Zooming in on ESG


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PETALING JAYA: The hot issue surrounding forced labour in Malaysia has put the environmental, social and governance (ESG) initiatives in the spotlight.

This came to the fore after some Malaysian companies of the likes of Top Glove and FGV Holdings were alleged to have embarked on forced labour practices involving some of their foreign workers.

Economists and analysts agree that with the current headwinds, exacerbated by the Covid-19, more concerted efforts are needed to ensure further adoption of ESG initiatives at all levels.

They expect such initiatives to leapfrog post-Covid-19 as more companies take cognisance of the importance of sustainable investments among socially conscious investors.

Sunway University professor of economics, Yeah Kim Leng, (pic below) who is also a former external member of the central bank’s monetary policy committee (MPC), told StarBiz that while the stock exchange has introduced FTSE4Good ESG ratings to encourage listed companies to adopt good ESG practices, there is a need for a more concerted push by the government, industry, academia and non-governmental organisations to embed ESG in their activities.

He said the ESG initiatives are important and aligned to the United Nations’ Sustainable Development Goals (SDG).

“Therefore, any shortfall in the adoption of ESG standards and practices by Malaysian businesses would impair the country’s achievement of the SDGs by 2030.

“As a more recent embodiment of the concepts of socially responsible investing (SRI) and corporate social responsibility (CSR), Malaysian businesses ignore environmental, social and governance (ESG) initiatives at their own peril, ” he noted.

Globally, Yeah said governments and investors are scrutinising ESG practices and risks of investee companies as exemplified by the recent US sanctions on Malaysian companies for alleged labour rights infringements.

Towards this end, he said, more initiatives should be put in place to propel ESG adoption. Among others, he said, an annual national awareness campaign to increase the adoption of ESG and SDG principles and practices in the business sector is needed.

A collaborative effort between the government and private sector, including matching funds, to develop best practices and standards for all sectors and showcase examples and success stories would provide the needed boost, he said.

Yeah said: “The government could also consider fiscal and financial incentives for businesses to obtain ESG ratings from approved agencies or rating companies.

“To further boost adoption, the government may require concessionaires, contractors, suppliers and service providers to have ESG ratings while being mindful not to raise business cost or regulatory burden.

“Double income-tax deduction for expenses incurred in either adopting ESG or improving ESG performance could also be considered. Equally important, consumers and investors need to be educated on the benefits of supporting businesses that are ahead in ESG performance.”

AmBank Group chief economist Anthony Dass, who is also a member of the Economic Action Council secretariat, said ESG investing has started creeping into mainstream investment. But unfortunately, he said, Covid-19 has exacerbated inequities and underscored the importance of companies expanding the strategy and risk management processes to include key stakeholders beyond shareholders.

ESG investing would be big in the post-Covid-19 era, he said. “The pandemic is a wake-up call for all businesses which has revealed that our markets and supply chains are fragile and easily disrupted.

“It is not just focusing on areas like oil palm plantation which came into the radar screen during the time of haze and has been in the limelight due to sustainability issues where it was labelled as the main cause of deforestation and wildlife extinction but to other plantation-based commodities, ” he said.

Dass said policymakers and businesses needed to commit to building back better and aiming for a green recovery. A possible silver lining of this pandemic crisis would be an accelerated transition to a more circular, resilient, inclusive and sustainable economy, he added.

The bottom line, he said, is that the economy would move towards a “circular economy” mindset, where the environment, public health, and the global economy all intertwine.

As a result, investors are going to look for ways to align their investments with the long-term safeguarding of the planet and people’s lives, he said.

Dass said a number of key factors needed to be looked at to create a successful post-pandemic ESG environment. Among them, he said, is to make ESG a core driver of growth for businesses and develop a multi-dimensional ESG strategy.

He said an ESG integration would help reduce risks and capture business opportunities linked to the transition to a more sustainable economy.

Boards and senior executives must proactively educate themselves and commit resources towards ESG, he said.

He added that business leaders must show real ESG leadership by taking care of their employees, especially during difficult times.

On the sectors of the economy which lack ESG practices, Yeah said: “Besides workers’ rights related to foreign workers and human rights involving indigenous communities, the forestry, palm oil and agricultural sectors face potential ESG risk arising from tropical deforestation and environmentally damaging practices.

“Except for listed companies which are required to incorporate sustainability reporting in their annual reports, there is little visibility on the adoption of ESG in the rest of the business community.”

As to whether there is a need to cut on the reliance of foreign labour due to labour infringement issues, he said one possible solution is to allow large companies with sizeable foreign workforce above a certain size, say above 100 workers, to be allowed to recruit directly from the source countries approved by both governments.

He added that monitoring the recruitment and welfare of the foreign workers by third parties such as ESG rating companies could be a market-based approach to resolving the long-standing problem.

“Concurrently, the business sector with appropriate support and incentives from the government need to accelerate the shift to higher value, high wage and technology-intensive activities that do not require foreign labour, ” Yeah noted.

Meanwhile, commenting on the ESG ecosystem, RAM Sustainability Sdn Bhd CEO Promod Dasssaid (pic below) said responsible corporate behaviour is the heart of the matter.

The decisions made by shareholders, the board of directors and management in producing goods or services have either positive or negative implications on people and planet.

While enforcement of regulations, whistleblowing, and active engagement from other stakeholders are part of the solution in keeping companies in line, he said the capital markets are also playing an important part through sustainable or responsible finance practices.

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