Environmental, social, and governance (ESG) criteria have a growing role in businesses in Southeast Asia. According to the Oxford Business Group, ESG standards are increasingly being used by investors in evaluating potential investments. These are also being used by business leaders in formulating responsible corporate strategies.
A survey conducted among Southeast Asia companies in September 2020 by global investment research firm MSCI reported that 79 percent of respondents had significantly or moderately increased their ESG investment as a result of the COVID-19 pandemic. Meanwhile, 60 percent of investors in the region plan to incorporate ESG into their investment analysis and decision-making processes by the end of 2021.
In this TechNode Global Q&A with Ee Ling Lim, Head of APAC Business Development, 500 Startups, we learn how the pandemic has served as a catalyst for companies in the region to accelerate their ESG initiatives. We also learn about the nuances in incorporating and implementing such criteria, which may include the need for a shift in corporate culture, as well as the need to find a balance between innovation and sustainability.
Ee Ling has over 13 years of experience in investment banking, consumer, retail, technology and EdTech. Formerly the Singapore Country Lead, Innovation & Partnerships for 500 Startups, since 2019, she has built and led innovation programs for corporates and startups in Singapore and Malaysia such as the Global Launch market access accelerator programs, the PETRONAS FutureTech accelerator program, and The Future of X UnConference. She also spent nearly a decade in investment banking institutions such as Bank of America Merrill Lynch and CIMB, where she advised corporations in Southeast Asia on growth and fundraising.
As a co-founder of EdTech company Smarter Me, which addresses the gap in relevant 21st-century skills and what children are learning in school, Ee Ling is actively involved in the region’s startup ecosystem. Since 2018, she has organized, hosted, and mentored for Young Founders Summit, a leading startup competition and entrepreneurship program for middle school and high school founders in Asia. She has also been recognized as one of Singapore’s 100 Women in Tech by the Infocomm Media Development Authority (IMDA), SG Innovate, SG Women in Tech and Singapore Computer Society, and was named as one of the Top 10 Female Founders by Asia Tech Podcast’s The Pitchdeck Asia Power Rankings.
Below is the edited interview with Ee Ling Lim in full:
Can you identify some of the trends driving innovation relevant to ESG in the Southeast Asia region?
Ongoing trends such as green energy and issues like climate change have long been driving interest and action in ESG innovation within Southeast Asia, but the COVID-19 pandemic was what really catalyzed its rise over the past year or two – especially in a corporate context.
The pandemic exposed significant vulnerabilities in traditional business models and organizational structures, while companies with strong ESG practices were shown to have outperformed in the same period. Given investor focus on ESG investments and the proven influence of ESG on business resilience, it is now imperative for many companies to grow and ESG innovation is accelerating as a result of this new demand.
A trend unique to Southeast Asia is that COVID-19 drew more attention to the ‘E’ (environmental) part of ESG. This resulted in more innovation of solutions led by regional startup giants like Grab and GoTo, who have pledged their commitment to net-zero carbon emission, leading the region’s tech startups in adopting ESG goals. These are great indicators and influencers for further adoption in the region. These Southeast Asian startup giants have also launched initiatives and commitments towards socioeconomic empowerment and empowerment of small businesses. For example, Grab provides its driver-partners education covering digital literacy, data protection, and financial literacy.
“A trend unique to Southeast Asia is that COVID-19 drew more attention to the ‘E’ (environmental) part of ESG.”
The growing focus on diversity is also shaping innovation in an ESG context, especially for better corporate governance. Technology can help streamline employee management and help workplaces meet the needs of their employees. For instance, digital collaboration tools enable more flexible working environments and schedules, which means more diversity in the workforce. Feedback tools such as audience response systems also enable more viewpoints to be aired and heard, which then shape better corporate policymaking.
What are the three key challenges for corporates and startups in addressing these ESG concerns?
Generally, we believe that most corporates and startups understand the importance of and intend to address ESG concerns, but some reasons which impede action include perceived resources needed to ‘invest’ in ESG practices. Companies first need to conduct a thorough assessment of existing business operations to identify areas of improvement, establish an ESG policy and guidelines, create appropriate measurement methodologies, develop an implementation roadmap and monitor the process.
This can be daunting for a startup with growth and fundraising priorities, especially those in the early stages of their growth. However, we are encouraging startups to break this process down into incremental steps to make it more manageable. In fact, 80.4 percent of startups in our 2020 ESG Annual Report felt integrating ESG was an opportunity to identify additional opportunities and risks for their business.
While diversity is a key focus area of ESG, it is difficult to implement inclusive policies when there is no diverse representation within management. Within the ASEAN region, the proportion of women in leadership positions is still less than half at 38 percent. This is a systemic problem that requires a change in everything from early education to cultural norms, but companies can do their part by making their workplaces more inclusive and giving women equal access to growth opportunities and fair pay. It’s proven to be a worthwhile investment: tech companies in Southeast Asia where women comprised more than a fifth of management generated 10 percent higher innovation revenues than those without.
“Businesses should consider strategic ESG practices that are unique to their organizations, help them contribute better within their ecosystems, and ensure that they emerge as true leaders to drive bigger commitments forward.”
Finally, the last challenge is for corporates and startups to avoid treating ESG as just another box to be ticked off. Businesses should consider strategic ESG practices that are unique to their organizations, help them contribute better within their ecosystems, and ensure that they emerge as true leaders to drive bigger commitments forward.
Are there any sustainability challenges unique to Southeast Asia? Can these be addressed through global solutions, or will we need localized efforts?
Deforestation, agricultural crop burning, and air and water pollution are some of the most significant challenges to environmental sustainability in Southeast Asia. Diversity and inclusion are also ongoing issues and gender inequality is still prevalent in the region.
ESG comes into play here as it is a set of specific, measurable criteria (relating to the environment, social, and governance) that companies can use to track their impact, as well as putting practices and policies in place to address them. They can make ESG part of the corporate culture by providing employee training, resources, and initiatives, adopting a zero-tolerance policy for discrimination, and choosing to work with vendors or suppliers that use sustainable materials and treat their workers fairly.
Using agriculture as an example, regional stakeholders can encourage farmers to practice sustainable agriculture by requiring that they meet the necessary standards and providing the resources to help them do so. Investment also carries significant weight in ESG compliance; if female representation on leadership boards becomes a requirement for investment, companies will place more weight on developing women’s talent, which also improves workplace equality.
“[Companies] can make ESG part of the corporate culture by providing employee training, resources, and initiatives, adopting a zero-tolerance policy for discrimination, and choosing to work with vendors or suppliers that use sustainable materials and treat their workers fairly.”
The important thing to remember is that every action has a ripple effect. If Southeast Asian governments impose regulations that penalize ESG violations and incentivize adoption, companies will accept ESG as the new business standard more quickly – as they also will if customers choose to support businesses that focus on sustainability.
How is 500 Startups contributing toward sustainability? Are you actively seeking out companies that promote ESG and innovations in your investment decisions?
ESG is broader and includes sustainability, which is typically associated with the environment. In the early stage of the investment process for certain recent funds, we use a pre-selection questionnaire to screen companies and receive their feedback on whether they engage in certain harmful activities: (e.g. child labor, certain environmental violations, indigenous lands, pornography, specified weapons, and more). If they are found to be compliant with our exclusion list, we then identify opportunities for ESG integration.
Our ESG specialist helps portfolio companies identify value creation opportunities and recommends tools, provides quarterly educational opportunities on ESG topics, and introduces mentors who can offer support towards developing ESG policies and practices in such portfolio companies.
For those funds, the ESG specialist and supporting team report on company progress, provide quarterly educational opportunities on ESG topics, and publish a yearly report.
Additionally, our commitment towards ESG at 500 Startups also includes supporting female founders through the following initiatives:
- Working towards increasing the percentage of female founders in our programs.
- Expanding our global outreach to find the best female-led companies.
- Offering more resources for female founders, including access to mentors, advisors, and investors that have a specific interest in helping female entrepreneurs.
For certain recent funds, we have also incorporated specific diversity and inclusion questions in the investment screening process to understand the participation of women in various roles at each company and encourage more startups to commit to improvement.
How do you define impact from the perspective of sustainability?
As previously mentioned, sustainability and ESG are not the same thing. But – given the context of this article – if we redefine the question as how we use ESG to measure a startup’s progress, then there are a few criteria that we look at such as:
- Are companies creating a more diverse and inclusive work environment with non-discriminatory policies and equal opportunities in hiring, progression, and culture?
- Are women represented in leadership and/or on the board?
- Are companies capable of protecting sensitive data, both their customers’ and their own?
- Does the company monitor emissions and resource consumption?
- Does the company’s product, service, or technology help to promote or achieve any of the UN Sustainable Development Goals?
Through these questions, we can determine where a company can mitigate risks and identify value creation opportunities. For early-stage and growing companies, implementing ESG is an ongoing opportunity to assess progress towards things like carbon reduction and building diverse teams that can attract future customers, investors, and employees.
Do you think that ESG matters should necessarily be addressed by drastic or disruptive changes, or can we do incremental solutions that will contribute to an overall improvement?
We need elements of both. We need a regulatory framework with subsidies to help businesses make the transition to adopting the ESG framework, as well as being more accountable. It will also help companies of all sizes work together to gradually meet those standards and ultimately provide products and services that are affordable and sustainable.
For early-stage and growing companies, ESG reporting is an ongoing opportunity to showcase progress in meeting sustainability milestones, build competitive advantage, and ultimately, set meaningful goals that will attract future customers, investors, and talent.
Some technological advancements have had a negative impact on sustainability, e.g., power consumption by certain decentralized technologies. How can we balance out the negative effects of increased consumption with the benefits of innovation?
We can’t have it all — just yet. Innovation always takes time to perfect to achieve the ideal equilibrium between sustainability and advancement. But the good news is that there is more awareness now on the effects of our consumption on the environment, and as a society, we are taking more proactive steps to mitigate that impact.
“We can’t have it all — just yet. Innovation always takes time to perfect to achieve the ideal equilibrium between sustainability and advancement.”
The first step is for both companies and consumers to understand the impact of our production and consumption, which is what we are doing at 500 with our founders. With better understanding, we can make more informed choices that have the best interests of all. We will also be more aware of the problems that remain to be solved, which we can then focus our innovation efforts towards and therefore arrive at a solution more quickly.