Increasing need for ESG competencies in boardrooms

There is an urgent need for board members of Malaysian public-listed companies to improve environmental, social and governance (ESG) competencies as the lack of attention to ESG issues is increasingly drawing the ire of global corporations, asset managers, and financial institutions.

In the past two years, a number of listed and non-listed Malaysian companies in the glove manufacturing, plantation and electronics manufacturing service (EMS) sectors have hogged the limelight for alleged ESG issues, and this has proved to be costly to their financial performance as their products suffered bans in certain markets and clients cut ties.

According to research Institute of Corporate Directors Malaysia (ICDM) which conducted in collaboration with Russell Reynolds Associates and Bursa Malaysia in the third quarter of 2020, ESG expertise is amongst the most needed but least present competencies on Malaysian boards.

ICDM president and CEO Michele Kythe Lim said sustainability and ESG matters will continue to gain traction, and it must be a matter of priority for boards and companies.

“If a company chooses to ignore ESG, they may risk going obsolete. ESG adoption is not only an expectation of the regulators, shareholders and other stakeholder groups are also increasingly holding companies accountable on ESG considerations,” she told StarESG.

Lim pointed out that having strong ESG competencies on the board is crucial in a company’s journey towards sustainability as the board possesses an immense influence on a company’s mindset and behaviours when dealing with ESG.

However, she noted that it is not just about creating the right ESG strategies, but also building the right culture to ensure ESG strategies are carried out effectively.

“Boards and senior management must be prepared to make the hard yet critical decision to shift their business model and direction – this needs to be internalised at all levels and integrated seamlessly into the core business and culture. Companies need to look at ESG and sustainability holistically and as corporate risks which need to be proactively addressed and managed,” explained Lim.

She highlighted that ICDM is on a mission to support board directors in broadening their mindset and expanding their skill sets to effectively address risks associated with ESG issues, and to find a balance between business growth and social sustainability and take on the role as stewards of that balance.

“As the business ecosystem continues to evolve, it is imperative for a paradigm shift to a progressive, sustainability-driven governance model for a more resilient business – and setting up the right ESG policies and procedures will be that first step to the right direction,” said Lim.

Regarding the key ESG targets and steps for Malaysian boards to commit to, Lim pointed out that ESG is more than just fulfilling regulatory requirements, rather it is to be driven by company values. It should be a proactive exercise done with the objective to establish and guide long-term sustainability and success.“There is also recognition that greater capacity building is needed to drive effective internalisation of ESG principles in their companies,” she said.

Lim noted that according to the 2022 Asean Board Trends Report by ICDM, as a stepping stone, it is imperative for companies and boards to cultivate a forward-looking mindset and the right organisational culture to turn risks into growth opportunities to drive long-term sustainability through the sustainability-driven governance model, which consists networked-thinking risk mindset, agility and digital culture, stakeholder co-creation and, continual innovation.

She added that boards will need to adopt a holistic and long-term view on its business model and governance, talent, dynamics and culture, including prioritising sustainability and ESG considerations, as well as enhancing competency in this area.

“Setting up ESG policies and procedures will be the first step to the right direction – no matter how small. Companies can start by doing a risk-based assessment to evaluate its position, and gradually integrate three pillars of ESG into their corporate strategy and operations. Specifically, start-ups and companies with smaller capitalisation may have an advantage as they can pivot their businesses faster due to their size, agility, innovation capability as well as speed to market,” said Lim.

She also emphasised that it is clear that ESG can no longer be an afterthought, “like how corporations used to approach corporate social responsibility.”

“ESG must be integrated into the core business strategy, driven by the board, and embedded within every unit of the organisation,” said Lim.

She highlighted that as the national institute of directors, ICDM will continue on its efforts to professionalise board practices and culture in corporate Malaysia.

“It is evident that regulators are calling for greater emphasis on ESG awareness amongst leaders and boards within corporate Malaysia. We aim to support the measures taken by regulators to progress the country’s sustainability journey and strengthening our overall ESG performance,” said Lim.

“Through our public and bespoke development programmes, we aspire to strengthen the director talent pipeline by developing ESG-competent boards and directors, while closing the ESG skill gap found in current Malaysian board members,” she added.

Developing ESG-competent boards and directors will be a key priority of ICDM in the coming years.

Late last year, ICDM worked with Bursa Malaysia in enhancing the Mandatory Accreditation Programme (MAP) to provide directors with foundational knowledge on the role of ESG in value creation.

Later this year, ICDM’s International Directors Summit (IDS) will return for the second year, from Sept 26 to 28, 2022.

The key theme of this year’s IDS will centre around ESG, namely “sustainability-driven governance” and addressing four key areas enabling sustainable value creation, namely, networked thinking risk mindset, digital culture, stakeholder co-creation and long-term innovation.

Non-compliance of ESG issues can be very damaging to companies especially those in the manufacturing and export sectors. – Paul W. ChanNon-compliance of ESG issues can be very damaging to companies especially those in the manufacturing and export sectors. – Paul W. Chan

Meanwhile, Malaysian Alliance of Corporate Directors (MACD) president and co-founder Paul W. Chan pointed out that the trending expectation of investors, and the investee companies is in the allocation of funds into socially responsible investments.

He pointed out that while the ESG concerns of specific investors vary, all need comprehensive information to help them make investment decisions.

“They want insights into the company’s posture on ESG topics and the associated issues and risks, as well as plans and responses. Institutional investors have, for example, become highly concerned with global climate change issues,” he said.

“As the scope of these issues continues to expand, so do the board’s oversight duties and fiduciary responsibilities,” said Chan, a chartered accountant who had served as the president of ACCA Malaysia and Malaysian Institute of Chartered Secretaries and Administrators (ICSA), and secretary-general of Malaysian Institute of Corporate Governance (MICG).

“With respect to increasing responsibilities of boards of Malaysian public-listed companies to appropriately discharge their fiduciary duties, it is imperative for boards to embrace, enhance improve and advance their competencies in ESG oversight,” said Chan, who is also vice president (1) of the Federation of Public Listed Companies (FPLC).

Global institutional asset managers are very critical and vocal on such ESG issues nowadays.

“Non compliance of ESG issues can be very damaging to companies especially those in the manufacturing and export sectors. As global market players, the earnings and stock prices could be adversely affected when global investors make negative statements against the company,” said Chan.

Chan also explained that more Malaysian businesses are moving towards adopting Integrated Reporting (IR) as a more comprehensive corporate reporting framework to enhance their communication with key stakeholders and to attract capital.

In the 2017 Malaysian Code on Corporate Governance (MCCG 2017) report, the Securities Commission (SC) had encouraged large companies to adopt Integrated Reporting (IR) based on a globally recognised framework.

Large companies are (as previously defined in Sustainability Reporting) those on the FTSE Bursa Malaysia with market capitalisation of RM2bil and above, at the start of the companies’ financial year.

IR is the main report from which all other detailed information flows, such as annual financial statements, governance and sustainability reports.

It is a concise communication about how a company’s strategy, performance, governance and prospects lead to long-term sustainable integrated value creation.

“IR improves the quality of information available to investors and promotes greater transparency and accountability on the part of the company,” the SC noted.

Meanwhile, at COP26, (November 2021 United Nations climate change conference), the International Sustainability Standard Board (ISSB) was established to develop a comprehensive global baseline or sustainability disclosures for capital markets.

The IFRS (International Financial Reporting Standard) Foundation and VRF (Value Reporting Foundation – a merged entity of International Integrated Reporting Council [IIRC] and Sustainability Accounting Standard Board [SASB]) were tasked to develop the global baseline standard.

“The target is to come up with a framework and standards by June 2022. As IFRS has been adopted by most of the global capital markets, it is expected the ISSB, when formalised, would eventually be adopted likewise,” said Chan, who is also the Global Ambassador of IIRC, United Kingdom.

Chan said in the future, financial auditors will need to “pull out all the stops” to go beyond financial reporting.

“What is in discussion, is potentially a new generation of ESG auditors that could well emerge. They may not necessarily be financial professionals – they could be engineers or other professionals with skill sets in complex process audits.

“It is appropriate and timely that stakeholders and institutions of higher learning invest resources in research and development, in the new corporate reporting framework to serve the growing corporate market.”

“There is a significant paradigm shift in corporate reporting beyond the traditional financials to encompass the intangibles and non-financials, such as ESG, United Nation’s Social Development Goals (SDG) and climate change. One thing is certain, the fiduciary duties and responsibilities of the board have definitely expanded,” said Chan.

Regarding boardroom diversity, Chan said in an era of rapid technology changes and digital-powered businesses, there is a need to focus more on “digital skill sets and experience diversity” in boardrooms.

“Things are changing so rapidly that technology is enroaching into every space in industries,” he said.

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