It’s time for company directors to step up on sustainability

We are living in unprecedented times: geopolitical tensions are increasingly acute; the global political, economic and financial system that has worked for more than a century is being tested. Corporates worldwide are now expected to stay on the front foot, working closely with policymakers and regulators to confront far-reaching global challenges.

At the same time, the role of environmental, social, and governance (ESG) in investment strategies is fast becoming institutionalized, channeled by regulators, indices and exchanges. There is evidence that balancing short-term performance with sustainability, transparency and good governances leads to long-term successes for organizations.

This makes delivery on ESG measures no longer merely a “nice to do” or a “box-ticking exercise”: it has become essential for business and societal prosperity, it is demanded by investors, and it is considered critical for long-term business success.

Creating a tailored local ESG ecosystem

ESG standards and measurements are not universally applied. And to accurately assess and digest these important indicators, consideration needs to be given to disparities in adoption and awareness, cultural and economic differences, market and regulatory customs, and capabilities.

There is no one-size-fits-all solution; an ESG ecosystem or model that works well in one jurisdiction may not have the same impact in another region. It is, therefore, important for each key stakeholder – companies, investors and policymakers – to identify their own goals and motivations in order to work out the best integration approach to create long-term impact in their respective local market.

As ESG considerations increasingly move into the mainstream, we (HKEX), as Asia’s largest exchange operator and market regulator, take our role very seriously in promoting ESG disclosures and implementation.

It is our job to encourage all market participants to play a part in driving the ESG ecosystem forward in Hong Kong, and more broadly. Our goal is to create a healthy and sustainable ESG ecosystem that caters for the unique cultures and needs of our local market, while at the same time meeting international standards and expectations. We started introducing various corporate governance standards and ESG reporting guidelines nearly 20 years ago, focusing on a number of environmental and social issues as well as offering guidelines on disclosure and reporting. It is a journey we are committed to for the long term.

It’s time for directors to step up

While it is clear that policymakers or regulators are in a strong position to drive change, what is more powerful is for the change to come from the top-down within business organizations. The board of directors therefore, need to play a major role – they have the deepest understanding of the goals and motivations of their businesses, the cultures and nuisances of their operating markets, as well as a vested interest in the long-term success of their organizations.

This makes the role of the board more critical than ever. As primary stewards of risk and guardians of long-term enterprise value, a board should be expected to step up in driving the ESG agenda of their companies. This includes setting clear ESG guidelines and giving overall strategic direction to the business operations, as well as overseeing the ESG roll-out and implementation throughout the process.

In principle, a board should take leadership for and accountability in:

Having the strong commitment, collaboration and strategic direction from the board is an essential first step for an organization as it starts its ESG journey. By focusing on both what not to do, as well as what needs to be done, the board should be able to connect with stakeholders within the business and the wider ecosystem, to pursue sustainable practices that fit into the business strategy and achieve positive outcomes for the long term.

Conclusion

While failure in ESG will present huge financial, operational and compliance risks at a corporate level; a positive and progressive ESG approach that is properly implemented and overseen will allow companies to not only create long-term enterprise value, but also play a meaningful role in shaping all our futures.

It’s time for boards around the world to walk the talk and take ESG standards and practice to new levels. Companies need to be a true positive influence.