The ESG Imperative

Why is Sustainability More Important Now Than Ever? 

The need for businesses and economies to shift their practices from unimpeded consumption of resources to a more regenerative and sustainable business model has never been greater.

While the topic of ESG (Environmental, Social and Governance) has gained strong awareness among C-suites of the top companies in corporate Malaysia over the past few years, recent regulatory developments have turned this into a hot topic among smaller public listed companies (PLCs) and small and medium enterprises (SMEs) as well. 

Since the establishment of the Bursa Malaysia’s Sustainability Reporting Framework back in 2015, PLCs have had to step up their ESG disclosures from mere commitment statements to full-length reports covering an extensive range of Economic, Environmental and Social (EES) themes with greater disclosure depth and performance indicators.

The Malaysian Code on Corporate Governance (MCCG) 2021 released last April further reinforces the need to integrate sustainability considerations into the business, requiring oversight at the highest levels of the organisation.

ESG and Stakeholders: Who is Driving this Change?

This shift has occurred in tandem with global investor push for transparency in companies’ annual reporting. Investors demand for companies to go beyond discussions on past performance and delve deeper into its future financial prospects, including how the company manages its ESG risks and opportunities. 

As the world changes, customers are also demanding more from the companies they buy from. Brands are often worshipped or vilified based on their corporate responsibility track record, and investors and business leaders have taken note. 

Employees as well prefer to work in companies with good ESG reputation, which tends to have better human rights track record and labour practices that prioritise fair pay, equitable growth opportunities and good health and safety performance.

Hence, incorporation of ESG disclosures allow for a more holistic look at businesses’ odds for success as it ultimately impacts their bottom line. It’s just good business.

Companies that made the leap early are the ones that have successfully navigated the recent Covid downturn, far outperforming those taking a ‘wait and see’ approach. 

ESG Business Risks: Will SMEs be Impacted?

As more corporations embed strong sustainability governance frameworks into their organisations’ value chains, companies that continue to ignore ESG risks being left out of future business opportunities and funding avenues. 

Sustainability is no longer just a priority of PLCs, but all un-listed businesses big and small, including SMEs, will be impacted by these changes.

Many major corporations have incorporated ESG clauses in their procurement screening processes to ensure companies with the appropriate measures for anti-corruption prevention, environmental compliance and human rights adherence are prioritised for project award.

Banking institutions have likewise factored ESG into debt and equity financing considerations. Hence, companies with bad sustainability practices will be deprived of avenues for funding and may have to pay a higher insurance premium to underwrite their risks.

Products using unsustainably sourced ingredients and raw materials are increasingly being excluded from the marketplace as the benchmark continues to be raised and sustainability governance boards are established for the respective industries.

The Future of ESG: Combatting the Climate Change Threat

Going forward, we can expect to see more incentives being introduced to encourage ESG adoption alongside punitive measures such as sanctions and fines for non-compliance.

Malaysia has committed to becoming a net-zero greenhouse gas (GHG) emissions nation as early as 2050, with a target to reduce emissions intensity of our GDP by 45% by 2030 relative to the 2005 baseline as part of Malaysia’s Nationally Determined Contribution (NDC) to the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC). 

The continued investment in public transportation and tax incentives to promote Electric Vehicles (EV), Renewable Energy (RE) and sustainable raw materials adoption, as announced in Malaysia’s Budget 2022 and the Low Carbon Mobility Blueprint 2021-2030 unveiled by Malaysian Green Technology and Climate Change Corporation (MGTC) of the Ministry of Environment and Water (KASA), shows the nation’s commitment to global climate goals, with tangible strategic climate adaptation plans to transition the nation towards carbon neutrality.

The continuation of the Ecological Fiscal Transfer (EFT) allocation to reward and incentivise states to protect their respective natural environments, is also consistent with the 12th Malaysia Plan’s (12MP) goal to protect 20% of terrestrial and 10% of marine areas by 2025. 

These measures on emissions reduction, ecosystem preservation and conservation of resources will go a long way to help avert the global existential threat of climate change and biodiversity loss, and reduce the risk of natural disasters such as coastal erosion, landslides and flooding.

As more and more sectors of the marketplace are waking up to the realities of the climate change threat, ESG is no longer a ‘nice to have’, it is an imperative for business sustainability.

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