SUSTAINABILITY is becoming a more strategic and integral part of Asian businesses, with the increasing number of corporates adhering to stronger environmental and corporate governance standards. But when it comes to social responsibility, ESG corporate leaders have much to do. 

In the assessment of Asia's Best Companies in ESG in 2017, participating corporates of The Asset Corporate Awards said ethical values and parameters have shaped their decisions to focus on ESG. Another factor was the belief that ESG plays a key role in broader financial performance. These are in contrast to the responses in past surveys where respondents most often cited reputation management or cost reductions as reasons for pursuing sustainability efforts.

The issue around corporate sustainability grows as stakeholders and regulators demand higher adherence to ESG factors, according to investment managers. Corporate management is also leading the charge toward increased focused on sustainability, which explains companies' increased attention on ESG, they say.

But as sustainability rises in significance, capturing its full value creates challenges. In Asia, the E and G (environmental and governance) considerations are gaining more traction than the S-factor (social), which is associated with employment issues as well as engagement with the larger community surrounding a business.

The most recent sustainability survey of corporates by Asset Benchmark Research (ABR) shows Asian corporates scored highest on environmental responsibility at 76.8 in 2017, a 20% jump from 61.6 two years ago — and weakest at social responsibility at 51.8 down from 55.5 in 2015.

Companies are chipping away at their carbon footprint with greenhouse gas emissions falling in the year, more than focussing on specific targets for social responsibility goals. Last year, fewer companies (55%) declared that they had a board member with a special remit for corporate social responsibility compared a year earlier (62%).

Community investment was also down last year, with just 86% of firms saying they included investing in the community as part of their social responsibility actions, down from 93% a year earlier. Attention to ethical business practices, including product safety, contract negotiation, fair trade was also absent in the policy actions of some of the respondents.

With regards corporate governance, corporates scored 71.2 overall on the back of solid financial standing as well as adherence to best corporate governance practices. Of the three factors, corporate governance appears to be the most understood consideration by investors and stakeholders in their review of ESG efforts.

The S, however, remains the weak link. ABR says there is a lack of shared framework to assess companies' various approaches in fulfilling their social responsibility. This may have weighed on efforts by corporates that aim to achieve higher ESG scores.

So how can companies bolster the S-factor in their ESG efforts?

A board member with a special remit for social responsibility is a good indication of the attention management gives to important social issues such as employee engagement and ethical business practices, says ABR.

Increasingly, the inclusion of labour issues and employee engagement within a company is forming part of assessments of social responsibility. This also extends to companies' supply chain operations.

The adoption of a social responsibility policy, more importantly providing specific actions and targets toward achieving such policy is essential in convincing asset owners of management's seriousness in addressing social concerns. Fair treatment of staff as well as workers involved in a company's supply chain is good social corporate responsibility.

Going forward, social performance will have a firm place in asset owners' assessment of investments. The integration of social issues, including labour standards into investment decision-making becomes increasingly relevant especially for institutional investors like pension funds that oversee the retirement savings of workers.

The story first appeared on The Asset ESG Forum in May 2018