83% Asian SMEs say ESG is high priority but only 37% have roadmap
Singapore: Last week, a report published by Bloomberg Media Studios in partnership with DBS, the largest bank in Southeast Asia, revealed that while 85 per cent of medium-sized and 75 per cent of small companies state that ESG (environmental, social, and corporate governance) is a high priority, only 37 per cent have a clear roadmap on how to achieve their goals.
The report published in the form of an e-book and titled "Catalyst of Sustainability", was a result of a survey conducted in August last year involving 800 SMEs (small and medium-sized enterprises) across six markets in Asia namely India, China, Taiwan, Hong Kong, Indonesia and Singapore.
The study engaged over 937 decision-makers in industries covering real estate, mobility, power, agriculture and F & B/Hospitality. In-depth interviews with 11 decision-makers from SMEs were also conducted to further understand the barriers and opportunities around sustainability.
SMEs have an important role to play to address climate change. According to the World Bank, SMEs account for 90 per cent of businesses and more than half of employment worldwide, yet many lack access to financing, technology, and expertise to embrace sustainability.
The report found that on whole, business leaders have positive attitudes towards sustainability with over eight in ten agreeing amongst other things that their company's operations should gear toward protecting the environment and they should incorporate sustainability values when selecting investment projects.
"Being ethical is most important," said a leader at an F & B company in Taiwan in the report. "You basically do what is morally right as a business."
On average, Asian companies that considered ESG a high priority allocated 18 per cent of their budget to ESG projects. They expect allocation to reach 19.8 per cent within the next three years, with the lion's share going towards environmental projects.
Decision makers in the study cited that the environment has the greatest impact on their industries with waste management, climate change and carbon footprint being key focus areas.
Although complying with regulations, attracting talent, boosting revenue, pleasing stakeholders, and simply doing the right thing were the main motivators for SMEs to embrace ESG, the survey respondents say that unclear reporting standards and financial concerns are the common barriers to ESG adoption.
Over a third of SMEs pointed out challenges around return on investment, cost of deployment and meeting growth targets. The lack of clarity on ESG standards presented another challenge.
"It's very hard for us to find the right criteria to measure our ESG performance," said a leader at a logistics and supply chain company in India. "Currently, we base our progress on energy savings compared to last year to see how well we've done."
The report discovered that most SMEs are serious about ESG and plan to make it an integral part of their business but many are still in the early stage of their journey. Around 83 per cent of small companies and 92 per cent of medium-sized companies have a strategy in place or are creating one, but only 37 per cent have a clear roadmap on how to achieve their goals.
Most SMEs prioritised initiatives that might improve their bottom line and those that can be immediately actioned. Currently, they are focusing more on identifying sustainability issues that are affecting their businesses rather than formulating ESG frameworks and long-term strategies that would take years to fulfil.
"We have our long-term mission but not strategies," said the leader of a Chinese real estate and construction company. "We just don't have resources to investigate and plan ESG initiatives for the next ten years down the road."
While long-term planning may be difficult, Yulanda Chung, Head of Sustainability, Institutional Banking Group, DBS, suggests practical steps: "SMEs can start by identifying material ESG elements to focus on and then evaluate whether these elements could improve their bottom line."
"Analysing industry trends and best practices is another important step to take early on." Chung adds. "SMEs can use the learnings to conduct risk analysis and understand the accompanying consequences if they do not align to industry standards and government guidelines. These exercises can also help them identify opportunities and begin to plan a course of action. Over time, they can turn this into a timebound, actionable and quantifiable roadmap."
Reporting requirements can hinder the ESG journey for SMEs. SMEs do not have the same resources as large corporations to embark on ESG reporting. The lack of a homogenous framework or standardised guidelines also leads to wide inconsistencies in measuring success and performance.
Respondents to the survey also said that companies expect banks to first and foremost provide overall ESG consultancy, followed by financial assistance, then thought leadership. Many companies, SMEs in particular, are unsure if their ESG initiatives qualify for green financing.
A company that has benefited from consulting with financial institutions with regards to its ESG plans is Gurgaon-based ReNew Power. ReNew is one of India's largest Independent Power Producers (IPPs) and has almost 1,700 employees with an annual turnover of INR 69.1 billion (USD 912 million). It produces renewable energy through wind, solar and hydroelectric power.
To meet the challenge of the intermittency of power generated by renewable sources, it had sought financing to build the largest-ever single Indian renewable energy project. The 1,300 MW Round-the-Clock (RTC) battery-enabled project consists of three wind farms and one solar-plus-battery-storage farm with 100 MWh storage capacity across three states. Together they will provide 400 MW of electricity to SECI (Solar Energy Corporation of India).
Initially, ReNew found it difficult to raise debt as the business is non-traditional and hence does not offer lenders the high degree of certainty in debt serviceability as some other industries do. However, it eventually managed to secure USD1 billion through a consortium of lenders including DBS.
"When it comes to SMEs, we understand the many challenges they face transitioning to more sustainable business models. But given that they are the lifeblood of economies, it is imperative that SMEs successfully make the transition," said Piyush Gupta, CEO of DBS.