2020 is a year that will go down in history as one of the most challenging yet. It was a year of uncertainty, complexity, and change. As we move ahead into the new year, we take with us valuable lessons and renewed strength – pushing stronger than ever on pressing ESG issues which we now know we can ill afford to ignore.
Based on the collective experience of our KPMG professionals, we've identified key sustainability trends to offer indications and insights on how the world is changing and how the industry might prepare for our new reality ahead.
- Governments blaze the way for sustainable development and decarbonisation: Davos 2020 and the global pandemic that unexpectedly followed called attention to the resilience of social infrastructures. We are now more starkly aware of the vulnerabilities on national and international levels – including geopolitical tensions, energy and food security, marginalised groups. Governmental leadership in a time of crisis is critical for survival. In Singapore, we see decisive moves by the Singapore leadership to address existential issues arising from climate change and health concerns, while balancing longer term strategic outcomes through a series of interventions for the green economy and an inclusive transition.
Being a safe harbour will augment Singapore’s position as a trade, finance and innovation hub in a period of intense volatility, and our centrality to the global order will be critical to our continued economic success. Our strong governance and technology architecture provide us the natural advantages us to be the preferred location in Asia for green finance, green innovation and green jobs. We are well set to power up sustainable growth in the region as we refresh partnerships with major economies such as the EU and China that have declared climate neutral ambitions and opened up massive markets for responsible production and new, ethical solutions.
We expect further regulatory and policy changes that will prioritise sustainable development, with environmental and social criteria becoming baseline requirements for tenders and procurement. There will be incentives to drive research and development in green products, commercialise and scale green production, implement green solutions and increase green trade. Data exchange platforms providing environmental and social data will be built to enhance transparency and facilitate capital flows and carbon trading. Industry capacity building and skills uplift will be rolled out. And the climate agenda will claim its place in diplomatic relations.
- Sustainable finance drives mainstream capital allocation: With the tremendous and urgent push to achieve large-scale environmental and social outcomes, we will see capital markets take serious action by becoming much more selective in the way they channel funds. Faced with heightened business risks, financial institutions can no longer ignore the costs that come with severe weather events and unethical practices and which may potentially result in stranded investments and asset write-downs.
The Monetary Authority of Singapore has tasked banks, asset owners/managers, and insurers to comply with regulations that require them to maintain close oversight such as Environment, Social and corporate Governance (ESG) risks, and stress test portfolios for high impact events. To do so, financial institutions are on a quest for reliable and accurate underlying environmental and social data that will provide them with clarity on the extent of their risk exposures. The fight for access to capital is set to become more acute as financial institutions demand accountability from their customers and investees through comprehensive screening and due diligence. At the same time, in a highly competitive market, financial institutions seek to capture opportunities by adopting progressive responsible financing frameworks and a suite of products and services that will support green growth and positive social impact such as sustainability bonds and loans, green derivatives, and ESG Exchange Traded Funds (ETFs) etc.
- ESG weighs in on corporate value creation: Stakeholder capitalism is back on the table. While financial performance continues to be a measure of success for most organisations, it is increasingly evident that it cannot remain the only measure, or even a reliable predictor of future enterprise value. Based on a Morningstar research, ESG stocks have consistently performed stronger than their peers during COVID-19, indicating that good governance over environmental and social performance has a positive influence on share price. The KPMG 2020 CEO Outlook COVID-19 Special Edition: Singapore Edition clearly showed that a large majority of leaders believe that their ability to keep their position is tied to ESG performance, sending a strong signal that success and remuneration cannot be delinked from sustainable business practices. It was also clear from the survey that purposeful leadership which looks beyond profits and contribute to greater societal good is a differentiator for organisations to attract and retain talent.
As organisations integrate ESG considerations into their strategies and business models, there is a need to objectively measure the “return on sustainability” and flow this into the overall valuation of the company. As a start, we expect to see more companies adopt internal carbon pricing as a mechanism to factor environmental externalities into management decision making. There is also an uptake of cost-benefit analysis, impact measurement, sustainability reporting and ESG-linked remuneration frameworks.
However, much more work needs to be done to arrive at a set of universally endorsed standards and guidance for consistent accounting and valuation. Recent efforts to achieve harmonisation include announcements by key sustainability bodies such as the Integrated Reporting Council (IIRC), the Sustainability Standards Board (SASB), the Global Reporting Initiative (GRI), the Carbon Disclosure Project (CDP) and the Climate Standards Disclosure Board (CDSB) to work towards standards alignment. In addition, there was the consultation paper by the IFRS Foundation to create a Sustainability Standards Board (SSB) alongside the existing International Accounting Standards Board (IASB) to better account for externalities, as well as efforts by the World Economic Forum (WEF) and the Big 4 accounting firms to create disclosure guidance for sustainable development.
It is yet to be seen if these efforts will come to fruition, and if so, at what pace and trade-offs. Companies will also start to face pressure from stakeholders to “prove it!” – essentially having to stand behind their ESG disclosures and guard against accusations of greenwashing and sustainability fraud.
Start the new year armed with key insights to tackle new opportunities. Talk to us to find out how our Sustainability specialists can help you improve performance and prepare for the year ahead.