STRATEGY SPOTLIGHT

Placing sustainability at the heart of business

As the climate emergency becomes real, companies must adjust their business models to accommodate ESG issues or risk irrelevance

WITH global heatwaves in Europe and China killing tens of thousands, and floods in Pakistan wiping out 90 per cent of the country's crops, the impact of climate change is being keenly felt around the world. According to the United in Science report released in September 2022 by the World Meteorological Organization, it is almost certain that the global average temperature will break a record high set in 2016 in at least one of the next five years. 

Against this grim backdrop, there is growing acceptance among businesses that sustainability, as manifested in environmental, social and corporate governance (ESG) factors, has to be at the top of management's priorities. The Covid-19 pandemic has only accelerated this trend, as it further highlighted the relevance of embedding a sustainability mindset across business and society. 

"Climate change, energy management and a circular economy are some of the existential ESG issues the world faces today. The global race to zero is fast accelerating to tackle this climate emergency. Climate and social risks are business risks. With the myriad and speed of ESG developments, it is clear that the cost of inaction will outweigh the cost of action," said Esther An, chief sustainability officer at property group City Developments Limited (CDL).

"With the myriad and speed of ESG developments, it is clear that the cost of inaction will outweigh the cost of action," says Esther An, chief sustainability officer at property group City Developments Limited. PHOTO: CITY DEVELOPMENTS LIMITED

 

In particular, Scope 3 emissions are emerging as a huge challenge for corporates. While Scope 1 and 2 emissions cover direct and indirect emissions from the company's owned sources and purchased energy, Scope 3 includes all emissions that occur in a company's value chain. 

For many businesses worldwide, Scope 3 emissions from their suppliers can account for more than 70 per cent of their carbon footprint. Integrating sustainability through the entire value chain, including suppliers, helps companies mitigate environmental and reputational risks.

Sustainability as strategy 

Sustainable practices and frameworks have become a business strategy as much as a societal good. For business and finance teams to become sustainability leaders, there is a need to focus on changing mindsets, adopting ESG goals, and delivering value through sustainable business models. 

"Organisations, including SMEs (small and medium-sized enterprises), will need to mitigate emissions significantly in order to meet a 1.5 deg Celsius world. However, we need to prepare for a much warmer world where organisations and governments need to prepare for adaptation measures, something COP27 will have on the agenda, to increase resilience and to assist the most vulnerable communities," said Fang Eu-Lin, sustainability and climate change leader, PwC Singapore.

"Organisations, including SMEs, will need to mitigate emissions significantly in order to meet a 1.5 degree Celsius world," says Fang Eu-Lin, sustainability and climate change leader, PwC Singapore. PHOTO: PwC SINGAPORE

Firms can start on this journey by first measuring and tracking data for the key ESG issues they are tackling. "Quantifying these issues makes their scale and scope more tangible, allowing businesses to devise further strategies and actions in approaching the issue," explains Cherine Fok, partner, KPMG ESG, and a member of CPA Australia's ESG Committee in Singapore. 

For example, carbon emissions can be monitored by developing a greenhouse gas inventory. By having an overview of its emissions, a company will be able to pinpoint its inefficiencies, reduce resource wastage and lower energy consumption. While this may involve incurring some costs initially, there are likely to be cost reductions in the long term. 

Having a data-backed understanding of how ESG is linked to a company's operations will also allow it to influence its interactions with its stakeholders in a meaningful way. Companies might create an external supplier code of conduct to govern their procurement procedures, and ensure that their suppliers are adhering to their ESG obligations. 

CDL, for instance, has conducted materiality assessments annually since 2014 to determine the key ESG issues that are important to its internal and external stakeholders. Through this process, it found that the top five issues today are climate resilience, energy efficiency and adoption of renewables, innovation, stakeholder impact as well as partnerships and product, and service quality and responsibility. 

Organisations will also need to have a broad understanding of sustainability issues before they can integrate ESG into their processes. To this end, organisations such as Enterprise Singapore are supporting SMEs with ESG upskilling programmes. "Leadership of organisations can then make sense of what material ESG issues are, where the opportunities for the organisation lie and embed that into their strategy and operations. For example, it could be a new product or service line, or getting ahead of the regulations curve to mitigate operational emissions," said Fang. 

Transforming business models 

With the transition to a low-carbon economy, companies will need to transform their operations to be carbon-light or efficient, while those in carbon-intensive industry sectors will have to pivot to lower-intensive industries to continue to be sustainable. 

"We can see those philosophies developing in the concept of double materiality, where the organisation must take responsibility for people, society and the environment, beyond matters that impact financial materiality," said Fang. 

Increasingly, discerning consumers who are cognisant of ESG implications are also pressuring companies to take sustainability seriously, and are less likely to be fooled by "greenwashing" - a process of conveying a false impression or providing misleading information about how a company's products are more environmentally friendly. Regulatory measures will likewise play a part in getting companies in line. 

"Organisations know that real change must be on the cards. Tech giants which monetise user information, and oil and gas companies which exploit the environment and labour cannot expect to go about their old ways without increasing backlash. As they continue to take, they must show tangibly what they are giving in return," said Fok.

"Tech giants which monetise user information, and oil and gas companies which exploit the environment and labour cannot expect to go about their old ways without increasing backlash," says Cherine Fok, partner, KPMG ESG, and a member of CPA Australia's ESG committee in Singapore.  PHOTO: KPMG

 

She adds: "Whether business models undergo a radical overhaul remains to be seen. If this does happen, it will take considerable time to effect. A compelling scenario we should aim for is an overall net-zero effect, where the ESG value created by businesses equates to the value they extract." 

Recognising that ESG and climate-related issues will impact business performance, CDL developed its Future Value 2030 Sustainability Blueprint in 2017, which maps out the firm's strategic goals and ESG targets, and integrates them into business strategy and operations. 

Beyond doing good, adopting sustainable practices ultimately makes economic sense in the long run. "Sustainability is not a fad. It has exploded into the mainstream over the last couple of years as the world has learnt from the Covid-19 pandemic that the health of the planet, people and business are interdependent," said An. 

"While going green has often been associated with higher upfront costs, the benefits reaped over time will exceed the initial investment cost."

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