Tough task in ESG nod

A fund manager said the Covid-19 pandemic had increased the importance and role of ESG compliance.

PETALING JAYA: As environmental, social and governance (ESG) compliance becomes more mainstream, and even a benchmark for investors today, corporations are increasingly faced with the arduous task of meeting challenging reporting demands.

An analyst noted that ESG metrics such as waste, energy and carbon can be challenging to quantify and report.

“It’s difficult because there isn’t one global standard and even if there were, it’s constantly changing and evolving,” he said.

Deloitte, in a paper titled “ESG Risks: The Reporting Challenge”, said changes in investors’ and society’s expectations have translated into a growing demand for better corporate reporting that responds to the need to understand broader risks and business impacts.

“Investors and other stakeholders are demanding more, higher-quality information and insights about company performance, risks, opportunities and long-term prospects than are available from the conventional financial reporting process.”

A fund manager said the Covid-19 pandemic had increased the importance and role of ESG compliance.

“The pandemic has presented corporations with a once-in-a-century opportunity to engage in ESG-related issues and make material changes that will positively, both directly and indirectly, impact their stakeholders.

“However, the pandemic is practically unprecedented. Standards that apply now may not have applied a couple of years ago and may even change over the course of the next 12 months as the global vaccine rollout is seeing more countries go back to life that was. So, it’s not easy.”

Affin Hwang Capital in a report yesterday said it is challenging for companies to be fully socially compliant due to the lack of international standards that are recognised by all parties.

“As such, a company’s actions are more likely to be regulated by domestic laws and the buyer requirements,” it said in the report.

The research house added that while the International Labour Organisation (ILO) has provided 11 indicators to help identify forced labour issues, there is still a lack of an effective mechanism for the implementation, as not all countries agree with their recommendations.

“For example, the ILO suggests companies absorb all recruitment fees in the hiring of foreign workers but Malaysian laws allow the recruitment agency to collect up to a month’s salary from the workers, which the ILO has indicated could lead to debt bondage and a form of forced labour,” it said.

There have been numerous allegations and reports against Malaysian companies as of late, asserting that they had allegedly used forced labour, with the US Customs and Border Protection (CBP) taking action against a few of them.

Affin Hwang Capital said being cleared by the CBP can be time-consuming.

“WRP Asia Pacific, a rubber glove manufacturer in Malaysia, was put under a withholding order in September 2019 but managed to have its name removed from the list in March 2020.

“However, Top Glove, for which CBP had imposed a withholding order in July 2020, has yet to be cleared by the CBP, despite the company claiming that it has resolved all 11 ILO forced labour indicators in April 2021.

“We believe that it would take at least a year on average to be removed from the list, assuming the company is keen on resolving the issue.”

Affin Hwang Capital added that different standards made social compliance audits challenging.

“Although the plantation, manufacturing and electronics manufacturing services sectors have been subjected to social audits by its customers, due to the exposure to multinational companies as their clients, the subject of forced labour was only brought to notice recently.

“We believe this is due to the different standards and audits being placed by the buyers, given that there are no internationally recognised standards.”

As an example, Affin Hwang Capital noted that while the Roundtable of Sustainable Palm Oil prohibits the use of forced labour, the Malaysian Sustainable Palm Oil only refers to labour laws that prohibit the use of forced labour for the palm oil sector.

“Similarly, some practices might be deemed legal in Malaysia but are discouraged by the ILO, like the recruitment fees. As such, the definition of social compliance is very much dependent on the buyer and their requirements.

“Given the difference in standards, we believe that it would be challenging to eradicate the risk of potential social compliance breaches.”

According to a report by the Financial Times, demand among investors for ESG-related products continues to rise, with US$54bil (RM229bil) pouring into ESG bond funds in the first five months of 2021, compared with US$68bil (RM228bil) for the entire 2020.

Meanwhile, A survey by the Index Industry Association (IIA) titled “Measurable Impact: Asset Managers on the Challenges and Opportunities of ESG Investment” revealed that there is still a need for better data and standardisation.

In its survey of 300 US and European asset managers, the IIA said high-quality data is critical to ESG investing.

“Despite the recent impressive growth in ESG investing, asset managers we surveyed pointed to some significant challenges in ESG implementation that could jeopardise future progress in the sector.

“These are due to insufficient data and standardisation, a regulatory-industry disconnect, uneven geographical development, lack of ESG asset diversification and the challenge of keeping up with changing societal views of ESG.”

The IIA emphasised that better data will lead to better benchmarking and comparability of ESG corporate performance, which in turn, drives better ESG investment products and societal outcome.

In a sampling of the survey, 63% of investment companies highlighted a lack of quantitative data as a major (24%) or moderate (39%) challenge to ESG implementation.

Separately, 64% of respondents cited a lack of transparency or insufficient corporate disclosure in relation to firms’ ESG activities.

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