New Report: Economic and Governance Goals Top ESG Agenda

A recent poll finds that businesses included in Australia, Malaysia, and Singapore are giving governance and economic performance more weight in their materiality analyses than they are for environmental and social concerns. Usually included in yearly or sustainability reports, these evaluations assist companies in spotting and assessing major risks and possibilities, especially those touching on environmental, social, and governance (ESG) issues. Even with more pressure for full ESG reporting, the results show that environmental and social issues are still less important than financial results and governance matters. 

Governors for Stakeholders and the Sustainable Finance Institute Asia examined the FY2022 and FY2023 reports of publicly traded firms across the three nations. Materiality evaluations ranked economic performance as second most important after governance. Although regularly referred to in disclosures, environmental issues came fourth and social aspects third. This trend begs concerns regarding corporate view of long-term sustainability risks, particularly in light of labour rights, moral supply chains, and climate change. 

From each industry and according to their market capitalisation, a sample of 100 firms was chosen for the study. The ultimate study relied on around 180 businesses since some disclosures lacked great clarity. Excluded were companies without a clear idea of how significant sustainability-related hazards and possibilities (SROs) are. The second phase of the research included more businesses with smaller market capitalisation to increase data coverage. 

A major issue the report highlights is the possibility of businesses underappreciating the relevance of societal and environmental considerations. These factors are typically regarded as longer-term problems, therefore businesses concentrate more on opportunities and hazards with quick economic consequences. This short-sighted perspective can cause us to miss chances connected to sustainability or future hazards. 

Of the three nations, businesses included on Bursa Malaysia revealed the most transparent display of materiality assessments, with 87% giving exact ratings of SROs. By contrast, only 45% of businesses on the Singapore Exchange (SGX) and only 14% of those on the Australian Securities Exchange gave comparable openness. One theory might be that Bursa-listed companies are more likely to adhere to the Malaysian exchanges' sustainability reporting guide, which offers clear guidance on how to evaluate materiality. 

The research revealed that some sustainability issuesincluding workplace health and safety, labour management, human capital, financial performance, corporate governance, emissions, and climate change were often cited among businesses. But there was a gap between how often these subjects were mentioned in reports and how important they were thought to be. Environmental concerns, for instance, were only given top priority in a select few fields—agriculture and utilities—suggesting their somewhat low perceived importance outside of those spheres. 

The difficulty and cost involved in establishing reasonable targets help to explain the diminished weight assigned to environmental concerns. Because they may not provide quick financial gains and can be costly to execute, climate-related objectives are less desirable in brief-term business planning. During their evaluations, this obstacle could cause businesses to either shun or lower the materiality of particular environmental issues. 

Directors on boards likewise help to determine these results. According to the report, boards often give more attention to ethics and governance and favor subjects having more measurable results. This emphasis could inadvertently demotes areas like environmental sustainability, where progress and measurement are frequently more difficult. Therefore, the study advised boards to be more closely involved in materiality reviews to prevent neglecting social or environmental hazards that could have long-lasting effects.

The report called on investors to demand clearer disclosures from companies, particularly around the justification for the prioritisation of certain risks. Being open about how these choices are made and how important concerns are handled might inspire a more balanced approach. The research also underlined the part changing legal structures play in altering these priorities. 

The results of the research are based on disclosures made before implementation in Australia, Malaysia, and Singapore required corporate climate reporting to conform with International Sustainability Standards Board (ISSB) criteria. These new standards focus on financial materiality, which includes sustainability issues that could affect a companys value and influence investor decisions. Companies may have to rethink their ESG priorities to better reflect financial importance if they move toward evaluations based on ISSB. 

Despite this, the study noted that companies that consider both financially material and impact material issuesthose that affect broader stakeholders or the environmentwill likely benefit from a more balanced and future-proof strategy. As regulations evolve and global sustainability challenges intensify, issues previously considered external or non-financial could carry direct financial implications. Companies that overlook this risk may face compliance costs or reputational damage in the future. 

Finally, the report advised companies to look beyond traditional ESG topics when conducting materiality assessments. Geopolitical unrest, economic instability, and trade interruption are all more important today for determining business risks in the volatile international environment. To help businesses get ready for unknowns, the study advised them to embrace more flexible and forward-looking evaluation techniques like scenario planning and business model resilience. 

A major media company believes these observations point to a need for regional businesses to update their sustainability strategies by including both short-term financial objectives and long-term social and environmental concerns. Matching materiality evaluations with worldwide norms and expectations will help guarantee that companies remain resilient, relevant, and responsible in a fast evolving world.