With sustainable development, diversity and human rights at the forefront in recent days, the business community is rapidly ensuring that their respective businesses accordingly follow suit. Hence, the introduction of a much touted term called ESG. However, how many of us actually know what ESG actually means? In this article, we will attempt to explain this new term concisely.
First and foremost let us delve into what “ESG” stands for:
|E = EnvironmentalS = SocialG = Governance|
We may imagine ESG as a “three legged stool” where the use of environmental, social and governance factors work hand in hand as a scale or benchmark towards the standing and viability of a company. It is becoming increasingly important as these benchmarks are considered in an investment decision. Further thereto, litigation risks also abound if these benchmarks are not complied with.
In a nutshell, the Environmental criteria considers how a company safeguards the environment, for instance, making business decisions which are mindful of the company’s carbon footprint. Social criteria examine how one company’s management manages relationships with employees, suppliers, customers, and the communities where it operates. Governance on the other hand, focuses on a company’s leadership, which includes due diligence, due care, the decisions made for and by shareholders, and whether they comply with laws and regulations.
The importance of ESG
As mentioned above, ESG is becoming increasingly important in a potential investor’s mind when determining its investment.
Apart from that, ESG practice creates a chain effect throughout the system. Consider this scenario where, an automotive manufacturer who has ESG practices in place, would ensure that its tyre manufacturer is ESG compliant, which accordingly chooses a rubber supplier who ensures that its rubber tappers are treated fairly.
As mentioned above, failure to comply with ESG practices may also open a company to litigation risks, where we see an increasing number of litigation around the world involving climate change.
Based on the given scenario above, the directors and management officers of a company ought to make conscious decisions that encompass both Social and Environmental considerations to comply with ESG standards, for example ensuring that regulations like the anti bribery and anti sexual harassment policies are in place and adhered to. Further thereto, the making of business decisions that are sustainable to the environment ought to also be considered.
In Malaysia, directors duties are embodied under Section 213 of the Companies Act 2016 whereby it is the duty of the director to act for a proper purpose, in good faith and in the best interest of the company together with the duty to exercise reasonable care, skill and diligence. This would also mean that the directors of a company have the duty to comply with guidelines and make conscious decisions that comply with ESG standards.
The social segment includes good business practices that are more inclusive, including equity, diversity, human rights, and social justice. This people centered framework includes providing fair wages, non discriminatory hiring practices, gender equality, occupational health and safety. This has become more and more important, whereby unfair social practices are shunned and the workplace has become a more inclusive environment.
With the threat of climate change and the recent mega floods occuring around the world, as evidenced in the 2021 Sixth Assessment Report of the UN Intergovernmental Planet on Climate Change. These increasingly frequent catastrophic climate events are linked to human actions.
As such, the term sustainable development has become crucial in recent times. A company’s ability to use the natural resources without harming the environment or upsetting the delicate balance of the ecosystem is now a factor to be considered in business decision making, what not in that the failure to do so opens the company to litigation risks, as climate change litigation is gaining momentum all over the world.
It has become so crucial that more than 130 countries around the globe have set or are seriously considering targets for reducing carbon emissions to net zero by the year 2050.
Malaysia has pledged the same by committing to becoming carbon-neutral by the year 2050. Furthermore, in the year 2009, Malaysia has introduced a National Policy on Climate Change which aims to address climate change with the introduction of policies and strengthening the framework. It also aims to consolidate the E, S and G of ESG. In addition to that, the Twelfth Malaysia Plan 2021-2025 looks to adopt an economic model that balances socio-economic development with environmental sustainability. All the while encouraging public and private sectors to adopt and integrate ESG into their decision making.
In addition, the regulators have also taken steps to promote sustainable development, for example on 28 April 2021, the Securities Commission Malaysia updated the Malaysian Code on Corporate Governance (“the Code”) whereby the focus was on the role of the board and senior management in addressing sustainability risks and opportunities of the company. It also addresses the urgent need for companies to manage ESG risks and opportunities by introducing new best practices that transition towards a net zero economy.
The Code was introduced in the year 2000 and has been reviewed periodically. Corporate governance practices that are globally accepted are set out in the Code. These practices go above and beyond the minimum standards required by statute, regulation or even as prescribed by Bursa Malaysia.
Bursa Malaysia has also released its new Main Market Listing Guidelines (“the Guidelines”) which details the business case for embedding sustainability as well as providing guidance on how it can be carried out in respective organisations. The Guidelines also provide specific guidance on the information that should be disclosed in accordance with the Listing Requirements in the preparation of the Sustainability Statement in the annual report.
Changes in practices are imminent and so are the changes in consumer’s practices who tend to make conscious decisions to purchase goods from companies that are conscious of protecting the environment. There are even campaigns to buy local produce, which do not need to be airflown from a foreign land, thus reducing the carbon footprint.
Many companies in Malaysia are starting to have ESG practices being implemented in their businesses. We have seen an increase in the setting up of anti bribery and anti sexual harassment policies. On the part of sustainability, there has been a significant reduction in the use of single use containers and plastic bags as more and more retail outlets shy away from single use plastic bags and “forcing” consumers to bring their own reusable bags and/or containers.
ESG is imminent and in fact already here. Companies, be it large, medium or small in size ought to begin considering putting ESG practices in place to ensure that the risk of litigation is reduced. Human and/or workers’ rights and the environment ought to be taken care of and having a set of ESG practices can hopefully address this urgent need.