Time for more professionalism in the ‘S’ of ESG

WHEN discussions turn to environmental, social and corporate governance (ESG) matters in the context of investments, it is the “E” part that gets an outsized portion of the attention.

In a world now concerned about the fallout from climate change (the “E”), and how businesses can get on the right side of laws enacted (the “G”), the “S” of the equation is the forgotten middle child.

The numbers hint at the imbalance. ESG-linked bonds have developed into a market worth more than US$778 billion annually as at end-2023. Social bonds represented about US$131 billion of that total, according to data from the International Capital Market Association.

Supply may be falling short of demand, though. Natalie Marko, head of social sustainability at Standard Chartered, said it is not uncommon for social bonds to be oversubscribed by three to four times.

“This happens when investor demand exceeds available supply,” she said. “It is a good measure of the market appetite for this type of debt.”

A gender-focused bond issue of 500 million euros (S$730.4 million) in March 2023 by the UK’s National Westminster Bank logged demand of almost two billion euros, for instance. Gender-based bonds finance programmes that promote gender equality.

“We are seeing an increased focus from investors looking to deploy capital for social impact,” Marko added. “In terms of outlook for the social bond market, we expect to see the entrance of new corporate issuers who can take advantage of this investor demand in 2024.”

Green is good

Climate change has attracted much attention in recent years, making it a significant business issue.

Andromeda Wood, vice-president of regulatory strategy at data analytics company Workiva, said: “Traditionally, and particularly over the last two decades, environmental reporting has been given more attention, due largely to climate change needing urgent attention.”

Regulation and a desire to appeal to green-oriented investors have created an additional impetus for environmental innovation and sustainability reporting. In Singapore, listed companies will have to make climate-related disclosures from the 2025 financial year.

While science-based reporting on environmental measures have been established, however, social measures are not.

Marissa Lee, associate director at policy advisory Global Counsel, said one challenge faced by companies is that social benefits tend to elude measurement. “It is not as simple as estimating emissions reductions from energy-saving initiatives, for example.”

ESG is more sector and results-oriented, whereas corporate social responsibility (CSR) – when done right – is about people, and is process-oriented, she added.

Time to put the spotlight on ‘S’

Marko of StanChart expects the social bond market to go through the same growing pains as the green bond market did in its early stage.

A sustainable framework needs to be developed, so investors are guided in the selection of projects to support. There must also be ways to ensure financed projects are smoothly run, and outcomes or performance can be measured objectively.

At The Majurity Trust, a philanthropic organisation, social impact is defined by “what is material to the community”. Cheryl Chung, its senior director of insights and strategy, said: “In our context, this would be mental well-being and inclusion of migrant workers, depending on the focus of each fund.”

Chew Ghim Bok, chairman of the Foundation of Rotary Clubs (Singapore), said social impact must also be long-term and sustainable. The head of the charitable arm of local Rotary clubs added that to ensure its longevity, “it is essential to demonstrate to stakeholders the lasting benefits of such an impact”.

Social issues are also becoming “increasingly concerning”, said Karen Ngui, head of DBS Foundation and the bank’s head of strategic marketing and communications. “All along, ‘E’ and ‘S’ have been viewed independently of each other. In reality, they are interconnected,” she said. DBS Foundation champions businesses for impact and supports vulnerable segments.

In Indonesia, OCBC has used proceeds from gender bonds to finance women entrepreneurs and women-owned small and medium-sized enterprises.

OCBC Indonesia has disbursed about US$270 million in loans to more than 1,300 female entrepreneurs under this Women Warriors Programme, said the bank’s chief sustainability officer Mike Ng.

What more can be done?

With the “S” aspect of ESG less defined than the environment and governance areas, statutory board National Council of Social Service (NCSS) is working with the National Volunteer and Philanthropy Centre (NVPC) and other partners to develop a Sustainable Philanthropy Framework.

This is expected to help corporates measure, monitor and benchmark their efforts in three areas: giving, volunteering and socially responsible business practices.

One of the entities contributing to the development of the framework is disability services and support organisation SG Enable, which has developed a national-level accreditation that benchmarks and recognises organisations for best practices and outcomes in disability-inclusive hiring.

The Enabling Mark framework comprises six categories: leadership, culture and climate; recruitment practices; workplace accessibility and accommodation; employment practices; community engagement and promotion; and extent of inclusive hiring.

Ku Geok Boon, chief executive of SG Enable, said having such metrics quantified means businesses can deliver greater value to their customers through their environments, products or services.

Chew of Rotary said such a benchmark could instil confidence in investors and those looking to give their money, time or expertise; but it must avoid a “one-size-fits-all” approach.

“Metrics need to be relevant, proportionate, achievable and, above all, measurable,” Chew added. “Furthermore, measuring impact should not take place at the end of the project. Regular evaluation of your progress against milestones enables one to adjust, intensify or pivot the programme to help ensure the desired outcome. This will help identify the right investment, conditions and partners.”

NCSS said the framework is not meant to serve as a means of regulation, but as a framework for expression. “Corporates being able to quantifiably express and report the social impact of their efforts reinforces the fact that they can do good for stakeholders, while doing well for shareholders. Besides driving social impact, corporates can also yield positive business outcomes, such as improved investor perception, employee value proposition, business reputation and customer loyalty.”

Lee of Global Counsel said more disclosure should be promoted, as this encourages companies to take stock of the ESG issues they need to pay attention to. This will also push companies to start gathering data, define baselines for performance and identify benchmarks for measuring progress. 

The challenge, she added, is when companies do not fundamentally understand why having an ESG strategy is important. Then, there is a risk that companies will practise “compliance thinking” and just check the boxes as fresh benchmarks are introduced.