnectedness of ESG issues with long-term business success. Lack of collective intent is highlighted by the fact that 52 per cent, or over one in two respondents in Singapore, claimed their boards look outward towards the regulator as they decide on sustainability action.

Also, boards in the region often wrestle with biases around short-termism, the urge to maximise profits, and a tendency to favour the interests and perspectives of specific stakeholder groups.

Only one in five boards across the Asia-Pacific considers sustainability critical enough to make it a joint responsibility of the entire board. Sustainability is a permanent boardroom agenda item in such boards, and all discussions include consideration of sustainability implications. Singapore lags here compared with Australia, New Zealand and Japan, with 31 per cent of respondents sharing that they have no one tasked with the responsibility of sustainability on their board, and only 7 per cent – or less than one in 10 boards – sharing that sustainability is, in spirit, a full board responsibility.

This lack of prioritising the environmental, social and governance framework needs to change.

Unprecedented rainfall in Dubai, Oman and Brazil, record-breaking temperatures in India, forest fires in Australia, extreme heat in Europe, and floods in the Americas – all these events underscore the tangible impacts of climate change. Furthermore, the widening wealth gap exacerbates social tensions, with 60 per cent of the global population becoming poorer.

Swopping risk focus for vision

A good place for Asia-Pacific boards to start their journey towards greater sustainability is to adopt a different perspective.

Typically, board directors perceive sustainability through a prism of risk, dedicating time and resources to fulfilling regulatory and compliance mandates related to sustainability.

Yet, visionary boards transcend this narrow focus by empowering management to devise business strategies that not only address but also capitalise on pressing societal and environmental issues. A classic case in point being the rock-solid support Mr Paul Polman got from his board when he was CEO at Unilever and drove some rather unconventional business decisions during his tenure. For instance, the board backed him when he stopped the practice of providing quarterly earnings guidance to Wall Street, moving away from short-term decisions that focused on the stock price, and instead chose to focus on longer-term strategies that included sustainable living.

Sustainability is also not just an ethical choice, but a business imperative. Maximising profits doesn’t exclude the responsibility of contributing to a better world for all. In fact, it can have a positive effect on companies in terms of value creation, as well as benefiting wider society.

There is enough evidence to suggest that focusing on sustainability results in brand enhancement, better talent availability, access to comparatively cheaper capital, and incremental business opportunities. One of the reasons brands such as the Tata Group, Unilever and Patagonia are talent magnets and have been delivering encouraging financial performance is their sustainability-friendly image.

The push towards sustainability is commonly triggered by external forces – regulatory bodies, consumers, civil society and the talent market.

Indeed, shareholder action pushing organisations towards greater sustainability have been on the rise. Take the case involving environmental law charity ClientEarth. For the first time, a shareholder – a minority one at that – brought a claim against the directors of oil giant Shell, holding them personally liable for failing to adequately guide the company on its net-zero journey.

Although an English court dismissed ClientEarth’s action, the case sent shockwaves through the boardroom community, highlighting the potential for personal liability when directors neglect their sustainability responsibilities.

But the reality is, rarely are boards the principal drivers of an organisation’s sustainability actions. The management is the one driving strategy execution, including actioning on sustainability. Boards must collaborate with management to create a culture based on shared stewardship values and purpose anchored on sustainability and greater good.

Instead of interpreting the sustainability agenda as a checklist of tasks, centred around ESG reporting, compliance measure and technological adoption, enlightened boards recognise sustainability as fundamentally a human issue. The tone at the top of the company – the board – can make a huge difference in the race to save the environment.

First published on The Straits Times, 28 June 2024.

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