Recent research has alluded to emerging evidence that a better ESG (Environmental, Social, and Governance) score translates to about a 10% lower cost of capital, as the risks that affect a business are reduced. While this is a global phenomenon, it’s becoming increasingly relevant to Sri Lankan corporates as well given their international stakeholder networks across multiple industries.
While companies in Sri Lanka have been somewhat focused on incorporating ESG into their business strategies in recent times, it’s time now to ramp up on these efforts to be globally competitive and attractive to investors, who are not only interested in the financial outcomes of investments but are equally concerned about the impact of their investments and the role their assets can have in promoting global issues, such as climate action. One demographic that is particularly attracted to ESG investing is millennials who are more likely to trust a company or purchase a company’s products when the organization has a reputation of being socially or environmentally responsible.
Moiz Rehmanjee, Group CFO at Hela Clothing and an ACCA Member, says “the real value a finance professional can bring to the table is in taking the initiative to not just dwell on the numbers, but understand the business and seek positive returns based on society and environmental aspects of the business, which in turn encourages an organization to focus on the business case of what is right for its long-term survival.”
He added that in the current pandemic context there is a natural tendency for organizations to dwell on short-term profits, but it is important to strike a balance between keeping your head above the water in the short-term whilst at the same time investing in the long-term, around sustainability and governance as a means of boosting stakeholder confidence.
Explaining this concept further ACCA Member Jonathan Arnold, Internal Auditor at Union Assurance PLC said “ESG factors include managing resources and preventing pollution, reducing emissions and climate impact, and executing environmental reporting or disclosure. Environmental positive outcomes include avoiding or minimizing environmental liabilities, lowering costs and increasing profitability through energy and other efficiencies, and reducing regulatory, litigation and reputational risk.
He went on to say “Given the prevailing COVID-19 pandemic, many organizations in the country today are also faced with certain social risks that can impact the communities they operate in. They are addressed by company social activities, such as promoting health and safety, encouraging labor-management relations, protecting human rights and focusing on product integrity. Social positive outcomes include increasing productivity and morale, reducing turnover and absenteeism, and improving brand loyalty, particularly in large-scale manufacturing facilities across Sri Lanka.”
Devruwan Fernando ACCA member and Manager Governance and Vendor Management at Dialog Axiata PLC explained that another important challenge is governance risks, which addresses corporate brand independence and diversity, corporate risk management and excessive executive compensation, through company governance activities such as increasing diversity and accountability of the board, protecting shareholders and their rights, and reporting and disclosing information.
Ms.Nilusha Ranasinghe , Head of ACCA Sri Lanka commented “we believe that Corporates should be integrating ESG elements into their business models to achieve sustainable long-term goals. Focusing on managing ESG issues and mitigating related risks can address stakeholders’ concerns while creating corporate value. As such, companies must now have a more serious focus on ESG, so they can eventually enjoy higher valuations. This is why ESG is addressed across all the areas of our qualification.”
The overall take is that despite some challenges in incorporating ESG, it’s more important than ever before for organizations, as “investors are now looking more closely at companies that are consciously invest in sustainability. Therefore formulating ESG goals is only the first step. For these to be effective and meaningful, organizations will need the leadership drive to inculcate these into their culture so these will eventually translate to solid bottom-line results,