Southeast Asian companies are in a sweet spot in terms of global trade and investment. They should lock in their advantage for the long term by stepping up their commitment to sustainability.
It won’t be easy – for any one company, different challenges await at different points on the transition journey – but an investment in sustainability is also an investment in the future. While Southeast Asia’s star is rising, the region’s companies should take action.
The six largest economies of Southeast Asia are forecast to grow by 4.7% this year and 4.8% next year, easily outstripping the developed world’s GDP forecast of 1.1% for 2024 and 1.4% for 2025. Southeast Asia also accounted for about 17% of global foreign direct investment (FDI) in 2022, nearly double the share in 2018, with FDI into Southeast Asia topping US$200 billion for the second consecutive year.
A combination of robust growth, a young workforce and digital innovation has made the region an attractive destination for international businesses seeking diversified supply chains.
But as regulatory scrutiny grows globally over the social and environmental impact of supply chains, Southeast Asian companies will need to step up their sustainability efforts to secure the region’s continuing appeal as a trade and investment destination.
The need to act is clear. We recently surveyed more than 3,500 foreign companies with business interests in Southeast Asia. Their top sustainability priority – chosen by almost two in five respondents – is to review the sustainability credentials of their suppliers.
Large companies in developed economies, particularly the UK and the European Union, are increasingly obliged to report on their climate risks and opportunities. The US and Singapore are among other markets consulting on similar rules.
Germany’s new Supply Chain Act shows the direction of travel. The law came into effect in January 2023 and imposes due diligence obligations on companies relating to human rights and environmental risks and violations in their supply chains. Those in breach could face fines of up to €8 million (US$8.62 million) or up to 2% of annual global sales.
While those penalties will apply in Germany, the implications for overseas suppliers are no less serious. A company found to be at fault could face severe reputational damage, as well as the loss of a major contract – potentially devastating for any small and medium-sized enterprise (SME).
The case for sustainability in Southeast Asia, however, is not just about mitigating those risks. There also are clear commercial benefits for greener businesses in developing economies, research shows.
A report published in March 2023 by consultancy BCG identified certain large, high-growth emerging market companies that perform well on both financial and environmental key performance indicators. Such firms, the report says, enjoy stronger access to key global markets, as the EU and other major trade partners impose tougher rules on the greenhouse gas footprints of the goods they import.
In addition, BCG found that asset managers and lenders have their own sustainability commitments, so are more inclined to provide funding to companies with high environmental, social and governance ratings.
While sustainability-related initiatives are a growing priority, the number one barrier identified in our survey is the challenge of hiring employees with sustainability expertise.
We see evidence of this in the way some companies approach sustainability disclosures. Where the benefits of transparency are not well understood, this process can become a box-ticking exercise in which businesses seek to minimize the burden of collecting and reporting additional data.
Companies at the early stage of their sustainability journey may not have the in-house expertise to develop a sustainability strategy or comply with disclosure standards that differ across jurisdictions.
But sustainability is a rapidly changing field, and the importance of these skills will only grow as companies around the world move ahead on their sustainability agendas, and sustainability metrics become an essential part of customer contracts.
Businesses in Southeast Asia can get ahead of the competition by investing in the talent, resources and data they will need to satisfy the most demanding customers.
Where investment is needed, government initiatives are an important source of support. Singapore’s Enterprise Sustainability Programme has set aside S$180 million (US$133.74 million) to help companies, especially SMEs, build their capabilities. Malaysia in 2023 extended its tax incentives for green investments and increased the green technology financial scheme to 3 billion ringgit (US$626.67 million) from 2023 to 2025.
Southeast Asian companies can also approach their supply chain partners for help with sustainability initiatives. HSBC is involved in several sustainable supply-chain finance programmes that offer preferential terms to companies that commit to certain sustainability targets, including a long-running scheme with Walmart, the world’s biggest retailer.
In a timely reflection of how the region’s economic star is rising, Malaysia’s Prime Minister recently proposed a free trade agreement between the Association of Southeast Asian Nations (Asean) and the Gulf Cooperation Council (GCC) – a first-of-its-kind agreement between the two regions.
Sustainability was at the heart of Anwar Ibrahim’s message. “This agreement is crucial in advancing progressive, inclusive and sustainable growth, especially as we recover from the Covid-19 pandemic and face geopolitical uncertainties,” he told the Asean-GCC Summit in Saudi Arabia on October 20.
Southeast Asian companies of all sizes should take note: sustainability will be a key component of future growth – better start investing now.
Sunil Veetil is the head of commercial banking sustainability for Asia-Pacific at HSBC.