Business Sustainability through ESG

Implementation

Yudo Anggoro, Ph.D

School of Business and Management ITB
Facilitator
Yudo Anggoro, Ph.D
([email protected])

Education:
Ph.D in Public Policy, University of North Carolina, US
B.Eng in Industrial Engineering, ITB

Occupation:
(Current) Director, Center for Policy and Public Management SBM ITB
Risk Management and Business Development Committee, PT. PGN, Tbk
(Former) Director, SBM ITB Jakarta
Audit & GCG Committee, Trans Jakarta
Service Manager, Citibank,N.A.
Business Sustainability
The ability of firms to respond to their short-term
financial needs without compromising their (or others’)
ability to meet their future needs (Bansal et al., 2014)
How We Map a Framework for Sustainability Program:
Triple Bottom Line (Elkington, 1994)

Sustainability is the product of interaction among people, profit, and planet for the greater good
ESG addresses many topics and stakeholders
Climate
ESG represents the company’s efforts to Change
systematically assess, manage, and monitor
risks of material potential impact to the
strategic and financial decisions of the Shareholder Environmental
Rights Impacts
company.

The term ESG is often used as a synonym for

sustainability, CSR, public relations, social ESG Risks
investment, or environmental compliance.

ESG is the management of risk and the Health and

preservation of shareholder value. Board Quality
Safety

Communities

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ESG and Competitive Advantage
ESG impacts can influence all parties along the value chain due to their interconnectedness and
dependency:

Increased Opportunities
Reduced Risk Organizational Resiliency
& Growth

Mitigates risk to the enterprise. Supports identification of new Anticipates and adapts to
markets, customers, and technological, customer, and
products/services. regulatory changes.

Reputation &
Workforce Productivity
Stakeholder Trust

Engages and empowers employees, Increased stakeholder trust = better

increases retention and attracts corporate reputation.
best talent.
 Examples of Strong ESG Examples of Weak ESG

• Reduced supply chain disruptions

• Reduced probability of stranded assets due to • Losses due to supply disruption
Reduced Risk climate change • Incur fines, penalties, and sunk assets
• Increased natural resource stewardship and • Increasing costs for key natural resources
reduced costs

• Missed opportunities for markets, customers, and

• Identify new markets, customer bases, and unmet
Opportunities & product innovation
need for new products/services
Growth • Inability to leverage assets, capabilities, and networks
• Enhanced likelihood of strategic partnerships
of vital partners

• Enhanced crisis management and business • Enhanced crisis management and business continuity
Organizational continuity capabilities capabilities
Resiliency • Proactive in anticipating the need for and executing • Proactive in anticipating the need for and executing on
on internal change internal change

• Enhanced employee output due to greater levels of • Monetary losses due to employee turnover and
Workforce
engagement lowered productivity
Productivity
• Attract best talent • Lose out on essential talent

Reputation & • Attract and retain B2B and B2C customers • Customer losses
Stakeholder • Obtain support/resources through greater • Loss of social “license to operate” and stakeholder
Trust governmental and community relations opposition
ESG and Sustainability (Pollard & Babbington, 2022)

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 Changing Attitudes of Investors Towards ESG
Drivers for Change:
• Transition of the debate on E&S
issues from values-based PRI Signatory Growth
argument to long-term value 120 3250
creation and risk assessment. 3000

100 2750
• Pressure on financial institutions 2500
to demonstrate sustainable 2250
80
business practices in the 2000

aftermath of the 2008 Financial 60

1750

Crisis and major industrial 1500

1250
disasters. 40
1000

• Increased momentum of ESG 750

20 500
stewardship initiatives and
250
proliferation of codes of best 0 0
practices. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Assets under management (US$ trilli on) AO AUM ($ US trill ion) Number of AOs Number of Signatories

Sources: UN PRI

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Sustainable ESG portfolio have delivered better performance

E S G variant of S & P 5 0 0 has outperformed traditional index.

Similarly, several k n o w n b e n c h ma r ks h a v e be e n outperforme d b y their E S G version ov e r the long run.

This is believed to b e driven b y the fact that E S G portfolio h a v e lower d r a w do w n s, c o mpa nie s c o m m a n d higher valuation p r e m i u m a n d
lowe r cost of capital.

S ou rce: B a n k of A mer ica research Repor t, S & P D o w J ones Indices D ata as o n S eptember 3 0 , 2 02 0, P as t p er f or man ce m a y o r m a y n ot sustain in future
ESG Risks & Opportunities
ESG issues often converge to create novel risks that reverberate across
supply chains, independent industries, and entire communities.
High
DEI Climate Change
Environmental Social
Social & Environmental

Importance to Stakeholders
Labor Management
Impact on Communities`
Transparency, Disclosure

Water & Natural Resource Scarcity

Emissions & Energy Management

Governance
Corporate Philanthropy

The quality of governance is the determining Importance of economic,

Deforestation
factor in treating changing market and environmental, and social
impacts:
nonmarket contexts as both risks and Low
opportunities.
Low High Medium

Importance to Business High

The assessment will give you an idea of where the greatest risks are to the business and the welfare of its key
stakeholders so you can leverage thisasatoolfor measuringthe efficacyandmaturity of thecompany’s workonESGingeneral.
ESG Stakeholder Loop
 Key Components of ESG

Corporate
• Corporate governance issues Environmental Social
apply universally across all Governance
industries.

Climate Change Workforce & Human Board Quality

• Good governance of corporate, Capital
•Carbon Emissions •Independence
environmental, and social issues •2-Degree Alignment •Inclusion and Diversity •Skills and Qualifications

creates sustainable companies •Fossil Fuel Reserves

•Energy Efficiency
•Supply Chain Labor
•Workplace Health and Safety
•Diversity
•Refreshment
•Renewable Energy •Gender Pay Gap •Board Leadership

• Material environmental and

social issues vary significantly by Resource Management Value Chain (Suppliers Management Incentives
and Customers)
industry and may even be •Water Management
•Raw Materials •Product Health and Safety
•Pay-for-Performance Alignment
•Ownership Requirements
company-specific, depending on •Energy Sources •Data Privacy •Metrics and Goals
•Data Security •Severance / CIC Payouts
the level of materiality of each •Predatory Sales / Pricing •Claw-back Provisions
factor.
Environmental Impact Society and Communities Shareholder Rights
•Air Quality •Community Relations •Board Accountability to
•Ecological impacts •Economic Impacts Shareholders
•Critical Incidents (accidents) •Human Rights •Shareholders’ ability to act
•Waste Management •Corruption •Voting Rights
•Plastics •Political Activities
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ESG as Part of a Company’s Core Strategy
An ESG strategy cannot be separate from the broader organizational strategy. The further development of an ESG strategy effectively means
the integration of sustainability elements to a company’s core strategy.

• Emphasis on Material Issues: Priority is given to the most material issues from a
financial, environmental, and social standpoint.

• Strategic Alignment: The emphasis on materiality allows for the development of

an ESG strategy that is fully integrated with the broader strategy.

• Board Leadership and Oversight: The Board and top management will own the
strategy and oversee its implementation.

• Innovative Programs and Policies: Introduction of new policies, procedures, and

technologies to achieve the company’s long-term strategic objectives.

• Metrics and Goals: The implementation program includes quantitative and

qualitative objectives which can be monitored to measure the company’s progress
towards its goals.

• Monitoring: The implementation should allow for regular assessment of the

effectiveness of the various programs, so that the company can make adjustments
for improvement.
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Problems:
• Greenwashing
• No coherent guide for investors and firms to
make the trade-offs that are inevitable in any
society, e.g. Elon Musk and Tesla, coal mining
industry
• Not clear about the incentive
• ESG has a measurement problem
Elon Musk and ESG
Critics towards ESG

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Standards, Frameworks, and Ratings

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ESG Ratings Comparison (OECD, 2020)

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Pertamina Group
PLN Saka Energy

Aneka Tambang Adaro

ESG in Telecommunication Industry?
Environment Social Governance

• Energy usage • Demographic • Regulatory

and GHG shift risk
• Climate • Data security • Legal risk
change risks • Human • Public utility
capital
management
 7 Mistakes of ESG Management
• Excessive Focus on Ratings: A company approach that focuses exclusively on improving the company’s rating is at
risk of allocating more resources to “checking boxes” instead of developing a strategy that is tailored to the
company’s unique outlook and exposure to risk.
• Treating ESG Solely as a Communications Effort: Communications can help the company amplify its messaging,
but they cannot substitute for a robust management system that addresses material risks.
• Lack of Board and Management Oversight: The company’s ESG management strategy should be positioned as a
core part of the company’s vision and values. The involvement of the board and senior management is key.
• Disconnect from Business Strategy: An ESG strategy that does not consider the company’s strategic objectives and
does not inform the main corporate strategy fails to serve its purpose.
• Compliance-Oriented Approach: An approach to ESG management focused on compliance with rules and
regulations may appear as reactive and indicate a reluctance to go above and beyond minimum requirements.
• Inconsistencies across the Firm: Lack of a company-wide strategy and coordination leaves significant gaps in the
company’s ESG management programs, with potential exposures to risk.
• Lack of Assessment and Monitoring: Lack of effective monitoring of ESG performance impedes the company’s
ability to make progress and receive full credit for its ongoing initiatives through reporting.

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THANK YOU