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Asia Tackles ESG in the C-Suite – Incentivising Action in the “S” Pillar

March 24, 2022
By Paul Haenle & Bob Herrera-Lim

On March 7, Teneo Insights Asia hosted the second episode in a three-part series exploring a range of ESG issues and how the C-suite is responding. Entitled “ESG in the C-Suite: Incentivising Action in the “S” Pillar,” participants explored how governments and companies can drive real action on social issues in the absence of aligned regulation across markets and without a high-profile push factor such as COP26.

During the session, Kathy Matsui, General Partner, MPower Partners; Paul Haenle, Chairman, Teneo Asia Pacific; Bob Herrera-Lim, Managing Director, Teneo Risk Advisory; and Yvonne Koh, Teneo Managing Director, explored opportunities for and challenges to driving action on social issues across markets in North and Southeast Asia.

 

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How do Governments and Companies in Asia Approach the “S” Pillar?

Most international companies continue to approach the social pillar from the risk mitigation perspective, aiming to minimise risk in areas such as human rights.

In China, social targets are increasingly well-spelled out in government policies such as “Common Prosperity” and the 14th Five Year Plan, with policies designed to help close the wealth gap, upgrade working conditions and address the implications of an aging society and women’s issues. These policies represent opportunities for multinationals operating in China to demonstrate they are contributing to the national good.

That said, companies should not expect help from the Chinese government on issues related to the “S” pillar. This is because officials are as likely to hinder a foreign company’s social agenda as to support it, particularly when challenging issues such as sourcing materials from Xinjiang arise.

In Southeast Asia, there is no common regulatory framework across the highly diverse markets in the region. This means the imperative to act falls largely on companies themselves. Covid-19 recently highlighted several key areas where companies can contribute meaningfully under the “social” pillar, including:

  • Stepping up supply chain due-diligence, as Covid-19 has spread supply chains across a wider array of markets, and multinationals have to track an increasingly diverse web of suppliers and sub-contractors that often cross borders;
  • Stepping in for governments in many Southeast Asian markets – for instance, procuring vaccines for their workers or providing financial support during lockdowns; and
  • Ensuring product standards and quality control, as the rush for personal protective equipment (PPE) in the early days of the pandemic spotlighted product quality concerns.

How do Investors View the “S” pillar, and What Social Issues are on Their Radar?

Historically, the “E” and “G” pillars have been prioritised as they are relatively easy to quantify, unlike the “S” pillar. This caused investors to focus on issues that affect the planet (“E”) or companies and investors (“G”). That said, the pandemic changed this dramatically – as evidenced by the situation in Southeast Asia outlined above.

In the venture capital (VC) space, there is an opportunity to help start-ups incorporate ESG into their management and operating culture from the ground up. This means ensuring that company culture prioritises diversity, equity and inclusion (DEI); pays attention to data security, data management and personal data privacy; considers supply chain issues that include child labour, human rights and ethical and transparent materials sourcing; and prioritises employee wellbeing to ensure healthy retention rates.

How can Multinational Companies Navigate Contradictions Between Attitudes to Social Issues in their Home and International Markets?

In China, it is getting harder and harder to “thread the needle” as geopolitical tensions increase the complexity of working in China and western markets simultaneously. The key is to have a deep understanding of China’s social agenda while also being aware that anything beyond business basics might be perceived as “western meddling” in domestic affairs.

In Southeast Asia, we do not hear as much about value clashes when it comes to the social pillar. Three things stand out in Southeast Asia:

  • As mentioned above, companies need to be aware of the spread of their supply chains. For example, if you work with a Thai supplier, you have to be aware that they may source inputs or subcontract work to countries such as Cambodia or Myanmar, which may be more opaque in terms of social issues.
  • Unspoken biases can be an issue in these markets, as local norms around characteristics such as age, gender, sexual orientation, education or social status might be very different and might clash with home market values.
  • Migrant workers are common across these markets, and many may not be afforded basic worker’s rights or even minimal benefits, raising potential social flags.

With this Multitude of Potential Issues Facing Companies Operating in Asia, How do we Ensure Companies are not Engaging in Social Washing?

The key here is that the social pillar – like the environmental and governance pillars – cannot be a box-ticking exercise for compliance purposes. Increased attention to the “S” pillar is helping in this regard – for example, in developed markets investors can now ask companies for their DEI policies. But even if these policies are in place, it is important to dig deeper – to do due diligence to ensure management is truly committed to social policies, that employees are seeing these policies in action and that partners and suppliers are being held to the same standards.

In emerging markets, this can be more challenging. For western firms operating in China, it means being proactive and highly deliberate in terms of trying to enhance positive social impact in ways that meet employee and community needs, align with their culture and values and fit into the Central People’s Government’s policy roadmap. The Common Prosperity policy and the 14th Five Year Plan are the policy documents most relevant to the social pillar at this time, although there are others at the regional and local levels as well.

In Southeast Asia, incentives remain lacking. Multinationals doing business in some of these nations – standards vary across the region – might have the best intentions and insist on socially responsible business practices among suppliers and partners. However, local firms with local shareholders, partners and clients may not see clear incentives to pursue responsible social practices. Far from social washing, the concept of social responsibility may not even be on the radar for them.

Regardless of the market, the key is that making progress on the social pillar means committing to a marathon, rather than a sprint, as social change does not happen overnight.

What Metrics are Available to Measure the Impact of Social Pillar Initiatives, and how are they Verified?

In many markets, documents such as DEI policies are a good start. And deep supply chain scrutiny is a must. That said, continued development and normalisation of metrics is required to drive continued progress in the social pillar.

In this vein, there is room for public-private partnerships to advance positive social outcomes in Asia. If governments legislate certain forms of reporting – such as gender balance or pay gap reporting – investors and business partners will increasingly leverage these metrics to make decisions.

Japan is a good example. While there is no native Japanese word for “diversity,” in 2012 the Shinzo Abe government implemented a policy entitled “womenomics” as one of “three arrows” aimed at overcoming decades of economic stagflation. Under the policy, companies had to report their gender ratios and related data. Once the data was published, the media began to report on the ratio, and investors, clients and partners increasingly started to incorporate the data into decision-making processes.

China is also a good example. The government’s recently concluded Two Sessions meetings have resulted in a raft of new policy announcements, providing a wide array of standards by which to measure performance in the “S” pillar and other areas.

You can listen to the full “S” episode HERE. This “ESG in the C-suite” program is the second in a series of three episodes that will highlight the “E,” “S” and “G” agendas in turn.

The views and opinions in these articles are solely of the authors and do not necessarily reflect those of Teneo. They are offered to stimulate thought and discussion and not as legal, financial, accounting, tax or other professional advice or counsel.

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