Amid growing expectations for businesses to adopt responsible Environmental, Social and Governance (“ESG”) practices, some Malaysian companies have recently been penalised for non-compliance on the ESG front.
They’ve variously had their product shipments seized, sanctions imposed, and their leaders thrown in jail for the more serious violations.
To stay ahead of these risks, companies need to understand what are the key ESG issues that can threaten their businesses and work on putting the appropriate prevention measures in place to mitigate those impacts on their companies’ reputation, financial performance and future viability.
Although each organisation’s ESG risks will vary depending on their industry, organisational structure and market exposure, the following are some of the top ESG risks faced by Malaysian companies, and some of the ways organisations can mitigate those risks:
Human Rights and Labour Practices
Malaysia still has a long way to go to catch up on international human rights best practice, with our policies on freedom of expression, freedom of association, freedom of religion, gender identity and child marriage among the issues still under heavy scrutiny from human rights watchdogs.
More importantly, the rights of employees and labourers in Malaysia have come under increased scrutiny from global corporations and regulators from the United States and European markets.
Sime Darby Plantations, FGV Holdings, Supermax Corp, and Top Glove are among the A-list companies whose products have been banned in certain markets over complaints of forced labour and modern day slavery, with investors and customers backing away due to these issues.
The recent Covid-19 pandemic have also exposed the appalling working and living conditions labourers in the construction and manufacturing sectors are subjected to that exacerbated the pandemic’s outbreak among their workforce.
While some of these companies may have been directly responsible for enabling these human rights abuses, many were brought to task due to suspected infractions by vendors in their supply chain. Hence, the burden is no longer limited to ensuring human rights and labour law compliance within one’s own group of companies, but to also scrutinise the organisations’ indirect impacts from their supply chain.
This can be done through regular supplier audits, with physical site inspections to verify vendors’ labour practices. Companies should also establish clear human rights and labour policies and require all vendors to acknowledge and adhere to those policies as a condition for engagement. Vendors found to be in violation should be sanctioned and ultimately terminated if improvements are not made in a timely manner.
Bribery and Corruption
As a nation, Malaysia has recently dropped five spots in the Transparency International’s Corruption Perception Index (“CPI”) 2021, scoring 48 out of 100 points in the index to place 62 among 180 countries in terms of public sector corruption.
Cognisant of the negative implications of corruption on the country’s economic development and social equity, the nation’s governance authorities have worked to progressively introduce additional laws and regulatory provisions to actively prevent corruption and facilitate the reporting of shady dealings among commercial entities.
The Malaysian Anti-Corruption Commission Act 2009 (“MACC Act”) has been amended to introduce a corporate liability provision under Section 17A for bribery and corruption, which came into force on 1 June 2020.
The Section 17A amendment criminalises an organisation if a person associated with the entity (be it directors, management staff, employees or service providers) is involved in bribery, in addition to the persecution of the person.
Companies convicted of the crime will face a fine of not less than 10 times the amount of the bribe or RM1,000,000, whichever is higher, with company Directors and Management potentially made liable for the company’s offence.
Companies who wish not to run afoul of this law should ensure that it has adopted adequate procedures within its organisation to prevent corruption, as outlined by the five (5) core T.R.U.S.T principles:
Climate Change and Biodiversity Loss
In the wake of the December 2021 floods in the Klang Valley as a result of ‘once in a century’ downpours that are becoming all too frequent, companies in Malaysia have realised they no longer have the luxury of ignoring the issue of climate change with its impacts knocking on our doors that has resulted in property damage, economic disruption, population displacement and loss of lives.
The loss of natural flora and fauna in our historically biodiverse nation from the impacts of land clearing for urban development and farming, rampant illegal logging as well as overfishing has also gained prominence in recent years.
Staring down the existential crisis of our species caused by climate change and biodiversity loss, an increasing number of companies have taken steps in reducing their carbon footprint by switching to cleaner energy sources, implementing carbon monitoring initiatives, and setting up green or climate-friendly operations in an attempt to curb global warming to 2°C.
Leading sustainability-driven property development companies such as Sunway and Gamuda Land have shown how responsible corporations can embed ESG considerations into the business model that not only reduces their negative environmental impact, but also empowers sustainability adoption among their customers.
Through practices such as the adoption of a Low Carbon City Framework and implementing Green Building Initiatives and Circular Construction, they help to curb emissions throughout a property development’s lifespan.
Efforts such as conducting biodiversity audits before and after development, transplanting mature trees from land clearing back into the townships they develop and establishing nature conservation initiatives also help to prevent biodiversity loss, and sometimes even improve the diversity of flora and fauna in the area after development.
Leading palm oil producer Sime Darby Plantations on the other hand, took to introducing an open-access online tool dubbed Crosscheck that allows its consumers and concerned members of public to trace its palm oil sources down to the mill level.
Responding to concerns of deforestation in Borneo that threatens to drive the extinction of species such as orangutans and gorillas, the Crosscheck tool comes equipped with satellite map data that shows a 50km radius around each mill that allows anyone to check the risks of deforestation, biodiversity loss and animal habitats threatened against satellite footage of real events on the ground.
It provides an unprecedented level of transparency and traceability that sets a new standard for all commodities players towards creating a deforestation-free supply chain.
Waste and Effluent Management
Developing countries such as Malaysia are among the fastest and largest waste generators globally, generating 38,000 tons per day as of 2018. A mere 5% of our waste are recycled while the rest are destined for landfills that leach contaminants into our groundwater and emit copious amounts of methane which is a harmful greenhouse gas (“GHG”).
In addition to our own waste, Malaysia has famously become the plastic waste dumping ground of the world, importing plastics intended for recycling that has instead ended up in landfills, fouling up the environment.
Beyond solid waste, wastewater discharged from industrial, agricultural and commercial sources can also cause great harm to people and the environment if it is not properly treated before discharging through appropriate avenues.
Take for example, the 2019 Kim Kim River toxic pollution at Pasir Gudang, Johor, where illegal chemical waste dumping into the river caused toxic fumes which hospitalised 2,775 people who were mostly children and teens studying in the schools surrounding the river.
And in 2020, over a million households in the Klang Valley suffered extended and repeated water cuts amid the pandemic due to the illegal dumping of chemicals that caused the shutdown of Air Selangor’s water treatment plant.
While our nation has laws such as the Environment Quality Act 1974, Water Service Industry Act 2006 and others to deter irresponsible waste disposal, jurisdictional issues, insufficient legal penalties and enforcement challenges has caused these waste management issues to persist.
Even among public listed issuers, waste management disclosures in their sustainability reports remain a recommendation and has not yet been made a mandatory requirement.
Responsible public listed companies (“PLCs”) have taken to disclosing their waste management data such as total tonnage of waste collected, waste segregation, percentage of waste diverted from disposal as well as their waste collection and effluent treatment processes to establish waste management transparency in line with global best practices.
They have also made efforts to support educational reuse, reduce and recycle (“3R”) programmes in schools, in their organisations, and ease recycling efforts within their communities through the provision of recycling bins, food waste and fabric collection points and composting initiatives that help to reduce waste generation in the long run.
Some have even turned their industrial waste into new business opportunities that provides additional revenue streams for their company.
Managing Your Organisation’s Specific ESG Risks
The above examples are just some of the general ESG risks that are applicable to all organisations in Malaysia. However, each company’s exposure levels, as well as the extent of their direct and indirect impacts on the above issues may vary, and there are many other ESG matters to take into consideration as well.
For example, a company with discriminatory employment practices will face hiring challenges once publicly exposed, construction companies with abysmal occupational health and safety practices will lose out in tender awards to those with better track records, while a food and beverage chain found to knowingly shirk their food safety responsibility and endanger customers’ health will lose its license to operate.
To effectively manage your organisation’s material ESG risks, it is good practice to carry out a materiality assessment process every few years, if not annually, to determine the financial and non-financial issues that have the highest impact to your organisation’s sustainability.
Once those material matters have been determined, companies can begin to establish key performance indicators (“KPI”) to track and improve the performance on those fronts.
Committing to annual or half-yearly performance reporting in adherence to sustainability reporting standards, such as Bursa Malaysia’s Sustainability Reporting Guide, Global Reporting Initiative (“GRI”), Task Force on Climate-Related Financial Disclosures (“TCFD”) and FTSE4Good Index, will go a long way to help ensure these risks are effectively managed to safeguard your organisation’s sustainability.