Concerns over ESG ecosystem

Malaysia University of Science and Technology professor Geoffrey Williams said “the infringements are very serious.They signal a failure of the sustainability agenda in Malaysia, which has been around for almost 15 years,” he told StarBiz.

KUALA LUMPUR: As allegations against Malaysian companies for labour-related infringements continue to mount, concerns over the validity of their respective environmental, social and governance (ESG) agendas are equally on the rise.

On Jan 29, the United States Customs and Border Protection (CBP) banned imports from disposable glove maker YTY Industry Holdings Sdn Bhd over suspected forced labour practises, the seventh such ban on a Malaysian company in two years.

On Jan 28, the CBP issued a notice against Sime Darby Plantation Bhd, alleging the company used forced labour and that its palm oil products will be subject to seizure by port directors.

Both YTY and Sime Darby Plantation have said they would engage and cooperate with the CBP to address the purported allegations.

Nevertheless, experts believe that these continued infringements will start to pose wider ESG risks for Malaysian companies.

On Jan 28, the CBP issued a notice against Sime Darby Plantation Bhd, alleging the company used forced labour and that its palm oil products will be subject to seizure by port directors. Both YTY and Sime Darby Plantation have said they would engage and cooperate with the CBP to address the purported allegations.

Malaysia University of Science and Technology professor Geoffrey Williams said “the infringements are very serious.”

“They signal a failure of the sustainability agenda in Malaysia, which has been around for almost 15 years,” he told StarBiz.

Williams pointed out there had already been a significant push for corporate social responsibility (CSR) and sustainability in Malaysia during the GLC Transformation Programme under former prime minister Tun Abdullah Badawi during the mid-2000s.

“This is not a new agenda at all.

“Bursa Malaysia, the Securities Commission and the government all pushed for what we now call ESG under that agenda and they all had frameworks and guidelines which appear to have achieved very little.”

Additionally, Williams said the US product bans signalled a failure of the information and verification process.

“Many of these companies make ESG regulatory compliance statements and even publish very expensive sustainability reports written by expensive but anonymous consultants, or sometimes even verified by certification agents.”

However, Williams questioned the accuracy of such reports and certification when non-government organisations expose and provide evidence of purported labour-related indiscretions.

“This means that the credibility and independence of the entire ESG and sustainability ecosystem is called into question. Who are the consultants and verification agents who told us that the companies have a good ESG record? How are they held accountable?”

Centre for Market Education chief executive officer Carmelo Ferlito, meanwhile, said that the entire situation should be approached in a “non-emotional” way.

“While I strongly condemn any form of labour exploitation or slavery, at the same time a wider investigation is worth verifying if the US claims are true or partially true; or part of a competitive strategy aimed at harming Malaysia.

“I do not have an answer to this but we should not accept accusations from the US for the simple fact that they are from the US.”

Ferlito said the dynamics of the labour market should not necessarily be dictated by Western labour regulations, as it could “turn to play negatively” on the labour force itself.

“Having said that, I am in favour of a full, impartial investigation. At the same time, I am also in favour of better conditions for the workers and I strongly believe that the best way to achieve this is to increase their freedom of movement between jobs.

“If workers were free to switch jobs, employers should compete for the best employees and this would be a tremendous incentive to improve wages and conditions.”

Holistically, Williams said the entire situation does seem to make a mockery of Malaysia’s commitment to sustainability and ESG.

“International investors will simply walk away, whether they have an ESG agenda or not.

He said this will affect not just the companies with product bans but all Malaysian firms that claim to have a good ESG record, because of a trust deficit.

Meanwhile, PublicInvest Research said the ban by the US authorities will have a minimal impact on Sime Darby Plantation.

The research house said this was because the US market is relatively small for the group, adding that the current, strong crude palm oil (CPO) price performance will likely drive another set of strong quarterly results for the group.

“It is worth noting that Malaysian operations contributed another 36% to the group’s bottomline. However, the US ban could eventually trigger contagious effects to other countries, given the rising global concerns over ESG.

“Its palm oil buyers could also switch their demand to other palm oil suppliers, or the refiners might take advantage by asking for a steep discount due to the poor perception of its CPO products.”

PublicInvest Research also cautioned that the situation with the CBP could drag on for a while.

“Citing Top Glove Corp Bhd as an example, the CBP ban for alleged forced labour could drag for at least a year before the authority lifts the import ban.

“This depends on how soon the group can resolve all the issues in compliance with the authorities.”

Additionally, Hong Leong Investment Bank Research (HLIB Research) said while Sime Darby Plantation’s presence in the US market seems insignificant, the findings by the CBP may have repercussions on its customers in other regions, especially Europe.

HLIB Research said Europe accounted for around 23.8% of Sime Darby Plantation’s revenue in 2020.

“Nevertheless, Sime Darby Plantation remains confident that the report by independent consultants, due out by end-March, will demonstrate that the group has internal controls and systems in place to support its workers and ensure their well-being,” it said.

Separately, MIDF Research said the outlook for Sime Darby Plantation remains resilient and that it is maintaining the group’s earnings projections for 2022 and 2023.

“Moving forward, we expect the group’s earnings to continue to be supported by favourable CPO prices.

“On top of that, we believe that the fresh fruit bunches production will improve, moving forward, as foreign workers are expected to come into our plantation sector latest by the first quarter of 2022,” it said.