In our latest Sustainability Solution article on M&A, we discussed Sustainability or ESG as the new compliance consideration in various aspects of M&A, including the need to review relevant data with respect to ESG issues in due diligence exercises.
In this issue, we will now talk about ESG from the corporate governance and management perspective.
Why ESG matters for companies?
The “E” in ESG — Environmental — represents the company’s commitment to its environmental responsibility and management of environmental risks. The “S” — Social — focuses on how the company navigates its relationships with its stakeholders to ensure social responsibility. Lastly, the “G” — Governance — covers how a company is governed to ensure the best interests of all stakeholders, investors, customers, partners, employees or regulatory authorities. Companies that put ESG values at the core of their operations can gain an advantage over their competitors through securing the trust and confidence of these stakeholders, and positioning themselves to do business in a more responsible way in the long run.
Business operators in Thailand are proactively pursuing many components of ESG, particularly the environmental and social components, but formal regulatory frameworks in these areas are yet to be developed. Forward-thinking companies are looking to learn from best practices in the markets where the ESG regulatory framework is more developed, and are starting to incorporate these into their management philosophy and way of doing business on a voluntary basis. Examples include environmental goals such as carbon neutrality and net zero emissions, and social goals such as Diversity, Equity and Inclusion (DEI), human rights, health and wellbeing, and reducing discrimination in employment.
The regulatory sector is nevertheless aware of this worldwide trend, and various government and public bodies have started to encourage both the public and private sectors to start implementing ESG principles and policies. It is likely that over time, this encouragement may transform into mandates and there will be requirements for companies to have explicit policies on, for example, emissions control or diverse and equitable human resource management, and processes established to hold themselves accountable to their commitments.
What can companies do?
From the legal perspective, companies must ensure that they operate in compliance with the law, limiting any potential legal and regulatory risks that could hinder the company’s operation and sustainable growth. To do so, companies should ensure they have in place all the necessary policies and internal measures, including anti-bribery and anti-corruption. Companies should communicate these policies from the top to all parties involved and ensure proper implementation whenever and wherever they do business. Governance plays a key role in protecting a company from undesirable misconduct and may help to mitigate some of the consequences of non-compliance, whether in terms of civil or criminal liabilities of the company itself or its board of directors. Government authorities also implement measures to promote ESG and companies may want to consider taking part in these initiatives.
In order to get ahead of this emerging trend, companies should start to consider how they would integrate ESG considerations into their broader governance and management systems. The appropriate response to the emerging ESG challenge will depend on the industry in which the company operates and the size of the organization. At a minimum, this will involve the establishment of a working group or committee to keep abreast of developments in the ESG space and implementing processes to ensure that such work gains visibility at the board level.
Larger organizations may wish to consider establishing an ESG office, under the oversight of C-suite executive, but even smaller organizations may benefit from a standing agenda item at management or board meetings that creates space for regular discussion of such issues.
Where policies are agreed upon, communication teams need to ensure that the message is disseminated across the organization (and as appropriate, to outside parties), processes need to be put into place to ensure compliance, and measures enacted to monitor progress against objectives. For example, a commitment to reduce a company’s carbon footprint might involve purchasing carbon-offset credits, switching a certain proportion of energy consumption to renewable sources, reducing the quantity of paper used in the office and increasing the temperature setting for the air-conditioning system. A diverse and inclusive HR policy could involve a review of screening and hiring practices for new employees, the introduction of flexible benefits and working arrangements designed to meet the needs of a diverse workforce, and a redesign of the company compensation and benefits framework.
Organizations may also wish to consider the ESG credentials of those with whom they do business — be they partners, suppliers or customers. This could involve the establishment of minimum standards for acceptance of new clients, or engagement with new partners and suppliers, and the inclusion into standard contracts of terms that compel the adherence to certain standards of practice in the ESG area.