Publication Type

Report

Version

publishedVersion

Publication Date

2-2022

Abstract

Despite rapid economic growth and increasing interest in impact investment worldwide, less attention has been paid to the question of whether this growth is sustainable for people and the planet. In an ideal scenario, growth would happen within planetary and social boundaries. However, current financial value is often prioritised and achieved at cost to society and the environment. For example, small farmers in Indonesia have long practised slash-and-burn agriculture, and in recent decades large companies have industrialised the practice. The peatland blazes in Indonesia release smoke and large amounts of greenhouse gases, which impact both Indonesia itself, and neighbouring countries such as Malaysia, the Philippines, Thailand, and Singapore. A similar pattern can be observed regarding public health issues such as the COVID-19 pandemic. These climate and social impacts of growth suggest that the current approach to financial growth is not sustainable in the long run, and organisations often fail to consider the externalities while they are seeking financial returns. To better align financial value with environmental and social values, it is necessary to develop and harmonise Environmental, Social, and Governance (ESG) measurements and standards. Organisations should measure and internalise the negative externalities to the environment and society resulting from their primary economic activities. Doing this requires organisations to report on these impacts transparently and to start managing both positive and negative effects, with the ultimate aim of creating value for all stakeholders and ensuring that economic growth takes planetary and social benefits into consideration.

While trillions of dollars are invested into sustainability and ESG globally, we have limited knowledge about whether these investments are genuinely making positive and material changes to the environment and society. Meanwhile, many frameworks are being developed for organisations to report their ESG impact, but there is an absence of standardisation and comparability across different frameworks. As a result, current sustainability reporting often lacks the comparability and reliability that key users need to make decisions. There are also other challenges with current sustainability reporting. Existing standards are not applied in a consistent manner with common language. In addition, lack of meaningful stakeholder engagement means that reporting organisations can decide to report on issues that are deemed to be important solely by the organisation itself. Moreover, numerous ESG ratings and metrics provided by third-party rating agencies (e.g., Refinitiv, MSCI, S&P Trucost, Bloomberg, Sustainalytics, Vigeo IRIS) mainly focus on public equity and lack transparency and consistency. Given that small- and medium-sized businesses form a critical part of the economy in Southeast Asia, this approach has limitations. Due to these challenges, reporting organisations can find themselves unable to make incremental changes, while they continue to maximise their financial value at the expense of environmental and societal value erosion. This can also lead to misguided investment decisions and give rise to the potential for greenwashing.

As a result of the reasons outlined above, there is an urgent need for a standardised framework to measure and report environmental and societal value and impacts, where possible in monetised terms and with a clear structure, creating a complete and holistic picture of the overall impact of the reporting organisation. A more inclusive ESG measurement that reflects the welfare of broader stakeholders is essential for organisations to clearly measure the impact of their externalities while continuing to enjoy financial returns.

Keywords

Environmental, Social and Governance measurements, corporate governance, standardized framework, green finance

Discipline

Business Law, Public Responsibility, and Ethics | Finance and Financial Management | Strategic Management Policy

Research Areas

Finance

First Page

1

Last Page

29

Publisher

Singapore Managment University, Sim Kee Boon Institute for Financial Economics

City or Country

Singapore

Embargo Period

2-23-2022

Copyright Owner and License

Publisher

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