Why ESG is increasingly becoming the strategy to adopt?
The global crisis caused by the COVID-19 pandemic in 2020 has intensified discussion across the globe around sustainability. It has shown consequences and revealed the need for deep thinking on the impact of our actions and choices on the environment and society. Today, ESG — Environmental, Social, and Governance is the buzzword in business and is on track to become mainstream in the post-pandemic period. Therefore, it is time to rethink ESG commitments and practices to drive improvements over the long term.
For many years, ESG practices in the manufacturing sector in Malaysia had been focused mainly on the environmental (“E”) aspect of ESG. Many initiatives were put in place to encourage the country’s manufacturing sector to go ‘green’ and reduce environmental impact.
The National Green Technology Policy introduced in 2009 is the Malaysian government’s effort to provide a conducive environment for green technology development. Various incentives are made available to targeted industry players to intensify potential producers and users of green technology, especially eligible companies that participated in activities related to green technology in the manufacturing sector. These activities include the utilisation of renewable energy; energy conservation/energy efficiency; the reduction of greenhouse gas emissions; waste recycling; environmental protection; and the treatment and disposal of toxic/hazardous waste. In return for these efforts, the government offers financial and incentive support in terms of soft loans, tax incentives, and import duty exemptions to drive this green agenda.
On governance (“G”), Malaysia has put in place a range of governance regulatory frameworks and initiatives that have been strengthened over the years. The Companies Act 2016 was an overdue major overhaul of the old Act that governs the regulatory framework of companies set up in Malaysia, while various other initiatives – such as the Malaysian Anti-Corruption Commission (MACC) (Amendments) Act 2018, Guidelines on Adequate Procedures 2018, and the National Anti-Corruption Plan (NACP) 2019-2023 – delivered the key message that strong corporate governance is fundamental for the sustainability of the Malaysian economy.
Of late, the “S” aspect of ESG has been moved to the forefront by COVID-19, where labour standards and human capital management were key highlights as companies with poor working conditions suffered most from the pandemic outbreaks. In addition, the rise of social considerations will become more pronounced as the pandemic continues to unearth social imbalances in the community.
When ESG Makes Dollars and Sense
Apart from ESG as a moral or ethical obligation, there are fundamental economic reasons to take ESG seriously. Globally, corporations are prioritising ESG in their operations and are being selective on who they choose to do business with. For instance, some companies in manufacturing sectors were issued with Withhold Release Orders (WRO) which prohibits the import of their goods into the US due to alleged use of forced labour.
Similarly, the European Union (EU) will soon enact the Carbon Border Adjustment Mechanism on imports, which makes imported products with a high carbon footprint less competitive in the EU. To remain competitive, Malaysia as the 27th world’s largest trading nation has no choice but to be aligned with this sustainability agenda.
Responsible investment is also gaining momentum. Many global banks have signed up for the UN Principles for Responsible Banking, pledging to fund only sustainable projects and businesses by 2040 or 2050. This means that projects/companies with no ESG strategies will risk not getting any funding and insurance coverage for their businesses.
The embrace of ESG also corresponds to consumer preferences. Consumers today are very particular about the products they buy, and consume only products and services from companies that practise sustainability. In fact they are even willing to pay more for environmentally and socially responsible products.
Finally, ESG concerns are now higher on the list of priorities for young talent when evaluating their prospective employers. Younger employees now want to know the stance of the companies they work for, and are increasingly looking for evidence that prospective employers incorporate ESG factors into their operational strategy as much as the pursuit of profit, as shown by numerous surveys. As such, commitment to ESG issues such as the Green agenda, Diversity, and Inclusivity could give a company a competitive advantage in recruiting the best talent.
In a nutshell, a company’s commitment to ESG will be scrutinised by every single party involved, namely investors, regulators, customers, and employees and will determine how attractive the company is to various stakeholders. While change might mean companies have to endure short-term pain to comply with ESG strategies, it is a necessary process to avoid a much greater loss in the future.