Time for a renewed focus on ESG in Asean

A recent UNICEF and the International Telecommunication Union (ITU) report revealed that two thirds of the world’s school-aged children do not have internet connection in their homes today. With hundreds of millions of students having to rely on virtual learning when schools are shut to curb the spread of the virus, the pandemic has inevitably exacerbated the inequalities that exist in our society today. 

While Covid-19 has devastated the global economy and claimed millions of lives, it has given the world a chance to pause, reflect and reset. Besides driving the society to tackle social inequalities with urgency, Covid-19 has also pushed climate issues up the agenda and given governments an opportunity to pivot the world toward a greener future. 

Winston Churchill once said, ‘Never let a good crisis go to waste’.  While the most immediate priority is to respond to the pandemic and prevent the further loss of human life, this is also the best time to learn from the past and rebuild better post-crisis. 

Asean governments have already recognised the importance of rebuilding better using Environmental, Social, and Corporate Governance (ESG) principles as a key metric. Within the Asean Comprehensive Framework, which was adapted at the 37th Asean Summit held in November 2020, there is a clear focus on these principles, with the aim of developing resilience and sustainability across the region.

For businesses, a commitment to ESG will involve transitioning to a low-carbon economy as the world seeks to limit global warming to below 2 degrees Celsius from pre-industrial levels. In practice, this requires companies to embrace renewable energy sources and adopt initiatives such as carbon capture to reduce their emissions of greenhouse gases. It also requires organisations to support efforts to reduce inequalities within the society and put in place governance measures that will result in positive social impact.

The sustainability movement is now mainstream, having progressed from a niche agenda only a decade ago. Companies that have a long-term strategy will stand out from the competition by demonstrating their ability to navigate a fast-evolving global landscape that is increasingly ESG-focused. 

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Key focus areas in Asean

Among the many aspects that come under the ESG umbrella, I believe there are three key areas that Asean needs to focus on most immediately: the transition to renewable energies, digital transformation and green infrastructure.

Firstly, the path to a low carbon economy is critical for Asean to rebuild its resilience and transition to a sustainable future. Even before the outbreak of Covid-19, many countries in the region suffered from devastation and destruction caused by extreme weather events which resulted from rising carbon emissions. 

There is a need to move past the common misconception that transitioning to a low-carbon economy hurts the bottom line. In reality, it can result in greater profitability and new business opportunities. In a recent article, United Nations Secretary-General António Guterres noted that it costs more to run most of today’s coal plants than it does to build new renewable plants from scratch.  

In terms of digital transformation, the need for all levels of society to have access to digital technologies to promote inclusive growth is a key pre-requisite for reducing inequality. 

Finally, there needs to be continued investment in green and sustainable infrastructure backed by new technologies to cope with the impact of increasing population density in urban areas. 

The role of financial services

As more businesses adopt an ESG mindset that takes into account the impact of their activities on the society, finance can play an important role in influencing the ways companies operate.

Indeed, investors’ demand in the market for ESG financing solutions has grown rapidly in recent years. Today, there is US$1.3 trillion in outstanding sustainable debt, which includes green, social, sustainability and sustainability-linked bonds. S&P forecasts that issuance of such bonds will increase to US$700 billion in 2021, up from just over US$530 billion in 2020. 

While the majority of this new issuance is expected to come from Europe and North America, Asean will have an increasingly larger slice of this market going forward as it looks to promote sustainable finance in the region’s capital markets. Key initiatives from Asean regulators will support this objective. And here in Singapore, from as early as 2016, SGX has already introduced sustainability reporting on ESG factors for listed issuers to complement their usual financial reporting.

Meanwhile, changing consumer behaviour is also driving the growth of sustainable finance. With heightened public awareness on ESG issues, consumers are now highly motivated to support companies that demonstrate superior ESG standards. A clear example is the growing urgency in the automobile sector to cut carbon dioxide emissions from its vehicles.  Tesla, which was once considered a niche player in the electric-car market, is now joined by other globally established players in ramping up efforts to reduce carbon emissions. 

In fact, the electric vehicles market is projected to reach 26,951,318 units by 2030 from an estimated 3,269,671 units in 2019, at a CAGR of 21.1 per cent during the forecast period. And, the Asia Pacific market is expected to witness the fastest growth, followed by Europe and North America. 

Supporting the low-carbon transition

At Citi, we are aligning our business to meet these new challenges as we believe that the financial sector has a critical role to play in the transition to a low-carbon economy. Last year, we announced our sustainable progress strategy, which includes a target of funding US$250 billion worth of sustainable projects over a five-year period. This is after meeting the previous $100 billion target four years earlier than planned.  

Internally, we are working to reducing the carbon footprint across our facilities and improve our sustainability culture. Citi has also committed to measuring, managing and reducing the climate risk and impact of our client portfolio. 

Looking ahead, we expect the growth of the sustainable finance market to be significant. Companies that do not have a clear path to transition from the pre-Covid economy are going to be fundamentally exposed to quickly changing investor preferences and face an inevitable increase in their cost of capital. 

Against this backdrop, it makes sense for businesses in Asean to create value by developing a strong overall ESG proposition. Companies that have embarked on this journey are already reaping benefits, while those that have not are running out of time to do so.

There is no longer any doubt that ESG will be a global driving force for the rest of this decade. As a young and innovative region, Asean has a lot to gain from this transition if it gets it right. 

The writer is the Citi co-chair of the APAC sustainability and corporate transactions group & head of Citi Hong Kong Global Subsidiaries Group.