Aon plc released its 2023 Asia Pacific Corporate Governance and ESG Survey Results which found that while the surveyed companies indicate environmental, social and governance (ESG) issues are critical to their organisations, most are lagging in integrating ESG measures – either via aligning to goals and key performance indicators (KPIs) or allocating a dedicated function to monitor ESG issues.
Despite 58 percent of surveyed companies stating ESG is critical to their long-term success, only 29 percent include ESG-related goals and KPIs for their C-suite, with most companies in Asia Pacific still in the early stages of using ESG metrics and developing their ESG profile.
While only 34 percent of companies reported having a dedicated ESG function, business strategy – instead of compliance requirements – is the primary driver of action on ESG in Asia Pacific, as the regulatory environment is still evolving in most of the surveyed countries.
Linking ESG to financial incentives is needed
Accelerating and expanding ESG efforts requires boards and management in the region to better understand the link between ESG and business strategies and use metrics and performance measures as their ESG maturity improves.
“Incorporating ESG performance criteria into executive compensation plans means ESG metrics are more likely to align with the company’s overall strategy and compensation plans. It is becoming clear that failing to address and integrate ESG metrics in the future will expose companies to reputational risk, financial impacts and regulatory consequences as they navigate new forms of volatility,” said report author Boon Chong Na, advisory partner and corporate governance and ESG lead, Human Capital Solutions for Asia Pacific at Aon.
“However, while improving ESG metrics, companies need to manage both the financial and non-financial aspects, as shareholders expect them to do well while also doing the right thing.”
Compared with privately held companies, listed companies are twice as likely (48 percent) to have clearly defined ESG metrics and to link them to C-suite performance.
Partner and Head of People Solutions for Australia at Aon, Simon Kennedy, said while difficult to make the transition to linking metrics depending on where listed or private companies are in the process of their ESG journey and with some markets ahead of others in the region, it is no longer enough to commit to targets that are not tied to either a financial incentive or disincentive.
“The first step is to align ESG targets with business strategies and goals. Companies can retain their existing measures, no matter how simple, and enhance them as they move forward. Ideally, ESG targets need to be as measurable as financial targets, preferably using audited numbers based on established standards,” said Kennedy.
Board education also key to integrating ESG
While 61 percent of respondents reported that they involve their entire board in decisions concerning ESG, 41 percent do not have a formal process or training program in place to educate board members about contemporary ESG topics.
“Among survey participants, most companies currently conduct only one or two education sessions on ESG per year for their boards,” said Kennedy.
Whilst directors are expected to be deeply involved in developing and overseeing ESG strategy, training is required to ensure board members are adequately informed and capable of making sound judgements about the ESG risks and opportunities under their governance.”
Green talent becoming a priority
Another key factor that emerged in the report is the issue of green talent, as nearly one-third of surveyed companies plan to introduce or expand ESG roles, with 76 percent of positions being hired at the mid-professional level.
“Companies will need to embark on job redesign and upskilling initiatives and invest in their talent to meet this growing demand, either through external university programs, micro-credentials, sustainability certifications or internally managed employee training. A comprehensive talent strategy is essential to keep businesses competitive, and a robust workforce reskilling program can help build a more resilient workforce, enhancing the potential of existing employees even if external talent pools are shrinking,” said Na.
Further key findings from the report include:
- 25 percent of private companies and 50 percent of listed companies have a dedicated ESG team.
- 30 per cent of new initiatives in 2023 involve re-skilling or upskilling the workforce on ESG.
- 61 percent of boards are actively monitoring diversity, equity and inclusion (DE&I).
“In Asia Pacific, companies around the region are taking steps to improve their performance on ESG, either to become more attractive to investors or as an aspirational endeavour unrelated to regulatory requirements. It is not a homogenous market, though countries such as Australia and Singapore are ahead of the curve in terms of ESG maturity,” concluded Na. “To achieve ESG improvement, companies need to learn from best practices across the region and extend their ESG thinking and behaviours beyond the boardroom so that they make better decisions that permeate the entire organisation. Integrating financial incentives and a greater focus on education, together with enabling technologies and analytics, reinforced by converging ESG standards, will ensure companies are not left behind as improved ESG performance gains pace in the region.”