Incorporating ESG principles for sustainability agenda

By Amanda Yeo

The government’s commitment in catalysing the sustainability agenda under the Budget 2021 is laudable as Environmental, Social and Governance (ESG) principles have gained traction among the industrial players, particularly when the Covid-19 pandemic emerges early this year.

As this health crisis amplified systemic inequalities faced in the society, some of the companies eventually realise that it’s time for them to advocate sustainability agenda while meeting the company’s cash flow expectations and profit targets.

Many companies did not incorporate Sustainable Development Goals (SDGs) in their business strategies even though the ESG adoption began taking shape in 2018.

As shown under the recent release of PwC’s SDG Reporting Challenge, only 20% Malaysian companies demonstrated their commitment to advocate sustainability agenda.

By definition, ESG principles are a set of standards used by investors to examine how a company impacts nature and society in the form of stakeholders and communities, and how it deals with governance issues such as internal controls.

It is the first sustainability scoring concept adopted by large index providers and promulgated by the United Nations (UN) Principles for Responsible Investing (PRI).

For instance, resources and energy use, waste management and carbon emissions are classified under the environment pillar. Human rights, fair labour standards in the supply chain, exposure to child labour, fair wages, workplace health and safety are categorised under the social pillar.

On the other hand, corporate duties and responsibilities, decision-making process, transparency and disclosure as well as accountability belong to the governance pillar.

Although Malaysia has introduced large scale solar, green technology and socially responsible investment fund related incentives, many companies did not adopt these policies as they did not foresee the relevance of ESG principles in their businesses.

Therefore, for more companies to advocate sustainability agenda in their long-term recovery and growth plans, the government can consider implementing the following strategies:

  • Organise annual national awareness campaign to increase the adoption of ESG and SDG principles in the business sector;
  • Provide fiscal and financial incentives for businesses to obtain ESG ratings from approved agencies or rating companies;
  • While the stock exchange has introduced FTSE4Good ESG ratings to encourage listed companies to adopt good ESG practices, there is a need for a more concerted push by the government, industry, academia and non-governmental organisations to embed ESG in their activities;
  • A collaborative effort between the government and private sector, including matching funds, to develop best practices and standards for all sectors and showcase examples and success stories would provide the needed boost; and
  • Introduce double income-tax deduction for expenses incurred in either adopting ESG or improving ESG performance. Equally important, consumers and investors need to be educated on the benefits of supporting businesses that are ahead in ESG performance. 

When the companies have a better insight on ESG, they could implement the strategies below to achieve sustainability-related targets, as suggested by PwC Malaysia:

  1. Identify the risks the company faces as well as the potential opportunities;
  2. Identify key stakeholders (investors and customers) and sustainability concerns;
  3. Determine what is most material to prioritise key issues to focus on;
  4. Build strong governance to ensure ESG accountability is driven throughout the organisation, starting from the top; and
  5. Develop an action plan to address issues and communicate with stakeholders.

By implementing these strategies, the companies could reinvent their business models in favour of more sustainable options – an approach that will not only help them to weather the current business climate but also provide a competitive edge for them to thrive in the post Covid-19 world.

The companies could also diversify their revenue stream by providing new products and services that are in line with the circular economy – turning inefficiencies in linear value chains into circular business value. This in turn would minimise wastage while developing a more resilient supply chain.

Moreover, the companies would have the opportunity to participate in green technology through the initiatives outlined in Budget 2021 – leveraging their investments to benefit the environment and society, according to AmBank research chief economist Dr Anthony Dass.

The following are the sustainability initiatives introduced under Budget 2021:

  1. Issue first Sustainability Bond in Malaysia for environmental and social initiatives in 2021;
  2. Further encourage issuance of Sustainable and Responsible Investment (SRI) products and bonds that achieve green, social and sustainable standards in Malaysia, by extending the existing income tax exemption for SRI green sukuk grant to all types of sukuk and bonds until 2025; and
  3. Continue Green Technology Financing Scheme 3.0 up to 2022 which will be guaranteed by Danajamin to encourage the issuance of SRI sukuk.

With the commitment from the current administration to realise sustainability agenda, it is an opportune time for businesses seeking corporate restructuring to embark on a debt-for-sustainability swap – an avenue to address corporate debt challenges while focusing on sustainability.

This can be done through introducing a government-sponsored corporate debt restructuring fund which would buy from the banks all non-performing loans from viable firms. The funds and firms would then exchange the loans at a pre-arranged discount from the purchase value of the debt with a new loan based on sustainability compliance in the firms’ operations or supply chains.

Another alternative is through a sustainability-linked loan (with measurable performance targets), a transition loan (supporting green business practices) or other green instruments (such as green bonds). This would not only reduce the use of limited government financial resources, but also leverage bilateral and multilateral development finance institutions, private investors and private equity funds.

When the government could create an ecosystem that enables timely restructuring of debt and access to sustainability financing for viable firms, more Malaysian companies would be able to incorporate the ESG principles, realising the country’s sustainability agenda that aligns with the 2030 Agenda for Sustainable Development.

Amanda Yeo is Research Analyst at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

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