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Family businesses need to move on sustainability or be left behind

Overlooking ESG factors not only threatens the supply chain but also puts a company's future at risk.

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EXPECTATIONS of environmental sustainability are now extending beyond multinationals to include their suppliers. The result is smaller players, like many Singaporean family-owned businesses, need to adapt or face removal from the supply chain. But change is easier said than done.

The backdrop to this is that businesses have always existed to create value, but what constitutes value continues to evolve. Where once it was narrowly measured in terms of pure profit, in recent decades this has broadened to include the full financial, social and environmental impacts of a business, from sourcing to production to disposal.

There have been two changes in recent years to this story.

First, having a clear Environmental Social Governance (ESG) strategy and programme, on how an organisation is a good corporate citizen, is no longer a broad "nice to have". Today, how a company tells - and more importantly lives its ESG story - is not just a public relations exercise but is a very clear insight into how it operationally manages current and emerging risk.

For instance, companies that are integrating innovation to address climate change or to enhance water efficiency are favourably viewed on how they are addressing current and emerging challenges. Increasingly, asset managers and pension funds are using ESG criteria to vet a company's strategy and business operations as part of financial fitness to compete.

The second change in ESG is that it's no longer solely multinationals on the front-line of this societal shift - but has widened to include their entire ecosystem. This has coincided with recognition that 80 per cent or more of a larger business's environmental impact is located in its supply chain .

What this shift means in practical terms is that these supplier businesses need to develop and integrate sustainability strategies if they are to remain within a supply chain in the future.

The good news is that it seems suppliers - many of whom are privately owned businesses - are in the right head-space to look at this topic. HSBC's 2019 Navigator survey revealed that 81 per cent of companies in Southeast Asia are projecting growth and 75 per cent believe in delivering the United Nations Sustainable Development Goals.

I'm also seeing this trend emerge anecdotally when I speak to clients. Often the conversation highlights the values and the positive impact that business owners want to impart and the higher purpose they see in tandem with profitability.

But there is still some way to go in order to convert desire into action. A 2018 HSBC and East & Partners report shows that 24 per cent of Asian respondents have an ESG strategy compared to 48 per cent of corporates globally and 87 er cent of European and UK companies.

Given European MNCs use Southeast Asian businesses extensively across a range of sectors - textiles, fast moving consumer goods, electronics, pharmaceutical, logistics, (commodities across all) - highlights that a dramatic gear change needs to happen among many local businesses. And the connectivity is growing.

I GET IT, BUT WHAT DO I DO ABOUT IT NOW?

Realising the need to change is half the battle but the next step is understanding what to actually do or where to start.

Here are some thoughts on how firms should be thinking about the sustainability agenda:

  • Think short and long-term when planning your growth and operating strategy. Implementing sustainable measures like rain water capture, or more eco-friendly heating systems, may have initial upfront costs but provide cost savings in the long run.
  • Think across business lines and functions. Consider electricity usage, where materials are sourced or how products are shipped and packed. Each area of the business should be considered as an opportunity for improvement to drive even greater value with new sources of business and perhaps eligibility for tax incentives.
  • Keep updated on industry improvements. Technological changes and green innovations are increasingly reaching scale, helping to lower cost, making them more feasible. Solar panels are becoming more cost effective and electricity providers are providing greener energy as viable options.
  • Leverage environmental sustainability as a competitive advantage. Sustainable stewardship is a leadership opportunity and can underpin business attractiveness to current and prospective clients. Even consider certifications like LEED (Leadership in Energy and Environmental Design), which is used globally as part of a building rating system, to enhance your green credentials.
  • Stay abreast of the regulatory environment, sustainable financing options and evolving investor and customer expectations. Take for instance Green loans. When meeting the environmental commitments, they can provide additional cost lift with more favourable loan terms.
  • Understand how you can use improved environmental sustainability and broader ESG measures to improve your cost of capital and balance sheet. Banks are increasingly being asked by regulators to take into account the wider environmental risk of their portfolio. This is certainly the case in Singapore which will soon see the introduction of risk management guidelines for financial institutions in this space. If a bank understands the context of a supplier within the overall supply chain ecosystem, it may offer improved financing terms.

Yes, these measures will require some upfront investment to ensure you have the right practices in place, and are able to make the time and effort to develop or ascertain the business data to demonstrate this to the banks. But the result is worth it. Benefits include increased and improved access to finance including green lending, potential funding for capital investment by key suppliers, or wider supply chain finance programmes that peg suppliers financing rate to their sustainability standards.

Implementing changes to climate-proof business operations - the greening of a factory or office building, switching of a fleet of delivery trucks to electric, sourcing more sustainably-developed goods, or changing consumption habits - takes time. Business strategies and product line-ups can't be shifted overnight. But we can all at least start the process now, not next week, or next year. Failure to act now means the legacy of this generation may irreversibly be seen as one of failure.

Change is often gradual, then sudden. As engagement rapidly spreads from school-age activists around the globe to the boardrooms of the world's biggest corporations, this feels like one of those moments. It will be those business leaders who adjust their purpose accordingly, and account for societal impacts across their supply chains, that will generate sustainable value over the long term for all.

  • The writer is head of Global Private Banking, Southeast Asia, HSBC Private Banking

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