Beyond the cash

Family businesses in Asia Pacific are embracing ESG not because they have to, but because they want to.

There is a sense of urgency to accelerate sustainability efforts across industries globally. Family businesses are emerging as frontrunners in this landscape, boasting a “first-mover advantage” KPMG’s global study, surveying over 2,000 family businesses, indicates that 43 percent of family businesses are already actively pursuing high levels of sustainability and digitalisation.

The concept of ESG is intrinsically linked to family businesses, which naturally operate in a space where people - including employees and communities - sit at the center of their operations. Family businesses' success and inter-generational longevity often revolve around doing right by their people and giving back to the community. This ethos fosters mutual trust, respect and transparency, which are fundamental to ESG responsibility.

While they may not readily identify with the corporate label “ESG”, many families' values align closely with ESG principles, their actions and aspirations reflecting a commitment to sustainability, impact and ethical conduct. For them, ESG isn't just a box to check on a corporate report; it's an intrinsic part of their identity and business ethos.

There is a notable shift among family businesses in Asia Pacific towards integrating societal impact into wealth management strategies. Many business families have recognised a social obligation accompanying their wealth accumulation, driven by a sense of responsibility towards the communities that have contributed to their success.

Long-term and sustainable thinking are also inherent to many business families, given their multi-generational outlook. Their considerations often extend beyond immediate gains, encompassing the well-being of future generations and the communities in which they operate. This provides them with a framework for measuring and reporting their social impact and communicating them to a broad audience of existing and potential customers.

That is why many families are now aligning their businesses with ESG principles, not only as a moral obligation but also as a strategic imperative.

Environmental initiatives currently take precedence on families’ agendas, given the urgency of the climate change crisis, but social considerations remain important. As business families navigate the complexities of ESG implementation, they should consider factors such as costs, compliance requirements and resource constraints to determine the most relevant and impactful actions.

The increased interest in ESG initiatives can be attributed to several factors.

First, the emergence of a younger generation in the region, that advocates strongly for ESG investment and positive change.

The second is the evolving regulatory landscape, especially in countries like Australia where climate-related financial disclosures are going to be mandatory from January 2025. Elsewhere, regions like the EU are increasingly demanding ESG compliance from businesses, compelling exporters to meet ESG standards to access and remain competitive in these markets.

These new rules are especially affecting mid-market companies, including family businesses and even small enterprises within their supply chains, compelling them to prioritize ESG practices.

Greater access to capital is another major driver. For example, according to Responsible Investment Association Australasia, approximately 93 percent of professionally managed capital in Australia - including institutional funds - are now subject to ESG investment mandates and policies. Separately, some banks are offering loans at attractive interest rates to companies that have strong ESG compliance and robust environmental management systems in place.

And lastly, as primarily people-driven entities, ESG bona fides give family businesses a competitive edge in attracting and retaining staff, especially in markets reliant on younger or more diverse workforces.

When it comes to measuring and reporting around ESG for their own internal purposes, families face unique challenges and opportunities.

Many families, for example those in countries such as Japan, have a deeply ingrained sense of privacy. This cultural aspect can make the concept of ESG measurement and reporting unsettling. Moreover, family businesses often resist adopting compliance frameworks typically associated with corporate ESG reporting, preferring instead to focus on their values and doing what they perceive as the right thing.

Some family businesses opt for an authentic and genuine approach to sustainability reporting, rooted in their family values and shared purpose. They may not adhere to formal frameworks but instead focus on demonstrating their commitment to sustainability through their actions.

However, there is also pressure for family businesses to conform to external expectations, such as demands for certifications or formal reporting under ESG frameworks. Currently, many family businesses engage in informal reporting, often through their websites, and as part of their marketing efforts rather than for transparency. But there appears to be a gradual shift towards recognizing the importance of transparency and the social license to operate, which may lead to more formalised ESG reporting in the future.

In Asia Pacific, many families have traditionally opted for philanthropic endeavors, setting up private ancillary funds or charities, and allocating a portion of their capital to donation initiatives. However, change is now underway as business families move towards impact investing and sustainable investing, in pursuit of societal impact alongside financial returns.

Anecdotal evidence suggests that some families are increasingly questioning the perceived mutual exclusivity between making money and creating social impact. Instead of simply donating capital, they are exploring avenues to invest in impactful ventures. For instance, a family in Melbourne recently chose to allocate around $50 million to establish its own impact investment fund. The family has reportedly seen better returns on this portion of its portfolio compared to other traditional investments, illustrating the viability of aligning financial gains with societal benefits. This is a story that is starting to be seen and heard more and more. Values and value should no longer be seen as automatically mutually exclusive.

Impact investing is also gaining traction for the same reasons. Projects such as fleet electrification, construction energy efficiency and waste reduction are seen as prudent choices that may not only save or generate revenue but can also improve brand reputation and customer appeal.

There is also a growing emphasis on stakeholder engagement and aligning values with strategic initiatives. Families are considering their stakeholders' priorities alongside their own, seeking genuine overlap that can drive both commercial success and positive social or environmental outcomes. While some are adopting ESG screens for investment decisions, others are exploring avenues through shareholder activism or incentivising positive practices.

As the conversation around ESG continues to evolve, it is imperative for family businesses in Asia Pacific to recognise the link between their values and ESG principles.

By integrating ESG into their strategies, family businesses can not only safeguard their legacies but also contribute meaningfully to a more equitable and sustainable future for generations to come. As they embark on this journey, collaboration, transparency and a genuine commitment to positive impact can help unlock the full potential of ESG.