Keynote address by Ashok Lavasa, ADB Vice President for Private Sector Operations and Public–Private Partnerships, at the Institute of Directors’ (IOD) Global Conference - ESG Strategy for the Board: Turning Rhetoric into Reality in a VUCA world, 23 February 2022
Good morning and greetings to all of you.
Thank you for inviting me to speak at today’s virtual session.
Let me begin by sharing with you a quote that I read yesterday “We are the first generation to feel the sting of climate change, and we are the last generation that can do something about it.” I would like to believe that this IOD session is a step in the direction of “doing something about it.”
The theme of the session, “ESG Strategy for the Board: Turning Rhetoric into Reality in a VUCA World” is a very relevant topic for today’s environment. Volatile, uncertain, complex, and ambiguous cannot begin to explain the challenges the world has faced over the past two years. This is especially true in developing Asia - the pandemic has inordinately affected the poor and vulnerable in developing countries. At the Asian Development Bank, we are working with our developing member countries to help restart their economies and recover quickly from the effects of the pandemic. While we help our developing member countries recover, we must ensure that the recovery is green, resilient, inclusive, and sustainable, with lasting economic progress that is shared across the population and restores advancement towards development goals. The best way to ensure that the recovery is resilient and enduring is by following Environmental, Social and Governance principles, or ESG Principles.
Before I speak about what ADB does to promote ESG principles, let me tell you that a couple of months ago when I came to Manila and into the ADB building, what I found was that the building was as attractive and modern as it was when I last came two decades ago; modern architecture, pleasing landscapes and smart lighting. But there was one change and that was that the roof of one of the building was covered with solar panels. That is the sign of the direction of change and development that we have to move to.
At ADB, we have dedicated sector groups with thematic specialists focused on environmental, social and governance issues, and we have several policies and initiatives related to investing in and improving ESG practices in our developing member countries. ESG principles are central to our long-term development strategy. Four of the seven operational principles under the ADB Strategy 2030 focus on ESG: (1) addressing remaining poverty and reducing inequalities, (2) tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability, (3) accelerating progress in gender equality, and (4) strengthening governance and institutional capacity.
Additionally, we have a robust safeguards policy, which aims to help developing member countries address environmental and social risks in development projects and minimize and mitigate, if not avoid, adverse project impacts on people and the environment. ADB’s environmental safeguards aim to ensure the environmental soundness and sustainability of projects, and to support the integration of environmental considerations into the project decision-making process. The safeguards policy requires borrowers to identify project impacts and assess their significance; examine alternatives; and prepare, implement, and monitor environmental management plans. It also requires borrowers to consult people likely to be affected by the project and disclose relevant information in a timely manner. Similarly, ADB’s social safeguards requires borrowers to carry out meaningful consultations with affected parties and ensure that adverse social impacts are prevented or mitigated.
ADB helps in mainstreaming ESG principles in developing Asia through two main methods: (1) through ESG investments, and (2) through helping corporates develop their ESG frameworks.
On the investment side, ADB has partnered with corporates and donors on several ESG initiatives. ESG has become a priority for many international lenders, and close collaboration with international financial institutions increases co-financing opportunities to leverage private capital for ESG investments. A few initiatives where ADB is investing in ESG projects such as sustainable infrastructure include:
- Through innovative financing platforms such as the ASEAN Catalytic Green Finance and Green Recovery Platform, which will leverage funds from capital markets and private sector investors for low-carbon infrastructure.
- The Climate Innovation Fund, launched in partnership with Bloomberg and Goldman Sachs, to support low-carbon economic development focused on South and Southeast Asia, to increase the pace, scale and ambition of climate solutions and contribute to the clean energy transition.
- The development of a debt financing platform to invest in sustainable infrastructure in Asia, in partnership with HSBC, Temasek, and Clifford Capital Holdings.
ADB is also focused on strengthening social and gender equity. As per our Strategy 2030, at least 75% of the total number of our committed operations should incorporate gender-inclusive project designs by 2030. ADB has recently launched the Community Resilience Partnership Program in partnership with the Government of the United Kingdom and the Nordic Development Fund. The program aims to help scale up investments in climate adaptation at the community level – targeting the nexus between climate change, poverty, and gender. The program will include a dedicated gender window with funds earmarked for supporting women-focused investments. Focusing on women means prioritizing investment projects where the primary stakeholders are women throughout the project cycle, from planning, design, and implementation, through to monitoring, evaluation, and learning. This is important in order to reduce women’s vulnerabilities and unlock their potential as agents of change for adaptation and resilience.
ADB also supports several initiatives to strengthen governance in the region. For Asia, embracing good governance to build economies that are socially inclusive and environmentally sound will be vital for achieving sustainable development. Despite the region’s success in producing fast-growing economies, many countries still face a host of governance issues. One important initiative which ADB is supporting to strengthen governance is the Asia Pacific Tax Hub. Effective, timely, and corruption-free delivery of public services can require a steady source of financing for many developing countries in Asia and the Pacific. One of the biggest challenges is how to pool more resources to improve public financial management and enhance government capacity. The Asia Pacific Tax Hub will be dedicated to maximizing international and regional resources of knowledge, expertise, and finance on domestic resource mobilization and international tax cooperation through close collaboration among finance and tax authorities as well as our development partners, and regional tax associations. ADB is in a unique position to improve governance at the national and sub-national level, develop capacity and share knowledge at the regional level, and contribute to the global initiatives in collaboration with other international organizations and sub-regional tax associations in the Asia and the Pacific region.
In addition to supporting ESG principles in the region by investing in ESG projects through the initiatives I mentioned earlier, ADB also helps our corporate borrowers develop their own ESG frameworks and build ESG capacity.
At ADB’s Private Sector Operations Department, which I oversee, we focus on projects that help promote private investments that will have significant development impact and will lead to accelerated, sustainable, and inclusive growth. Every project that we evaluate for ADB investment undergoes assessment in accordance with our operational and ESG principles, and we help our private sector clients in ADB’s developing member countries develop the environmental, social and governance aspects of their businesses. ESG factors are a core component of ADB’s investment framework. We believe that a strong ESG proposition can create value for companies and their stakeholders. In addition to the societal benefits, there is a business case for companies having a strong focus on ESG. Building a strong connection with broad elements of society creates value, not least because it builds resilience into the business model. Compromising connections with stakeholders simply to make earnings targets, on the other hand, destroys value. Businesses need to satisfy the needs of their customers, employees, and communities—these days, often a global community - in order to maximize value creation. Thriving businesses concerned with long-term horizons fuel a virtuous cycle. They create jobs, increase tax revenue, and raise standards of living.
Our Private Sector Operations Department has supported several corporate clients in enhancing their ESG capacities. For example, in December 2021, ADB participated as an anchor investor in the initial public offering (IPO) of Cimory. Cimory is the holding company of the Cimory Group, a leading manufacturer and distributor of dairy products and consumer foods with well-established household brands in Indonesia. ADB helped in strengthening the company’s governance, in preparation for its IPO. The management of Cimory greatly appreciated ADB’s value add to their business on its environmental, social, and governance dimensions, including gender inclusion and reducing its carbon and environmental footprint.
Another example of ADB’s ESG value addition to corporates is in developing market leadership in sustainability. Last year, ADB and China Everbright Environment Group Limited signed a memorandum of understanding to cooperate on efforts to promote the circular economy and protect ocean health in Asia, a first of its kind. This initiative follows a decade-long partnership between ADB and the China Everbright Group in developing a portfolio of pioneering sustainable investments across waste-to-energy, biomass, and renewable energy in emerging markets. At the onset, ADB also provided capacity building to strengthen the Group’s environmental and social management systems, which enabled the Group to issue its inaugural Sustainability Report as a publicly listed company.
ADB also supports our clients in raising debt from capital markets through green and blue bonds. The Green Bond program enables ADB to support its developing member countries seeking to mitigate greenhouse gas emissions and adapt to the consequences of climate change, whilst delivering environmentally sustainable growth to help reduce poverty and improve the quality of life of their people. The Green Bond portfolio specifically targets projects that promote the transition to low carbon and climate resilient growth as set out in the ADB Green Bond Framework. Similarly, blue bonds help to address the growing funding gap required to protect and restore ocean health. Blue bonds increase the amount of capital that can be invested in oceans to finance solutions at scale. ADB is also assisting some of our financial institutional clients to develop their own blue bond frameworks.
In addition to work done through various initiatives in the Bank as well as the support provided to corporates on ESG, ADB publishes knowledge products on Environmental, Social, and Governance Investment. Recently, ADB published a book on the various risks and opportunities for ESG in Asia. These ongoing studies allow us to identify future trends and opportunities for investment in ESG. The study noted that there are several impediments to ESG investment growth such as unclear criteria for sustainable investment, low quality non-financial data, lack of disclosure, and resource misallocations. An optimized policy environment could help to facilitate ESG investment flows in the region, and ADB can work to fill these policy gaps and help our clients build their ESG capacity through systematic frameworks and tools.
Finally, I would like to conclude by reiterating the importance of ESG in today’s investment climate. ESG factors have become an important part of global investment decisions. Corporations and consumers are increasingly becoming more environmentally and socially conscious and operating on ESG principles is now considered as a “must have” rather than a “nice to have”. As Jochen Zeitz, President and CEO of Harley-Davidson said, “Sustainability is no longer about doing less harm. It’s about doing more good.”
ESG investment is distinct as a desirable approach even for investors who only consider financial returns. Long-term investment decisions benefit from investors having more information about companies, and ESG factors comprise a large part of this information. Investments now take place on a global scale and helping investors be more educated and aware of companies’ operating practices, reputation, and commitments can play a vital role assessing companies, wherever they are.
We see a strong trend amongst our clients in our developing member countries towards operating on ESG principles, and ADB will continue to provide capacity building, knowledge and financing to support our developing member countries in sustainable development. We must learn to look beyond the balance sheet bottom line because the bottom line in the long run is to minimize the apparent and unforeseen liabilities that we accumulate in a unidimensional approach to financial profits. Eventually, we all profit if there are more gainers than losers in the world.
Thank you and my best wishes for fruitful deliberations on ESG, which is an important aspect of corporate citizenship and its role in the future of our planet. Remember what Edmund Burke, the Irish philosopher said, “Nobody made a greater mistake than he who did nothing because he could do only a little.”
I thank you for your patience.