Consumer protection – A pillar of ‘S’ in ESG

The pandemic saw Malaysian corporates flagged for bad behaviour when it comes to managing the social aspect of the ESG scorecard. — Bloomberg

WITHIN the environmental, social and governance (ESG) framework, while the focus has been heavy on issues related to environment and governance, and rightly so, very little discussion is centred on the social aspect as it has a very far and wide definition.

Broadly speaking, “social” in ESG refers to how a corporation is not only handling issues related to its employees but goes beyond that.

For most corporations, their existence is made possible by being part of an ecosystem, delivering a product or a service to its customers.

By default, the customer itself is a stakeholder in how a corporation manages its ESG risk, threats, and opportunities.

Other than the customer, other stakeholders that form part of the social agenda include not only the community in which the corporation operates, but also government agencies, suppliers, shareholders and of course, its employees.

How a corporation handles these relationships will define a corporation’s ESG score, which in turn, will determine if the corporation needs to do more to improve its score or otherwise.

The Malaysian bad apples

The pandemic saw Malaysian corporates flagged for bad behaviour when it comes to managing the social aspect of the ESG scorecard.

Some of them were exposed for having poor working conditions while others were even barred from selling their products to certain export markets.

In the airline industry, which is one of the most devastated industries due to the pandemic, customers were turned into creditors in a scheme of arrangement carried out by one airline, which resulted in advanced ticket sales made by customers being wiped out.

Although the company has shown significant progress in terms of returning to profitability, it remains under the Bursa Malaysia watch list as a Practice Note 17 designated company.

Perhaps the company was a victim of circumstances as another airline, MYAirline, was in the news lately after announcing the abrupt suspension of services, impacting more than 100,000 passengers.

The issue of refunds again surfaced, similar to the case of Air Asia X Bhd (AAX) and AirAsia when the pandemic hit.

This brings to question how should corporates treat payments that are received in the form of advanced sales for the delivery of service in the future.

Escrow account

In accounting terms, monies received for future delivery of service are not recognised as revenue until and unless the said service is provided to customers.

However, in many businesses and not just in airlines, corporations that receive advanced payments tend to use the cash proceeds to meet the operating needs of the company.

In the quarterly results ended June 30, 2023, announced by both AAX and Capital A Bhd, the advanced ticket sales in the balance sheet stood at RM2.02bil and RM321mil, respectively, representing some 31.9% and 22.3% of the two companies’ annualised seat sales revenue for this year.

The irony of the situation is that for both Capital A and AAX, the cash and cash equivalent holdings were only RM735mil and RM269mil, respectively, as at the balance sheet date.

This suggests that a significant amount of the advanced ticket sales, especially for Capital A, has been utilised for operational needs, leaving a shortfall of RM1.29bil and RM52mil, respectively, in the books.

Perhaps, within the airline industry, monies received from advanced ticket sales should be regulated, with companies only allowed to use a restricted portion of 10% or 20% to meet operating needs and the balance must be transferred to an escrow account to meet potential refunds if the airlines fail to deliver the service.

Only after the service is rendered to the customers, should an airline be allowed to redeem the cash held in the escrow account.

Escrow accounts are an excellent way to protect customer rights and this can also be observed in the housing industry via the Housing Development (Control and Licensing) Act, 1966 (HDA) and Housing Development (Housing Development Account) Regulations, 1989.

However, despite the restrictions provided under the law, we still see housing developers abandoning their projects and leaving unassuming buyers fuming with anger when the dream home turns into a nightmare.

The authorities are then stuck trying to help these buyers via rescue schemes.

According to the deputy Local Government Development Minister, the task force on private housing and abandoned projects has recorded 655 housing projects categorised as delayed, sick, and abandoned, with a gross development value of RM79bil as of Sept 30, 2023.

That’s a huge number by any standards and represents more than double the value of residential and service apartment overhang of RM37.4bil as at the end of June 2023.

This also goes to show that despite the legal framework, corporations simply fail to deliver for one reason or another. The social aspect of ESG was sent to the twilight zone.

In conclusion, while we are all well aware of ESG matrixes, especially those related to the environment and governance, the social matrix seems to be left much to be desired, especially those related to how corporations deal with customers.

Customers are king and, in no circumstances, should they be faulted for buying a corporation’s product, or worse, turned into creditors.

Until and unless we are able to lift the manner in which we treat customers, we will continue to see corporations flouting the law or regulations.

It will be made worse for certain industries where there is no governance with respect to how customer deposits or payments are treated for advanced purchases.

Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.