ESG in Taiwan: A Driving Force for Corporate Responsibility and Competitiveness

Introduction

In recent years, ESG factors have garnered significant global attention. Taiwanese businesses and the government have also recognised that adopting sustainable and socially responsible business models is crucial for the competitiveness of companies in the future.

Although ESG was once reviewed as ‘soft law’, Taiwan has progressively amended its regulations. Companies are now required to disclose governance reports in their annual reports, publicly listed companies must prepare sustainability reports with specific chapters on climate-related information and listed companies are mandated to conduct greenhouse gas inventory and assurance. These regulations have gradually made ESG compliance a statutory obligation.

Research shows that adopting ESG principles offers numerous benefits: it can reduce operational risks, increase market transparency, stimulate innovation opportunities, attract sustainable talent, draw investment, reduce legal risks and enhance international competitiveness. While the benefits of ESG adoption are widely recognised, some commentators question whether ESG truly brings these significant benefits. A key issue is whether companies with strong ESG performance attract more investment or if only those that are already performing well focus on ESG. This might create a positive feedback loop, where successful companies pay more attention to ESG, further enhancing their market position. However, the question remains: does ESG drive success or does it merely reflect it?

Despite these doubts, the Taiwanese government continues to actively promote ESG as a strategic initiative to strengthen Taiwan’s competitiveness in the world. ESG has become an integral part of Taiwan’s policies, aimed at enhancing Taiwan’s position in the global market and strengthening its economic competitiveness.

Taiwan’s ESG Measures and Government Support

Over the past decade, Taiwan’s government has made substantial progress in embedding ESG principles into corporate governance frameworks. Building on these efforts, in 2023 the government introduced the ‘Sustainable Development Action Plan for Listed Companies’. This Plan aims to accelerate the adoption of sustainable development goals across the corporate sector, with a particular focus on governance, innovation, transparency and digitalisation, and outlines five key initiatives:

1.  Leading corporate net zero initiatives: This includes promoting carbon reduction targets and action plans for listed companies and assisting in the establishment of emissions trading platforms.

2.  Deepening corporate sustainability governance culture: Starting in 2024, listed company boards must appoint at least one director of a different gender. Beginning in 2025, emerging stock companies will adopt a post-nomination system for director elections. The government also aims to link executive compensation to ESG performance.

3.  Improving sustainability information disclosure: From 2025, listed companies with a market capitalisation below NT$20 billion will be required to prepare sustainability reports to enhance non-financial information disclosure. The Taiwan Stock Exchange and the Taipei Exchange will also audit sustainability reports and strengthen third-party verification.

4.  Enhancing stakeholder communication: From 2024, listed companies must upload meeting handbooks and annual reports to designated platforms before their shareholder meetings to increase investor participation.

5.  Promoting ESG ratings and digitalisation: This includes the creation of a digital platform for sustainability reports and the development of an ESG information platform. The government aims to push for ESG evaluations and create ESG-related indices (for example, carbon efficiency index, human capital index) to guide market funds towards sustainable development.

ESG Examples

With the government’s resources directed towards guiding and promoting ESG and active participation from private enterprises, ESG has shifted from a consensus to a concrete action plan. When ESG brings direct benefits to businesses, companies are more motivated to align with these practices. Below are two examples to illustrate this:

1.  ESG in government procurement: Taiwan has incorporated ESG indicators into its procurement processes and established a Corporate Social Responsibility (‘CSR’) scoring system. This system encourages suppliers to gain points by meeting social and environmental objectives, including:

·        Employee salary increases: Suppliers who raise the salaries of at least 80 percent of their employees or commit to paying at least NT$30,000 to full-time employees in government procurement contracts can earn points.

·        Work-life balance: Suppliers offering measures such as family-friendly policies (for example, parental leave), gender equality and flexible work arrangements also earn points.

·        Green procurement: Suppliers who commit to purchasing green products and report these activities to the Environmental Protection Administration (‘EPA’) are also rewarded with points.

The total score from these indicators can reach up to six points, which can significantly influence a company’s competitiveness in bidding for government contracts. In summary, companies that raise salaries, offer work-life balance measures or engage in green procurement, gain higher scores, improving their chances of participating in government procurement, thus boosting their business opportunities. This strengthens the link between ESG and commercial success.

2.  ESG trigger clauses in credit agreements: Another important development is that many financial institutions in Taiwan have incorporated ESG indicators into their credit agreements through ‘ESG trigger clauses’. When a company achieves certain ESG milestones, these indicators can directly influence the company’s loan interest rates. For example:

·       Environmental Performance Triggers:

§  Carbon emissions reduction: Achieving specified carbon reduction or carbon-neutral goals can lead to lower interest rates.

§  Renewable energy consumption: Increasing renewable energy usage by a set percentage may result in better loan terms.

§  Energy efficiency improvements: Meeting energy efficiency benchmarks could trigger favourable financial incentives.

·       Social Performance Triggers:

§  Gender diversity on the Board: Including at least one female director can lead to reduced interest rates.

§  Employee welfare and safety: Improving welfare and safety standards may qualify a company for lower loan rates.

·       Governance Performance Triggers:

§  Corporate governance standards: Implementing stronger governance practices can enhance loan terms.

§  ESG reporting and transparency: Meeting ESG disclosure standards (for example, TCFD) can trigger more favourable financial conditions.

·       Third-Party ESG Rating Triggers:

§  Rating improvement: An improved ESG rating from agencies like Sustainalytics or MSCI may result in better loan terms.

§  Positive rating targets: Surpassing a specified ESG rating (for example, BBB) could trigger reduced interest rates or other benefits.

When companies meet these ESG indicators, they can enjoy lower loan interest rates, which further encourages the adoption of sustainable practices and improves financial performance. These mechanisms demonstrate that ESG is not only a compliance requirement but also provides tangible financial returns, offering clear incentives for businesses to align with ESG principles. As Taiwan’s Financial Supervisory Commission (‘FSC’) chairperson once stated, ‘We hope that the financial industry’s money can change the earth’s tomorrow’.

The Impact of ESG on Small and Medium-Sized Enterprises (‘SMEs’)

The two examples above demonstrate that ESG practices are not limited to large corporations or major enterprises. Government procurement projects are not solely restricted to large-scale infrastructure projects; even small-scale service or product procurements can offer additional points in the evaluation process for small businesses that implement strong ESG practices, thereby increasing their chances of securing contracts. Furthermore, financing is a universal need for all businesses. Small and medium-sized enterprises (‘SMEs’) could potentially negotiate with banks to establish more suitable ESG trigger indicators tailored to their size and capacity. This would allow SMEs to access more favourable financing conditions under ESG frameworks, making it easier for them to achieve their sustainability goals while improving their financial terms.

Some experts believe that SMEs with innovative ideas often demonstrate greater resilience in transforming or implementing sustainable ESG practices. Unlike large corporations, SMEs typically have more limited resources, which leads them to approach sustainability issues from a different perspective. SMEs do not need to address all areas of ESG like large companies do. Instead, they can focus on specific issues, which can be a more efficient execution strategy. This focused approach allows them to make better use of their limited resources and achieve more tangible results. For example, SMEs can concentrate on reducing carbon emissions, improving employee welfare or supporting local communities, without requiring massive structural changes or large-scale financial investments. In Taiwan, some small enterprises have already achieved carbon neutrality. This flexible and focused strategy often leads to more innovative and impactful solutions, allowing SMEs to become more agile and competitive participants in the journey toward a sustainable future.

The Impact of ESG on Corporate Culture and Competitiveness

As ESG principles gradually become embedded in the core culture of Taiwanese companies, this transformation has received dual support from both market forces and government policies. For Taiwanese businesses, ESG has become a standard that must be followed. Companies that fail to keep pace with this trend will find it difficult to secure a position in the global market.

The Taiwanese government’s emphasis on ESG not only aims to create a sustainable business environment domestically but also seeks to enhance Taiwan’s competitive advantage in the global market. As other countries adopt similar ESG frameworks, Taiwan’s ESG policies help maintain its competitiveness in Asia and around the world.

Conclusion: A Future of Shared Prosperity

ESG embodies both idealism and pragmatism. Taiwanese business leaders have increasingly realised that ESG not only brings tangible benefits but also significantly enhances corporate reputation. As previously mentioned, when competing products are similar, consumers tend to favour brands with a strong ESG track record. Moreover, from an international supply chain perspective, implementing ESG is not only crucial for business survival but also a strategic pathway to unlock further growth opportunities.

As an integral member of the global community, Taiwan actively guides its businesses to align with international responsibility standards, striving for not only economic growth but also social and environmental sustainability. By continually strengthening ESG practices, Taiwan aims to empower its enterprises to sustain a competitive edge in the global market while contributing to a more sustainable and prosperous future.