The sustainability imperative for Southeast Asia CFOs

Across the globe, CFOs and their finance functions have been dealing with the question of sustainability for some time. However, while the costs and regulatory burdens associated with addressing sustainability were quite evident, the benefits of doing so have until recently been less visible and quantifiable. That has changed significantly in the past few years and especially in the wake of the COVID-19 pandemic, as public awareness of the world’s environmental, social, and governance (ESG) challenges has grown – and with it the demand for businesses and policymakers to take action.

A similar trend is playing out across Southeast Asia. While environmental issues have conventionally been top-of-mind, social and governance issues are also increasingly coming to the fore. For example, high-profile regional developments include the roadmap currently under development by the ASEAN Capital Markets Forum (ACMF) to provide guidance on meeting the region’s infrastructure and ESG financing needs, as well as outline the strategies and mechanisms to develop a capital markets ecosystem to mobilise private sector capital for the financing of sustainable projects.

On the local level, regulators have also sprung into action by codifying standards and guidelines to promote the integration of ESG issues into investment considerations. Indonesia’s Financial Services Authority (OJK), for instance, has appointed eight banks to commence the distribution of credit based on sustainable finance principles. In Malaysia, Bank Negara Malaysia (BNM) recently released a discussion paper on the topic of climate change and principle-based taxonomy; in Singapore, the Monetary Authority of Singapore (MAS) introduced the Green Bond Grant Scheme; while in Thailand, the Securities and Exchange Commission (SEC) is expected to revise its disclosure requirements for listed companies to include information on human rights practices and carbon emissions.

Why ESG issues matter for CFOs

Fundamentally, ESG issues create a series of new business risks that CFOs will need to grapple with. Besides the most obvious physical and operational risks, organisations are also exposed to transition risks arising from society’s response to these issues, such as changes in technologies, markets and regulation that can increase business costs, undermine the viability of existing products or services, or affect asset values.

Then, there are also the issues related to the cost and source of capital. As investors increasingly reward companies that are pivoting in a credible way towards more sustainable business models, CFOs will experience significant impacts on their organisations’ cost of capital. This is no surprise, given that a growing body of evidence is showing that companies with a strategic focus on ESG outperform others, and display greater resilience during pockets of market turmoil. In the early stages of the pandemic, for example, ESG-focused investment portfolios appeared to have delivered stronger performances than traditional portfolios.

But a focus on ESG issues could also present new opportunities for CFOs. For example, these could include access to more diverse sources of capital, such as ESG-linked loans and other sustainable debt mechanisms, which offer potentially lower interest rates that are contingent on satisfactory ESG performance.

The evolving role of the CFO

With investors and regulators increasingly focused on the ESG issues that have, or may have, a financial impact on a company, CFOs that fail to embed sustainability in their corporate communications are missing an opportunity to create strategic, investor-relevant narratives. But first, they will need to not only develop an in-depth understanding of the regional and local ESG issues relevant to their organisations, but also quantify their material relevance, and set up ambitious but achievable key performance indicators.

As CFOs continue to support their organisations in the transition towards greater ESG integration, we envision that their role will need to evolve in two strategic ways:

• Increased interaction with stakeholders across the organisation
  Setting ESG targets alone is not enough to move towards a more sustainable business model – these ambitions need to permeate the organisation. It is therefore key for the CFO to involve all stakeholders and departments to ensure there is both the will and a budget to implement the required practices and plans.
  
  As sustainability metrics have not yet been fully incorporated into international accounting standards and rating firms regularly update their ESG criteria to incorporate new trends, CFOs will also need to step up to help their organisations navigate the ambiguity, while supporting innovation and the creation of sustainable products and services in the organisation.

• Increased responsibility for the provision of reliable ESG information
  Allocating a financial value to ESG impact areas may be difficult to achieve due to the intangibility of assets under scrutiny. As a result, the demand for more reliable ESG information is increasing. Here, CFOs have a key role to play in ensuring the relevance, compliance and accuracy of non-financial information provided to external stakeholders, and that the quality of management’s internal reporting is on a par with external reporting. This will require new flows of reliable data, and finance functions will need professionals with sufficient knowledge of sustainability and related laws and legislation, as well as data modelling capabilities to address the different plausible scenarios.
  

By enabling their organisations to better measure and account for their ESG-related contributions, CFOs are uniquely positioned to help their organisations translate this value into the language of business. This will, in turn, enable them to expand their organisation’s contribution to these issues, make the appropriate strategic and resource allocation decisions to advance their ESG causes – and ultimately, integrate ESG-related purposes into their organisation’s core strategy.