The "right" ESG strategy to innovate and grow

Almost 2 years since the pandemic first hit Singapore's shores, optimism is returning to boardrooms again. Globally, many enterprises are looking to capture business opportunities from going green, as the climate agenda grows in importance exponentially.

In Singapore, the government has also pivoted the nation towards sustainable development, emphasising the need to build a strong breed of local enterprises that would be able to harness sustainability as a competitive advantage.

Yet curiously, the majority of Singapore chief executive officers (CEOs) (52 per cent) say that they are only willing to invest up to 5 per cent of their revenue in sustainability-related programmes, showed KPMG 2021 CEO Outlook survey.

Even with potential business opportunities abound, industry players that KPMG has interacted with suggest that they are content with status quo - some may not have a sustainability strategy or dedicated headcount to drive these efforts in their organisation. KPMG's survey noted that about 2 in 5 Singapore CEOs admit that they struggle to tell a compelling ESG story.

The reason for this? Knowledge and understanding of ESG is still relatively nascent in Singapore and some companies are just not sure how to get started or what to focus on. Furthermore, faced with pressures for profits in the short term, enterprises may see ESG investments, as well as research and development for green outcomes, as having little or no immediate financial benefits.

Hence, the focus of their efforts as well as investments into ESG may be limited to quick wins and meeting compliance requirements. That said, given the lack of availability of funds and resources amid a crisis period, some may argue this would be the most appropriate ESG strategy to undertake.

Granted, there is no "right" ESG strategy, but every decision does bring longer-term consequences and opportunity costs. If enterprises today do not shoot for sustainable outcomes in their long-term strategies, they may not have to wait long to be left behind by the competition.

A key challenge seen in current ESG efforts is the pace at which renewable energy sources and technologies are being rolled out, accompanied by slow adoption among consumers. One of the contributing reasons for this trend, as mentioned earlier, is the reservation of businesses towards investing too much into ESG-related R&D and transformation efforts.

Another would be companies' reluctance to undertake the iterative process and long trajectories needed to get green innovations tried, tested and adopted by the market - a function of having to commit upfront investments and resources if they did so.

Meanwhile, the development of policies and laws to support these innovations are also closely intertwined with market developments. If green innovations have yet to be rolled out, policies and laws may also need time to catch up if further developments for any sector are to be encouraged and more players eased in. This is a chicken and egg situation.

While it may seem astute to wait for the ecosystem to evolve before joining in, the reverse is also true since companies that wait and see rather than seek to disrupt may eventually arrive too late in the game to benefit from market share and ESG reputation gains.

ESG is a market opportunity as much as a societal contribution - and it will be a focus for a sizeable period of time, steering product and service development in the years ahead. Hence, business leaders who fight short-term distractions and stay focused on creating long-term ESG strategies will be in a better position to build lasting companies for the future.

Furthermore, while there is no one "right" ESG strategy, it might be worth considering one that is shaped by a company's employees. KPMG's research notes that 52 per cent of Singapore CEOs have indicated their employees need to have a strong voice on the big issues that matter, such as climate change, if they are to feel engaged and motivated - higher than the 36 per cent of global CEOs who said so.

Even as top-down directions remain essential for guidance, pushing forward with any ESG efforts will require employee ownership for them to execute this with greater thought and willingness.

The difficulty, though, will be in identifying the "right" ESG strategy for the enterprise since there could be many competing demands. Hence, aside from internal ideation efforts to gain ground up feedback from employees on what needs to be done, what will really help is to get independent assessors to give a full audit on gaps and untapped opportunities for the company. This will provide clarity for next steps, while validating the company's ESG story.

We see this in our research where 88 per cent of Singapore CEOs said they expect to rely increasingly on external assurance of their ESG data to meet stakeholder and investor expectations for consistent and robust sustainability reporting, as compared to just 55 per cent of their global peers that said so.

As companies strive to effectively track their ESG progress and measure long-term success, devising a set of key metrics is critical. Some companies who have started work on their ESG reporting frameworks have found that the challenge often lies in delivering quality, measurable and consistent data in the long run.

Companies starting from a blank slate can take heed from the various government bodies, who are introducing guidelines aligned to international frameworks. SGX, for instance, is proposing an ESG reporting roadmap, which includes a list of core metrics such as greenhouse gas emissions, gender diversity and board composition.

However, even as benchmarks are useful, customisation remains key. Businesses need to be prepared to evolve their metrics as some of these targets may become less relevant amid constantly evolving demands. Hence, on top of regular third-party ESG audits, enlisting the help of employees at all levels, who have a pulse on stakeholder expectations, could be helpful in identifying gaps in ESG measurement that need updating. With this, companies will become more confident in their ESG approach over time, which will also help them tell their ESG story publicly with greater conviction.

Going forward, having a sustainability-focused purpose will be just as important as profitability. Companies need to embark on their strategic ESG plan purposefully - and fast, rather than waiting for that one "right" ESG strategy to strike. Calls for companies to step up and contribute to pressing global issues, such as climate change and social inequity, are set to grow louder.

The way forward for enterprises should involve ongoing experimentation and exploration in their ESG journey, with the outcome of the discovery and execution of a long-term strategy that works best for their business. This will help strengthen enterprise resilience and value, while contributing to a more liveable world.