Asia needs to clean up

Firms shut out of supply chains if they fall short in environmental, social strategies, says HSBC study

Asian companies, particularly those in Southeast Asia, are at risk of falling out of multinational corporations’ supply chains if they fail to improve their environmental, social and governance (ESG) strategies, according to HSBC.

The conclusion is contained in a report commissioned by the multinational bank, in conjunction with East & Partners, based on interviews with senior executives of 1,731 companies and institutional investors. More than 300 companies and investors in Asia — specifically China, Hong Kong and Singapore — took part in the survey conducted over five weeks to the end of June.

According to the report, 24% of Asian respondents have an ESG strategy compared with 48% of corporations globally and 87% of European and UK companies.

Globally, tax incentives and financial returns are the two biggest drivers for corporations undertaking ESG-related activity. But Asian corporations’ motivations depart from those of their global peers, the report noted.

“While tax incentives are the biggest driver, Asian corporations feel that stakeholder pressure and supply chain initiatives also contribute in driving ESG decision making,” it said. “In fact, supply chains are the second most important driver for larger Asian companies.”

STAKEHOLDER PRESSURE

The disconnect between European and Asian companies’ adoption of ESG strategies, and the sensitivity of Asian corporations to stakeholder pressure and supply chain initiatives, raises the question of what this means for Southeast Asia’s supply chains.

European and British companies have deep and historic supply chain connections in Asean. For example, many European corporations are investing in electronics, textile and auto industries in the region. And the connectivity is growing:

Europe accounted for 22% of all foreign direct investment flows into Asean between 2000 and 2016.

Recent research shows that 51% of European firms view Asean as the region with the best economic opportunities, followed by China (26%).

Some 86% of European firms expect their level of trade and investment in Asean to increase over the next five years.

Electronics is one of Asean’s most important sectors directly employing more than 2.5 million workers. Singapore, Malaysia, Thailand, Vietnam, the Philippines and Indonesia account for over 90% of Asean industry exports.

Exports of apparel and textile products from Malaysia, Thailand, Indonesia, the Philippines and Vietnam nearly tripled from US$24.4 billion in 2001 to $71.8 billion in 2014. Vietnam’s total alone was $42 billion in 2016, followed by Indonesia with $16 billion.

The automotive sector in Thailand is one of the key contributors to the economy, continuing to grow at around 8.1% of GDP.

The pressure for Asian corporations involved in supply chains within Southeast Asia is further compounded by separate research by the Carbon Disclosure Project. It indicates that 80% to 90% or more of a business’s environmental impact is located in its supply chain.

“With Europe’s clear leadership in ESG adoption, it stands to reason that large corporations will want to see a similar shift in their suppliers’ ESG stance,” said Daniel Klier, global head of sustainable finance with HSBC.

“Asean is increasingly becoming the supply chain ‘factory’ for several sector strongholds for Germany, France, the UK and China including electronics, textiles and automotive. These companies are making very clear and public proclamations on their ESG strategies as well as their expectations on their suppliers. Asean suppliers of European clients who are not alive to this change risk being left behind.”

SECURING GREEN FINANCE

The study suggests that fewer Asian companies have an ESG strategy compared with their global peers. “However, when they do seek ESG-related finance, it seems to be for specific projects,” observed Jonathan Drew, HSBC’s green finance lead in Asia.

“This creates an opportunity for Asian corporations to reinforce their position by utilising greenlabelled financing to communicate their focus on sustainability issues, and for others to gain advantage over their peers while ‘sustainability leadership’ remains relatively scarce.

“This is particularly relevant as we’re increasingly seeing regulators, investors and customers in supply chains wanting more understanding and transparency in terms of both whether and how corporations are addressing ESG issues generally, and specifically how their ‘green’ capital is actually being applied and whether it aligns with promises originally made.”

Urgency is required given the significant rewards and incentives for Asian corporations to address the issues and communicate their stance to stakeholders, said Mr Drew.

“Green finance is a great tool to achieve this with better disclosure of approaches and through reporting measures to distinguish between investments that are financially sustainable and those that are less so,” he said.

“This brings a whole new level of attention to the type of business you’re engaged in and how you go about it. If you’re a corporate issuing a green bond or green loan, your stakeholders and investors know they are supporting a business that is addressing environmental challenges. That’s a great label to wear and it has an impact on the cost of capital.”