Asia's Outstanding Companies: Why sustainability makes good business

By Morgan Davis

Kalimantan, the Indonesian portion of Borneo, is known for its gorgeous beaches and an ancient rainforest that is home to wildlife such as orangutans and clouded leopards. Tourists and honeymooners scuba dive in the waters nearby and relax on the beach. But Kalimantan’s greenery is shrinking.

The World Wildlife Foundation estimates that a chunk of the lowland tropical rainforests almost equivalent in area to Belgium was cut down between 1985 and 2001 to supply global timber demand. The growth of palm oil plantations also helped drive deforestation.

Palm oil, used in a wide range of products from cooking oil to lipstick, has come under pressure recently because of links to deforestation, animal habitat reduction and pollution, among other problems.

A quick internet search for palm oil returns photos of the red and orange nuts as well as pictures of orangutans deprived of their environment and dead, brown earth under felled trees.

For Indonesian palm oil company Bumitama Agri, sustainability is both essential and a challenge. The company is learning to walk the fine line between successful business expansion and conservation, working with NGOs near their plantations to ensure environmental preservation, while also offering employment opportunities and infrastructure development to adjoining communities.

Bumitama Agri – which is listed in Singapore and which was voted the city-state’s most outstanding company in Asiamoney’s 2018 survey – isn’t the only company facing such pressures. Companies all over the world are being forced to rethink the business practices in order to fall in line with new environmental, social and governance standards. For companies in the developing economies of Asia, the pressure is considerable.

“We’ve seen a complete change in our environment,” says Markus Müller, global head of the chief investment office at Deutsche Bank Wealth Management. “We now have regulators and governments flagging up the need to change our ways.”

Similarly, millennial investors are focused on reversing the environmental damage of previous generations.

“It’s very evident in investor conferences,” says John Nai Peng Ong, CFO of Philippine developer SM Prime Holdings, referring to the increased focus of investors on sustainability. Companies in Asia, he says, are putting more focus on sustainability and are trying to make that more evident to outsiders.

As with many other Asian companies, Bumitama Agri’s sustainability efforts are relatively recent and in part centre around Kalimantan. In 2013, Bumitama Agri began a new planting project near Tanjung Puting National Park.

“There was a lot of concern prior to us going in,” says Lim Sian Choo, group head of corporate secretarial services and corporate social responsibility. The company conducted environmental and social assessments, and worked with a nearby NGO, making sure it planted far enough away from the park so as not to affect biodiversity in the area. The company also reforested an area that was destroyed by fires.

At the same time, Bumitama Agri was concerned about the local community, which was living below the poverty line. A new plantation would bring jobs and infrastructure to the area. The company established projects with the locals, training them and educating them on practices such as planting mangrove trees along the river bank to prevent erosion. Simultaneously, Bumitama Agri embraced local knowledge of native plants, learning about their uses.

“A group of us believe that the plantation can coexist with the forest and the community,” says Choo. “This is one of our first efforts to showcase this.”

Of course, the harmony doesn’t come easily.

“There are a lot of challenges,” she adds.

Conflicting agendas between regulators, NGOs, individuals and the company can create questions about the relational values of conservation and development.

“How do we marry all the different agendas of everyone?” asks Choo. “It is balancing these agenda, to the objectives of protection, production and inclusion, to our sustainability policy. I wouldn’t say that we’re there yet, but we’re seeing little successes happening.”

The company’s executive director, Christina Lim, says the situation in Kalimantan inspired Bumitama Agri’s change in mindset towards sustainability.

The company complements its business with projects such as the one it is working on now, creating a safe corridor for animals. It works on local community projects, partners with NGOs, and maintains appropriate boundaries between planting and designated areas.

Bumitama Agri is an active member of the Roundtable on Sustainable Palm Oil (RSPO), an industry organization that keeps a close eye on the planting practices of its members.

Increased scrutiny within the industry and by regulators does not come cheap for companies such as Bumitama Agri, and it slows growing plans. But it cannot be avoided.

“If you don’t comply, you’re going to be a step backward,” says Lim.

While Bumitama Agri is an upstream palm oil producer, end-clients are checking for sustainability at every step of the supply chain. Large retailers have become stricter too, looking for products made from sustainable oil. Not adhering to sustainability practices will terminally damage companies’ reputations in the near future.

Though the global spotlight is on sustainability and being green, a number of companies, banks and governments have pointed out that most of the world is far behind the United Nation’s 17 sustainable development goals for 2030. 

DBS and the UN produced a financial report in late 2017 called ‘Green finance opportunities in Asean’ that found that $3 trillion is needed in green investments between 2016 and 2030 to meet those SDGs.

For long-term investors, companies’ sustainability efforts are important, says Müller of DWS.

Companies will face less volatility in the future if they implement good practices now. Non-compliant companies could face penalties and fines, and the loss of investors.

“Within the next five to 10 years, regulations will be completely different in regards to ESG, in particular to the ‘E’,” says Müller. He expects there to be more mandated disclosures and greater transparency, for example in areas such as carbon use.

But as investors are quick to acknowledge, the ESG characteristics of companies may not be strictly comparable. Understanding the efforts of companies globally is like comparing apples with dragon fruit and pineapples. Home countries and industries may determine the extent of a company’s sustainability efforts or how investors look at it.

“In general, it is a challenge for companies that are located in countries with strong growth rates to convince the market of their ESG compliance,” says Müller. “It’s a process. It’s a transformation. It takes time and it needs trust.”

Asian companies may come under pressure for being less environmentally conscious than their Western counterparts, but it’s important to understand where the companies are now, and where they came from.

For Müller, it seems natural that Asian companies have become cognizant of sustainability only relatively recently.

“You can see how their state of economic development has taken them to a point where they need to think about the environment,” he says. Looking at the history of the West, economies often begin with polluting, carbon-heavy activities and social hardships.

“If we look back in time, we find that in the early days of industrialization, we hardly had what one could call a clean economy,” says Müller. “In Asia, the challenge is to reconcile economic growth with the need to move towards a more environmentally friendly economy.”

Some companies are finding it relatively easy to roll out new sustainability policies. For example, Ayala Land and SM Prime Holdings, both property developers in the Philippines and joint first winners this year, can incorporate sustainable building practices and include things such as green spaces and public transportation hubs in new estates to meet sustainability goals. Malaysian utility company Tenaga Nasionalhas used customer incentives, such as programmes to encourage solar panel use, and the acquisition of alternative power sources to make a difference to its carbon footprint nearly overnight.

People can be quick to act on easy, obvious things they can fix. Take plastic straws, which have suddenly become so abhorred now that people can see the damage they cause.

The reality is that sustainability efforts must run deeper than a ban on straws. While it all contributes to the ultimate goal of sustainability, it is often the companies in industries that don’t have an easy fix that should be garnering more attention – and applause for their efforts.

Seafood producer Thai Union – Thailand’s most outstanding company in Asiamoney’s 2018 survey – was forced to confront sustainability issues head on, and has made great strides in just a few years.

People all over the world buy canned tuna and frozen seafood and, just like the producers of palm oil, the seafood industry has been condemned for questionable practices. Commercial fishing can hurt other marine species such as sharks and sea turtles, while overfishing has led to big declines in some tuna populations. Plus, the fishing industry has been linked to human rights abuses. 

Thai Union, which sells popular brands including Chicken of the Sea, began making an overt sustainability effort a few years ago, hiring a dedicated team in 2012. In 2015, the company rolled out a sustainability programme globally.

“The real breakthrough was four or five years ago,” says Thai Union CFO Joerg Ayrle. “Thailand was at the forefront of a lot of criticism around human rights abuses and sustainability in the seafood industry.”

While Thai Union was confident that it was not participating in the questionable practices, the company realized that this was an opportunity to demonstrate transparency and to stand out as an industry leader.

“Customers, consumers and employees, they want to work for a responsible company, they want to buy products from a responsible company,” says Ayrle. “Companies that ignore sustainable development or use it as window-dressing and greenwashing do so at their own peril. They risk the long-term viability of their products and workforce, as well as the potential loss of access to global markets.”

Since then, Thai Union has outlined its SeaChange strategy, which works on the UN’s sustainability development goals, including zero hunger, decent work and economic growth, and life below water.

“The key big step forward is to start by making very clear commitments to where we want to have our sustainability standards defined,” says Ayrle.

In a business such as Thai Union’s, that means being knowledgeable about the standards of each step of the supply chain, from fish to kitchen. Building audit features into the supply chain, committing $90 million to sustainable tuna initiatives and bringing in-house some previously outsourced features, are all investments for the company, says Ayrle.

From Thailand to the Philippines, from property development to tuna sales, it is clear that companies are becoming more aware of the need to shift towards a more sustainable business model. But investors say that sustainability still remains an afterthought for too many companies.

ESG and sustainability have increasingly been part of BNP Paribas Asset Management’s conversations with companies in Asia, but the investment firm’s Felix Lam says that the topic is generally brought up by the asset manager, not the companies.

“As part of the investment process, we’ve been increasingly bringing this up during our meetings with companies,” says Lam, senior portfolio manager for Asia-Pacific equities.

Discussions will vary depending on what sector the company is in. For instance, BNP Paribas Asset Management may focus on environmental issues for a commodities company, while the primary focus for a bank would be governance policies.

“We don’t feel that most companies would bring those up by themselves,” says Lam.

Still, he says that it is apparent that Asian companies are thinking more about ESG. While they may not be questioned enough on the subject to warrant an unprompted presentation of sustainability initiatives, companies have enough investors making inquiries that they are at least prepared with answers, he adds.

What about the accusation that some firms’ sustainability efforts are little more than marketing ploys?

“For an outside observer, it’s hard to see the difference between companies that are actually doing something, and those that are just talking about doing something,” admits Müller.

But, like Lam, Müller is heartened by the conversations that are happening.

“For me, it’s a positive sign that at least they’re starting to talk about it, because it shows that they’re at least thinking about it,” he says.

And there is a chance that talk leads to real action, Müller says.

“It’s already late in the day to start doing something about the environment,” he says. “We have no more time to waste.”