Jakarta. As governments around the world start pushing for better environmental management to help mitigate the threat of global warming, corporations are tying in the idea of environmental protection with social responsibilities and corporate governance.
Closer to home, they also start making valuations on the benefits they will get in the long term from spending big on these nonfinancial activities.
Company managers and shareholders often demeaned environmental, social and governance as “unnecessary costs” in the past, but this old belief is slowly fading.
Now more and more of them are convinced that, say, uncontrolled greenhouse emissions, can lead to extreme climate change that will affect all sectors, including the economy.
Neglecting this fact will only mean a heavier cost to bear for the companies eventually.
These are only some of the issues discussed during “Beyond Profitability,” a discussion forum hosted by GlobeAsia magazine in Jakarta on Dec. 6.
The seminar saw government officials, captains of industry, environmental researchers and lawmakers tackle the question of sustainability and growth.
‘Nonfinancial’ Aspects as Important as Financial
One of the panelists, Basrie Kamba, external relations and corporate affairs director at Jakarta-listed nickel miner Vale Indonesia, said managers and shareholders in private companies should never underestimate divisions that deal with the “nonfinancial” aspects of a company’s business.
These include corporate social responsibility, public relations, government liaison and external affairs.
Basrie quoted from a famous open letter addressed to chief executives all over the world, written by Laurence Douglas “Larry” Fink, chairman and chief executive of BlackRock, an American multinational investment management corporation and the largest money-management firm in the world with more than $6 trillion in assets under management.
Fink wrote that “[g]enerating sustainable returns over time requires a sharper focus not only on governance, but also on environmental and social factors facing companies today. These issues offer both risks and opportunities, but for too long, companies have not considered them core to their business – even when the world’s political leaders are increasingly focused on them, as demonstrated by the Paris Climate Accord.”
Basrie argued that companies in Indonesia are also guilty for not considering environmental and social factors as “core” to their business, when in the long term these will have “real and quantifiable financial impacts” and provide useful insights into company efficiency.
“We in the extractive industries understand the impacts of these activities. We are forced harder than our friends in, let’s say the consumer goods sector, to do so,” said Basrie, who has worked in the mining industry for 15 years.
“Just take a look at these nonfinancial teams, be it CSR, government affairs, or external relations – they’re always put in the second tier in a company’s structure. They’re mocked as spenders, or firefighters, only useful when things get ugly,” he said.
Basrie said one thing that irks him most is when managers and investors ask the “irritating” question: why do these nonfinancial divisions need to spend a particular amount to achieve their goals?
“They always ask CSR teams, ‘How come you’ve spent this much?’ They never have any question when a CSR team only spends a fraction of their budget,” Basrie said.
Basrie said CSR teams often have no answers to such questions since many company people still “only see things in numbers,” especially investment returns and profit margins.
As things stand now, environmental, social and governance (ESG) – the three central factors in measuring the sustainability and ethical impact of a business – are still rarely taught in the country’s business schools and many companies and businesses – even state institutions – still consider their ESG teams as “second-class citizens.”
“Most companies still only report their input indicators, usually the total amount of money they spend to support a community,” he said.
However, mining companies such as Vale also have to consider output indicators of the money they have put in. Often, social conflicts resulting from bad ESG can be translated into measurable costs that shareholders will not like.
“Is doing ‘good’ also good for a corporation’s bottomline? That’s the question,” Basrie said, adding that in the long term, the answer is always a resounding “yes.”
He pointed out an example where companies that receive awards for sustainable business practices can offset costs from poor ESG and regain trusts from stakeholders, consumers and the government.
In Indonesia, poor ESG has led to large corporate scandals that have left huge scars on company reputations, or bring it down altogether.
Nevertheless, Basrie said the responsibility for maintaining good ESG should not only fall on corporations, but also the government.
Basrie believes the government should be on the frontline when it comes to enforcing good ESG, as government institutions can lead by example by adopting sustainable and environmentally friendly business practices.