28 Sep Embracing ESG: Emerging Challenges in ASEAN’s Supply Chains
Regulators and investors are now paying greater attention to environmental, social, and governance (ESG) issues, especially in recognition of the impending global climate crisis and in the aftermath of the COVID-19 pandemic. What does this mean for Southeast Asian businesses, especially in the key agrifood and forest commodity sectors?
On 16 September 2021, the Singapore Institute of International Affairs (SIIA) held a webinar, “Embracing ESG: Emerging Challenges in ASEAN’s Supply Chains”. The webinar was moderated by Ms. Meixi Gan, Deputy Director of Sustainability at the SIIA, and featured views from Mr. Jimmy Greer, Vice President of Outreach and Research at Moody’s ESG, Mr. Kevin John Monteiro, Executive Director and Chief Financial Officer of Japfa, and Ms. Carolyn Lim, Senior Corporate Communications Manager of Musim Mas Group. The webinar was sponsored by Moody’s and SGX. Here are some takeaways from the discussion. A full recording is also available for SIIA corporate members, and a video of highlights from the session will be shared on social media.
ASEAN corporates and investors are taking ESG seriously
Moody’s ESG focuses on six categories when scoring companies – environmental, business behaviour, human resources, human rights, corporate governance, and community involvement. Mr. Greer explained that Moody’s ESG gives different weightings for each category depending on what sector a company is in, with each having an industry-specific model.
When assessing companies in the food and agribusiness sectors, Mr. Greer said that there is significant emphasis on factors in the business behaviour domain, namely environmental and social standards in the supply chain. The impact that businesses have on ecosystems and communities is now better understood, and investors are starting to use environment and labour rights considerations to map out their decision making.
Regulators are also encouraging greater rigour from companies. For example, SGX began a public consultation in August 2021 on a proposed roadmap for making climate-related disclosures mandatory for issuers, as well as requiring diversity for boards. It is important for such information to be made available to investors to help companies raise capital and demonstrate their ESG credentials. Even Musim Mas, a privately owned company, is following this trend – a company’s track record on ESG is also testimony to how well the company is run in other areas.
Companies in Southeast Asia have therefore taken great strides in ensuring that their ESG assessment criteria and their ESG commitments are robust and detailed. ESG assessments help companies to determine what are the most pressing challenges they need to act on. In order to better understand its material ESG issues, Japfa conducted a Life Cycle Assessment (LCA) on its poultry operations in Asia, a science-based assessment of the company’s entire vertically integrated production cycle, from feed and farming to poultry production. This exercise allowed Japfa to understand the impacts associated with their production methods, and subsequently identify key environmental hotspots such as animal waste and water issues.
The growing focus on ESG can, in turn, promote greater collaboration between investors and corporates. Ms. Lim said that Musim Mas announced a partnership with PT Bank Danamon Indonesia Tbk in June 2021 to promote financial literacy among independent smallholders in the palm oil sector. Musim Mas also received a green trade finance facility from UOB in May 2021.
Circumstances differ between developed and developing economies – contextual solutions are required
The panellists agreed that international industry standards and certifications are useful as they provide a systemic approach for companies to roll out and scale up sustainability practices. However, international industry standards need to be adapted or reconceptualised for specific country contexts. Business models in ASEAN countries might also be significantly different compared to those in other regions.
For instance, in developed countries, discussions over ESG often centre around ethical issues such as animal rights and the promotion of free-range farming. However, in the ASEAN context, Mr. Monteiro pointed out that achieving the sustainable development goal (SDG) of zero hunger remains a priority. Malnutrition is still a problem in our region. Japfa is therefore focused on meeting basic human needs by keeping staple high protein foods affordable, and getting more food on plates.
Another example relates to sustainability standards in the forestry sector. Methods to measure the conservation value of forests were initially developed for temperate climates and had to be modified for tropical climates. This led to the High Conservation Value (HCV) and High Carbon Stock (HCS) approaches that are more appropriate to the ASEAN region.
There are also limits to voluntary international certifications, such as the Roundtable on Sustainable Palm Oil (RSPO). RSPO only covers around 19 per cent of the global palm oil industry. In comparison, Indonesia and Malaysia have made their respective national certifications mandatory for all palm oil growers in their countries. Therefore, governments play an important role in mandating and enforcing sustainability practices that are suited to local contexts. In the food sector, Ho Chi Minh City in Vietnam has introduced a traceability system for poultry that is more rigorous than corresponding practices in other developed markets.
Promoting ESG in complex supply chains
The current global focus on reducing carbon emissions has drawn attention to the difficulty in managing the supply chains of businesses, particularly in sectors where these chains may be long and complex. The panellists agreed that major businesses in Southeast Asia generally have a good grasp on their Scope 1 greenhouse gas emissions, but Scope 2 and Scope 3 emissions are an issue. Scope 1 emissions are direct emissions from company-owned and controlled resources, whereas Scope 2 and 3 emissions are indirect emissions. To measure Scope 3 emissions, companies must get suppliers to provide their own emissions data, which can be a challenge for small businesses and community farmers. The same challenge applies to ensuring other ESG commitments are met across the supply chain, by suppliers who are not under a company’s direct control.
Mr. Greer noted that investing in ESG across a company’s value chain is difficult. Businesses must not only convince their partners to improve their practices, but also provide the education and tools needed for them to accomplish meaningful change. Mr. Monteiro and Ms. Lim shared examples of engagement with contract and smallholder farmers in their sectors.
Companies in ASEAN are embracing ESG commitments, in line with the global trend towards greater attention being paid towards ESG by regulators, investors, and consumers. However, there are unique challenges in Southeast Asia, and more multi-stakeholder cooperation is still needed to promote ESG practices in the region.