ASEAN’s strong diplomatic links key to boosting resilience amid global geopolitical risks

ASEAN's strong diplomatic links key to boosting resilience amid global geopolitical risks

As companies grapple with rapid changes in the global economic environment, ASEAN nations can support businesses in the region by capitalising on strong diplomatic relationships and tackling geopolitical and climate-related obstacles together, said speakers at the 2024 Wee Cho Yaw Business Forum on 4 April 2024.

The event was organised by the NUS Global Asia Institute in partnership with NUS Business School and UOB, with nearly 300 business leaders and academics meeting to discuss the forum's theme of "Building ASEAN's resilience in an era of deglobalisation and decarbonisation."

Businesses must prepare for greater instability as the world shifts towards a multipolar system and climate change leads to more natural disasters and environmental risks, said Guest of Honour Mr Wee Ee Cheong, UOB Deputy Chairman and Group CEO.

"At this speed of change, the business environment in the next decade will look very different, especially with deglobalisation. Economic flows will be more regionalised and supply chains will shift to be more localised. We may see increased volatility in economic cycles, international businesses facing disruptions, increased regulatory complexity and compliance costs," Mr Wee said.

Keynote speaker Mr David Semaya, Executive Chairman and Representative Director of Sumitomo Mitsui Trust Asset Management, said the COVID-19 pandemic was a wake-up call for businesses to realise that similar disruptive events will occur more frequently as climate change progresses, and a globalised approach may not hold up well in such crises.

"(The pandemic) showed how nations were overexposed to global integration, just at a time when globalisation seemed to be slowing, if not stalling," he said.

"Companies realise risk events are not now happening with a frequency of every 6 to 8 to 10 years, but these events now seem to happen every 6 months. Fires, floods, droughts, wars, political upheaval, you name it. There is a race to plan and prepare for the changes happening as we speak."

Opportunities for the region

The need to diversify supply chains creates opportunities for ASEAN, with more foreign direct investments (FDI) expected to flow into the region from such activities. Mr Wee noted that FDI into ASEAN from China has increased significantly in recent years, reaching US$18.7 billion in 2022 - an 81 per cent increase from 2016 levels. UOB's one-stop FDI advisory unit has helped more than 1000 Chinese companies expand beyond their shores since 2011, with 90 per cent of those companies expanding into Southeast Asia.

With geopolitical risks a major concern for many businesses, ASEAN countries should leverage their strong diplomatic relationships to capitalise on this trend, said Mr Semaya.

"You have great relationships within ASEAN, with China, with the Europeans, and with the Americans. If you keep that (up)… you can really benefit from having good relations with all of the big players around the world."

ASEAN can also make a significant impact in tackling the climate crisis by setting up national or regional carbon tax schemes like the ones already operating in Singapore and other regions such as North America and Europe, said Assistant Professor Du Xinming of the Department of Economics at NUS.

While a globally coordinated carbon tax system is the ideal solution to incentivise the transition away from fossil fuels, such a system is difficult to set up and implement quickly. Given the urgency of the crisis, efforts must shift towards smaller, more practical initiatives with more immediate results.

Asst Prof Du noted that research has shown how carbon taxes, even on a smaller scale, can be highly effective in reducing or delaying the consumption of fossil fuels and accelerating the transition to renewable energies, with no adverse effects on firms, jobs, employment, and other economic outputs.

"Economists and policymakers usually think, what is the best policy? In my opinion, this is not a good way to answer the question today regarding climate change. Today's question is, what is the policy or intervention that should be adopted?" she said.

"It can be the second best, the third best, or not the most cost-effective, but we need to do something, and we need to do it now… We've done so little to correct these greenhouse gas emission externalities that any correction can help."

Focus on supply chains

Supply chains were a recurring topic in the discussions on how to build resilience against deglobalisation and decarbonisation risks, with speakers urging businesses to examine their supply chains for vulnerabilities and sources of high emissions.

In the first session on deglobalisation, the panellists said businesses should prioritise gaining better visibility of their supply chains, going beyond knowing who their suppliers are to understanding where their operations are located and the sources of materials provided to the suppliers.

While it is costly and time-consuming to conduct such supply chain mapping, uncovering and fixing vulnerabilities will save businesses much pain and loss in the long term, said Associate Professor Joel Goh from the Department of Analytics and Operations at NUS Business School.

He gave an example of an organisation that discovered through a mapping exercise that a critical component of their best-selling product was supplied by a single company with a single manufacturing facility. Such a vulnerability placed them at a high risk of supply chain disruption and business losses.

Pharmaceutical company Kalbe Farma encountered a similar issue with one of their key ingredients, which was only manufactured in Japan. The company's president director Mr Vidjongtius shared that when their sole supplier discontinued production of that ingredient after the pandemic, the company struggled to find a second source and was forced to make a large investment to avoid disrupting their own production.

"If we have early detection or information with this mapping, it gives us more resilience, more skill (to manage disruptions)," said Mr Vidjongtius.

During the session on decarbonisation, panellists discussed the responsibility of companies to reduce greenhouse gas emissions throughout their value chains - from the scope 1 emissions directly generated by a company's properties and operations, to scope 2 emissions that stem from electricity production, and even to scope 3 emissions from indirect sources in the company's value chains, like the production operations of the company's suppliers.

Mrs Tongjai Thanachanan, Chief of Sustainability and Strategy at beverage company ThaiBev, shared that ThaiBev reduces its scope 1 emissions by collecting carbon dioxide and biomass or waste products produced by their fermentation and beverage-making processes to generate energy or turn into fertiliser or animal feed.

However, scope 2 emissions are harder to reduce without government intervention. Most companies have to purchase electricity from the grid to power their operations, and whether that electricity comes from fossil fuels or renewable sources depends on the country.

One solution that Asst Prof Du suggested was to divert funding away from fossil fuels to sectors that align with sustainable development goals, such as renewable energies and carbon storage, to accelerate these sectors' already impressive progress and facilitate the transition to clean energy.

She noted that if subsidies for fossil fuels were redirected to renewables, the volume of renewable energy subsidies would triple from current levels.

Funding would also be needed to implement social protections like targeted cash transfers for low-income groups, to ensure that they are not disproportionately harmed by the energy transition, which has short-term costs that may show up as high electricity prices, Asst Prof Du added.

The toughest challenge of reducing scope 3 emissions will require governments and industries to collaborate and provide education and support for smaller companies that lack the resources or knowledge to reduce their carbon footprint.

For example, many of ThaiBev's suppliers are smallholder farmers who raise crops using methods that emit large amounts of methane, and getting them to change their ways will be challenging, Mrs Thanachanan said.

"It's much more than (just) macroeconomic policy - you need micro actions at the community level as well. That would be my policy ask, that governments look at this from the social angle, the transition angle, and get people to move together."