The last year has seen a radical shift in corporate reporting from a voluntary system to a “comply or explain” approach. Kim Spear of Newgate Communications talks to James Pearson of Pacific Risk Advisors and finds out more
In December 2015, the Hong Kong Stock Exchange (HKEx) switched its environmental, social and governance (ESG) reporting guidelines for listed issuers from a voluntary ESG reporting system to a “comply or explain” approach. Fast forward one year and there has been series of HKEx hosted workshops, information sessions and on-boarding programmes, designed to help issuers align with the new reality of ESG compliance.
To this end, Newgate Communications has seen a noticeable spike in interest from its clients on how to communicate ESG strategies. Many have established ESG strategies but others want to know how to develop a well-articulated strategy that brings to life and value to a programme to a set of targeted stakeholders.
We decided to invite ESG industry expert and CEO at Pacific Risk Advisors (PRA) Mr James Pearson, to share his views on where companies, funds and institutions stand today and the importance of going beyond “the report” to getting into the core of the business to identify not only sustainability risks, but also the opportunities.
Can you provide some background about Pacific Risk Advisors and your clients?
We have been in Asia Pacific for over 12 years and globally advise a wide variety of industries and sectors across the ESG and sustainability risk management sphere. Our clients are senior management, directors, boards, fund managers and project managers who want to integrate strategic ESG programmes into operations with a view to maximizing investor returns. Some of the areas we cover include operational risk and efficiency, ESG and risk strategies, business continuity, risk assessment, renewable energy strategies, carbon footprint and climate risk impact, energy efficiency and managing risks in manufacturing and supply chain operations – to name a few.
What trends in ESG have you noticed in the last year – what are your clients saying?
A major trend is that ESG is going mainstream compared to several years ago when it was seen only as a specialist issue. We have seen a big spike both in interest and understanding around the importance of ESG to lower operational risks and costs and to demonstrate pro-active risk management. Our clients are much more aware that in order to attract high quality investors, they need to assess their assets and align to the current and future concerns of stakeholders. High on our client agenda and the reason they come to us, is that they are really looking to integrate green and sustainable choices, they want to highlight their responsible investments and leverage ESG for opportunities to expand market share as well as cost reduction.
In your view, has the introduction of ESG reporting guidelines helped propel ESG into the mainstream?
I don’t consider reporting alone to be particularly valuable however, it is an important end result that should follow a process of discovery. The real value of ESG is the process of identifying the risks that are found in all operations but that are rarely fully identified, managed or mitigated. Today investors need and want to see the overall picture of a firm beyond the financials to satisfy their stakeholders – this is real driver of ESG reporting. What the report offers is a view of how the firm is managed and provides a clear structure that should ultimately be part of a business culture.
Can you provide some examples of turning ESG risk into opportunity?
Our work with private equity firms is a great example. One firm we worked with asked us to identify the costs associated with converting operations from LPG to solar energy. After a review of the financial subsidies available and the costs of converting to solar power across a number of units at an operational level, the firm made substantial savings with a conversion process to solar power. Another example is a furniture maker where we discovered that they operated 20% of their machines without the proper extraction facilities to reduce dust levels – the reduction of dust buildup enabled them to create a better atmosphere for the painting process, increasing quality of the final product and reducing rejects. In addition, the lower wood dust volumes reduced the risk of fire and provided a working atmosphere that did not require employees to wear dust masks. This helped increase production in a safer workplace. Additional opportunities are seen in selling the wood shavings and energy resource use.
How would you describe ESG in Asia Pacific compared to say London or New York?
Most investors want clearly defined ESG strategies before making an investment decision – regardless of borders. Issues like child labor and environmental risks which are linked with business assets in Asia are serious and no one wants to invest in a firm with a track record that might come back to haunt investors if management cannot answer the basic questions about their core business risks. Each region has specific ESG requirements but as a global community stakeholders want to know what and who they are investing in.
Finally, how does CSR fit into ESG?
CSR comes under and enhances the ESG umbrella. What companies do at a local level – for the local community, charities, and employees – are important initiatives but identifying the risks associated with business and getting shareholder commitment is a broader process that must have measureable KPIs and activate growth opportunities.
James M. Pearson is the CEO at Pacific Risk Advisors (PRA), based in Hong Kong and Kim Spear is an Associate Partner at Newgate Communications, also based in Hong Kong