Commentary: Investors can steer companies to be more sustainable

Date: November 1, 2021

First published in Straits Times on 31 October 2021

They need to know the emphasis firms place on environmental, social and governance factors

Although Covid-19 has proven to be the most wide-reaching public health crisis that has severely damaged the world economy, it has nonetheless highlighted a few important considerations that businesses need to bear in mind if they are to successfully compete in a post-virus world.

First, companies that integrated sustainability and transparency strategically into their business operations prior to Covid-19 are more likely to display greater agility when responding to unexpected events.

Second, health, safety and well-being are now central to the resiliency and sustainability discussion in a way that has never occurred before.

Third, the importance of cooperation and collaboration – nobody can deal with a pandemic on their own. We are all in it together.

Given that sustainability is increasingly important to the survival and resilience of organisations, Sias – the Securities Investors Association (Singapore) – this year integrated it into the score card of the Singapore Corporate Governance Awards (SCGA).

Investors need to know how well companies are governed as well as what emphasis they place on environmental, social and corporate governance (ESG) factors before they part with their money.

Together with our research partner, NUS Business School’s Centre for Governance and Sustainability (CGS), a new scoring framework called “Smart” was created to assess the sustainability practices of companies as disclosed in their Sustainability Reports. Areas of assessment included “scope and statement”, “material ESG factors”, “actions & achievements”, “reporting framework” and “targets”.

The Smart framework makes up 40 per cent of the total scoring. The other 60 per cent is based on the existing Stars framework for corporate governance assessment, which are “shareholders’ rights and equitable treatment”, “transparency and disclosure”, “accountability and audit”, “responsibilities of the board” and “stakeholders’ roles”.

Observations from Sias’ research

Sias has always kept close watch on companies’ governance and sustainability practices.

In research undertaken with CGS, the findings show that while the overall corporate governance or CG scores in 2021 remained stable, the Big-Caps’ and Mid-Caps’ overall CG scores actually fell. However, this was compensated by the slight improvement in the CG scores of Small-Caps that saw improvement in shareholder rights and equitable treatment.

Our research on corporate sustainability showed that 100 per cent of companies identified material ESG factors.

However, although 90.1 per cent of them described the selection process and the reasons why those factors were chosen, only 25.8 per cent disclosed the linkage of top executive remuneration to ESG performance.

The overall results for the new SCGA, incorporating sustainability assessment in 2021, show that on average, big-sized companies which had a market capitalisation of $1 billion and above gained the highest SCGA score at 70.3 per cent.

In comparison, medium-sized companies (with a market capitalisation of between $300 million and less than $1 billion) and small-sized companies (with a market capitalisation of less than $300 million) score an average of 61.6 per cent and 59.2 per cent, respectively. Clearly on all fronts, there is room for improvement.

Investors have a role in the sustainability drive

Every one of us has a duty to help safeguard the environment. As responsible investors, we should all also ensure that companies embrace and uphold good sustainability practices.

Correspondingly, every business will now have to deliver sharper and more detailed ESG narratives, as well as the data to back them up.

To prepare investors and companies, Sias proposes three questions that shareholders and investors should ask at annual general meetings:

1. Why did you choose those exact metrics and methods?

Companies should focus on explaining that their data provides an accurate representation of their ESG position and that it is credible, straightforward and consistent.

To instil confidence in the market, companies should highlight the relevant metrics in all their investor engagements and presentations, keep on demonstrating that they believe in their methods and approach, and state the reasons why their businesses are dedicated to improving their ESG performance.

2. Have you adopted best practices?

Since there is currently no agreement on what best practice means, it is important to have a clear explanation by companies in their annual reports of the chosen framework and methods.

Investors want to know the impact a company’s business is having on the environment and other human beings with the same precision that they report their financials.

As a result, companies should always disclose the frameworks they have used and the ESG advisers they have employed. To outline their long-term commitments, they should establish a sustainable rating agency target.

3. How does your ESG performance encourage investment?

It is also important to establish a link between ESG performance and board remuneration as this would bring about greater alignment between management and shareholders’ interests.

Furthermore, even investors less concerned with ESG would be unlikely to object when they see evidence that a company’s financial results are positively correlated with its ESG performance. This would then act as a sort of insurance policy to address “greenwashing” concerns.

Looking ahead

Companies will need to carry out a new materiality assessment that incorporates ESG considerations to ensure they have captured what is material to them. They will then need to address these issues in their sustainability strategy and report on the progress towards achieving their goals.

Addressing the interlinks between environment, social and economic well-being are the initial building blocks. It might be a good idea to take a page from the software industry and implement “adaptive governance”, a concept that refers to the ability to deal with complex societal issues involving many stakeholders, diverging interests and uncertainty about the actions to be taken.

Whatever the approach each company decides on, what is clear is that regardless of how much longer the pandemic lasts or even after it ends, all firms must take ESG seriously and incorporate that into their daily life.

In the meantime, Sias will continue to play its part by fulfilling its watchdog role, doing research and giving regular updates on how well the local market is progressing on the ESG front. As noted earlier, we are all in this together.

  • The writer is David Gerald, founder, president and CEO of the Securities Investors Association (Singapore)