The importance of ESG for companies, investors

Stakeholders are calling for the establishment of independent watchdog to monitor greenwashing and misreporting

MALAYSIAN investors are slowly recognising the importance of sustainability as more investors are starting to care about whether their funds are environmental, social and governance (ESG)-compliant, according to Deloitte Malaysia risk advisory leader Justin Ong Kean Hu.

Ong said non-ESG-compliant investments were hard for the economy to grow due to the ESG issues the economy was experiencing.

“There are direct and indirect impacts to return generation for ESG investment. For example, when glove manufacturer Top Glove Corp Bhd was involved in (forced labour practices), investors holding Top Glove (stocks) at that point in time suffered huge losses.

“In the broader market and ecosystem, if companies do not follow these basic human rights, it is very hard for the economy to grow because you are facing manpower issues. The international market knows about companies’ human rights issues and they will not do business with them. How does a market attract manpower if they practise forced labour? How do they maintain their level of business operation?” Ong told The Malaysian Reserve (TMR).

Companies do not align with sustainable narrative, generally, “derive significant revenue” from alcohol, gambling, tobacco, pornography, guns, for-profit prisons, oil and gas (O&G), and coal, Ong said, it should be analysed in two ways.

“First, a company’s performance around ESG themes. Second, from a sustainable development perspective, does the company contribute to a more sustainable development future?

“In terms of O&G, you still need power no matter what. Certain regions of the world, for example, Africa, need O&G-based power to go about day-to-day. If you stop investing in O&G abruptly by now, they will not be able to get relatively affordable energy and how would that affect their livelihood?

“I do not agree with making a blank statement such as ‘I don’t want to invest in O&G anymore’. It depends on where the investment is and the socio-economic dynamics of the location in that these O&G companies operate. It does not mean that because you invest in O&G then you are bad,” he said.

Sunway University Business School economics professor Dr Yeah Kim Leng said the list of industries were applicable to Malaysia.

“It covers O&G companies, gaming and alcohol industries, and the relatively small arms industry. There is a strong international investor demand for ESG investments in Malaysia but the opportunities are limited due to the scarcity of investable assets packaged as ESG-compliant.

“Nevertheless, due to the availability of large pools of global ESG funds, more and more firms are likely to take the ESG route,” Yeah told TMR.

Studies linking ESG to corporate performance have shown that the improved financial performance due to ESG is more evident over longer time horizons.

“Companies that adopt sustainability initiatives and manage for a low carbon future also show improved financial performance. Socially conscious funds, therefore, should incorporate the ESG matrix in portfolio asset selection and allocation.

“Investors should care about ESG-compliant funds because a large number of studies have shown that they generate higher returns compared to conventional funds and contribute to sustainable development,” he said.

Institute of Corporate Directors Malaysia (ICDM) president and CEO Michele Kythe Lim said not just investors but businesses have to understand and internalise the value of integrating ESG as part of their business strategy.

“ESG affects everything for a business across public and private sectors, the global supply chain with regulators, purchasers, investors, banks and financial institutions also applying ESG screens in their evaluations before contracting with any business.

“Thus, organisations will need to prioritise incorporating ESG as a core part of their business strategy as otherwise they risk becoming obsolete,” Lim told TMR.

Lim said ESG is not a new conversation as Malaysia has been transitioning and driving a sustainability-focused culture within organisations and the landscape, starting from the corporate governance reforms with the first publication of the Malaysian Code on Corporate Governance and the subsequent five updates — corporate responsibilities, corporate social responsibilities, ethical and Islamic, to what we know today, as ESG.

“The transition, or rather evolution, is a clear indication of the increased level of awareness of leading organisations, including those within corporate Malaysia, in the importance of taking a more holistic approach in managing their business strategy and risks.

“Conventionally, the sustainability conversation was very much focused on the regulatory aspect such as reporting. Today, sustainability is less about compliance but about forward-looking leadership.

“It should set the right tone for a culture that facilitates the development of competencies needed to respond to market changes to ensure long-term resilience and value creation,” she said.

Corporate Malaysia, Lim said, had adapted to this mindset shift, with some small wins that showcased the progress in terms of ESG integration with the launch of the FTSE4Good Bursa Malaysia Index (2014) and FTSE4Good Bursa Malaysia Shariah Index (2021), Sustainability Reporting Guideline (2014), enhanced ground rules for inclusion into the FTSE4Good Index, sustainability Reporting Framework with new climate change reporting (2022) and Mandatory Leading for Impact Programme.

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