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ONLINE INSIDER - ASIA
A Site Selection Web Exclusive, November 2022
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WEB Exclusive story

Make Room for ESG: A ‘Must-Have’ Factor in Industrial Site Selection

ONLINE INSIDER - ASIA
Even when multinationals do not build ESG into their critical location factors at the outset, it is steadily becoming a more important location factor.
By John Evans, Managing Director and Sarah Urtz, Research Analyst, Tractus Asia Ltd.

Site selection has long been a game of necessities and preferences, and not always process driven. Locating the optimal site on behalf of a client involves a delicate balancing act of costs, conditions and risks. Market access, proximity to supply, human resources, supply chain, utilities and a host of finer details determine a site’s suitability for a given project.

Historically, environmental, social and governance (ESG) concerns rarely factored into the discussions. However, as international agreements, government incentives and other social and economic pressures increasingly encourage sustainable investment, the industrial sector is evolving to include ESG in location decisions.

As corporate boards set ESG goals, the question that is arising at a C-Suite level is this: How does the ESG framework become part of the location analysis, resulting in a socially responsible investment? The framework accounts for an organization’s sustainable business practices, such as its level of greenhouse gas emissions and climate change resiliency; its relationship with and treatment of stakeholders; and how it is managed, including internal measures to promote accountability and transparency among leadership. Increasingly, senior leadership are incorporating these criteria into investment decisions to choose locations that are better able to yield environmentally and socially responsible results.

“Considerations such as access to renewable energy and compliant and effective wastewater treatment options have become critical location factors, where they were formerly ‘nice to haves.’ ”

The past decade has seen a global trend of companies incorporating ESG criteria into investment decisions. Climate change effects have made environmental concerns a near-universal reality. In the United States and Europe, diversity, equity and inclusion initiatives now serve as a foundation for hiring processes. Northern Europe, New Zealand and Singapore are global leaders in maintaining some of the strongest corporate anti-corruption policies in the world. China, once one of the least ESG-friendly nations, has made rapid changes to regulations and enforcement, including the establishment of some of the toughest environmental requirements for manufacturing investments and severe consequences for corruption.

The Growing Importance of ESG Pillars in Industrial Site Selection

As multinational corporations (MNCs) look to expand in Asia, environmental concerns have driven the largest shift in business practices. This shift is apparent both in location decisions and operations. Regarding industrial site selection, considerations such as access to renewable energy and compliant and effective wastewater treatment options have become critical location factors, where they were formerly “nice to haves.” Critical location factors are criteria that, if not met, preclude a location from further consideration.

SolarPanel_Industrial

For one company’s recent site search, if the short-listed sites could not be expanded to accommodate the construction of a solar farm, then the site was eliminated.

Even when MNCs do not build ESG into their critical location factors at the outset, it is steadily becoming a more important location factor. In a recent project with a leading global toy manufacturer seeking to build an operation in Vietnam, early discussions revealed ESG compatibility as a relatively low priority. However, by the end of the process, the company’s leadership determined that renewable energy was essential to meet the company’s ESG commitments. If the short-listed sites could not be expanded to accommodate the construction of a solar farm, then the site was eliminated. Another client, Coca-Cola Corporation, stated critical location factors of a clean water supply and accessible, world-class wastewater treatment facilities, as well as space for a plastic can recycling operation. These criteria were highly emphasized throughout the site selection process and were weighted heavily in the site selection analysis.

“Among ASEAN countries, Thailand leads in environmental sustainability disclosure, with Indonesia, Malaysia, Vietnam, and Singapore having still mandatory but slightly weaker reporting mechanisms.”

Environmental concerns are not only part of new investments but are increasingly driving re-investment. Many MNCs are adjusting their current business practices to meet ESG standards, and government incentives are supporting this trend. For example, Jelly Belly Candy decided to invest in a new more efficient chiller system and rooftop solar which qualified for a tax credit equal to the investment from Thailand’s Board of Investment. In India, large corporate powerhouses such as Reliance Industries and JSW Energy have made voluntary commitments to go carbon-neutral by 2035 and net-zero by 2050, paving the way for more companies to follow suit. In Vietnam, construction conglomerate SCG has committed more than US$2 billion toward developing its technology to achieve Vietnam’s targets of 20% greenhouse gas emissions reduction by 2030 and net zero emissions by 2050. Alibaba has gone even further with announcing the implementation of ESG as a guide for its future development, focusing on helping meet China’s dual carbon and data security goals. Beginning last year, the Chinese company now publishes a yearly ESG report alongside its annual business report.

Asian Countries Implement Policies & Incentives

Government regulations have been instrumental in initiating corporate sustainability changes. Last year, China launched its Carbon Emission Trade Exchange (CCETE), making it possible for companies to achieve their renewable energy targets in the country. Although ESG practice in China is still nascent, the government has been focusing on environment protection for many years. Chinese President Xi Jinping proposed Dual Carbon Goals at the general debate of the 75th session of the United Nations General Assembly in September 2020, which aimed to hit peak carbon emissions by 2030 and achieve carbon neutrality by 2060. The Dual Carbon Goals have been the driving force of China’s ESG target. It has also launched several new laws to limit air and water pollution, and listed companies are required to disclose environmental information.

BCG-PRDgraphic

Thailand’s Bio-Circular-Green (BCG) Economic model launched in 2021.

Other Asian countries have begun to place a similar emphasis on environmental information disclosure. In 2021, India’s Committee on Business Responsibility Reporting recommended the implementation of a voluntary Business Responsibility & Sustainability Report (BRSR), which is set to become mandatory this year for the top 1,000 public companies. Among ASEAN countries, Thailand leads in environmental sustainability disclosure, with Indonesia, Malaysia, Vietnam, and Singapore having still mandatory but slightly weaker reporting mechanisms. In 2023, the Philippines will move from a “comply or explain” approach to mandatory disclosure for listed, and eventually non-listed, companies. Thus, reporting of performance on sustainability-related factors has become as vital as reporting on financial and operational performance.

Where regulations do not cut it, incentives might. Many companies increasingly go beyond what is mandated by the state, a trend which has pushed both sectors into a positive feedback loop of environmental consciousness. As more and more companies announce sustainability initiatives, numerous governments have responded by incentivizing additional sustainability practices though tax exemptions and other privileges. Qualified pollution prevention and control enterprises in China enjoy a preferential CIT rate of 15% since April 2019. In keeping with Thailand’s Bio-Circular-Green (BCG) Economic model launched in 2021, the country’s Board of Investment (BoI) offers a robust package of incentives, including exemptions and/or reductions on corporate income tax for up to 10 years, as well as non-tax incentives such as work permits for foreign nationals, land ownership and more.

There is a growing consensus among MNCs and site selectors that ESG is no longer a location factor that is “nice to have,” but is a critical location factor fundamental to long-term, tenable business growth. Companies that abide by ESG principles have a competitive advantage in the form of government incentives and improved marketability in a world that is increasingly embracing green energy and corporate social responsibility. Likewise, locations that can meet ESG standards now have an edge in the site selection process.

John Evans is Managing Director and Sarah Urtz is Research Analyst at Tractus Asia Ltd., (www.tractus-asia.com), a leading Asia-based global site selection firm.


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