In today's landscape, heightened awareness of sustainability has catapulted corporate ESG (Environmental, Social, and Governance) performance into the limelight. By the year 2020, ESG investment funds had already made their mark in the mainstream market, displaying the potential to surpass broader market performance.
Meanwhile, numerous jurisdictions have begun to contemplate the implementation of binding ESG corporate disclosure regulations. This upsurge in both funding and attention surrounding ESG has substantially elevated the importance of non-financial corporate performance. It has resulted in a complex network of ESG reporting and rating frameworks and sparked a wave of ESG-related commitments from corporate entities worldwide.
DEFINING “GOVERNANCE”
ESG, or Environmental, Social, and Governance, represents responsible business practices. The "G" in ESG stands for governance, encompassing decision-making across entities from governments to corporations. Governance rules are pivotal, evaluated alongside environmental and social factors by investors.
a. The Malaysian Government
In the context of ESG (Environmental, Social, and Governance) considerations, the aspect of "Governance" assumes a vital role within the government. It involves the development of policies and regulations designed to ensure fair treatment and the efficient operation of the nation.
Essentially, it encompasses the establishment of rules and guidelines that foster equity, safety, and prosperity for all citizens, thereby contributing significantly to the overall well-being and stability of the nation.
Case in point, to promote sustainability in Malaysia, the government plans to introduce an ESG standards framework by year-end. This initiative, spearheaded by the International Trade and Industry Minister, Tengku Datuk Seri Zafrul Abdul Aziz, aims to assist local companies, especially SMEs, in transitioning to renewable energy. The framework will offer support in areas such as funding and capacity building for export.
While the upcoming New Industrial Master Plan 2030, set to launch later this year, reflects the nation’s commitment to advancing the industrial ecosystem. The focus includes pivotal factors like ESG compliance and ensuring energy sufficiency for the future.
Governments are accountable for environmental stewardship, social responsibility, and maintaining good governance for the people and the world. They are not, however, subject to ESG evaluations like companies under rating agencies and investors.
b. Your business
Within the corporate landscape, Governance encompasses the structured framework of rules, policies, and practices that steer a company towards responsible, ethical, and transparent management.
This intricate web of principles governs the interactions between a company's leadership, its board of directors, investors, and various stakeholders, thereby ensuring accountability. Notably, it serves as a foundational pillar for the attainment of all ESG objectives.
In this article, we direct our attention to this crucial 'G' in ESG. While the three elements of ESG are inherently intertwined, the significance of 'Governance' often goes underappreciated within corporate realms.
Let’s delve into the reasons why businesses should place a strategic emphasis on corporate governance.
CULTIVATING YOUR COMPANY’S ESG EXCELLENCE THROUGH GOVERNANCE
Investors have poured over $100 trillion into ESG funds, and 70-90% of respondents in the 2023 Edelman Trust Barometer expect CEOs to address issues like climate change and discrimination. Overlooking this critical element can impede your business's journey toward sustainability.
On top of this, KPMG's '2022 CEO Outlook Australia' underscores ESG's shift from a "nice-to-have" to a business imperative. Surveying 1,325 CEOs, it reveals that 62% plan to invest over 6% of revenue in sustainability, and 45% recognize ESG's direct impact on financial performance, up from 37% in 2021.
Companies need to strike a balance between compliance and performance, focusing on improving organisational performance through strategy formulation and policy-making. This can link to the company’s goal of reducing environmental impact through installing solar systems, and the optimisation of digital platforms to enhance overall operational efficiency.
WHY THE TIME TO ACT IS NOW
The term "greenwashing" is now internationally recognised, referring to marketing strategies that deceptively portray a company as environmentally responsible. In response, regulatory authorities abroad have classified "greenwashing" as grounds for lawsuits.
In the United States, the majority of such class actions have targeted retailers and consumer-oriented businesses in sectors like fashion, food, and beverages. This growing trend underscores the serious consideration given by U.S. courts to these allegations, prompting businesses to carefully evaluate the potential for greenwashing litigation.
And recently in Italy, Italian oil firm ENI faced legal action related to allegations of lobbying and greenwashing in favour of increased fossil fuel activities, despite being aware of the associated risks.
For businesses facing these legal actions, it may entail uncertain outcomes, substantial litigation costs, and the potential for companies to reach costly settlements, all of which can significantly damage their reputations & future business opportunities.
These cases illustrate the global trend of heightened scrutiny and legal action against greenwashing practices, emphasising the need for businesses in Malaysia to proactively address their ESG practices as the nation moves forward in the same direction.
These are the emerging ESG reporting standards that are garnering significant attention, and it is highly beneficial for companies to take note of them:
TCFD: The Financial Stability Board (FSB)established TCFD to recommend disclosures that help investors, lenders, and insurers assess climate-related risks.
GRI: GRI, or Global Reporting Initiative, has over 25 years of experience in developing global sustainability reporting standards. They cover various topics, promoting transparency and dialogue between organisations and stakeholders.
IFRS: The IFRS Foundation is a non-profit organisation focused on creating high-quality accounting and sustainability disclosure standards accepted worldwide.
CDP: CDP operates the global environmental disclosure system, assisting organisations in measuring and managing climate, water, and deforestation risks as requested by investors and stakeholders.
Embracing these reporting standards can greatly enhance a company's credibility, transparency, and accountability. This, in turn, equips organisations to make informed decisions, effectively manage risks, and meet the expectations of investors, customers, and other stakeholders.
MALAYSIA'S TRANSITION TO MANDATORY ESG REPORTING
Malaysia is poised to shift from voluntary to mandatory ESG reporting, with impending implications under the forth coming Climate Change Bill.
Natural Resources, Environment, and Climate Change Minister Nik Nazmi Nik Ahmad has announced that the Energy Efficiency and Conservation Bill will be presented during the upcoming parliamentary session later this year.
The time is ripe to grasp the profound influence of leadership and governance within your organisation on ESG initiatives, and to act decisively.
Enter Sunview, your partner incomprehensive solar power solutions, delivering a 360-degree approach to sustainability. We are unwavering in our commitment to guide clients in achieving ESG with climate project development & emission trading services.
Effective governance not only ensures compliance with regulations, but also fosters trust, transparency, and sustainable growth. Discover essential ways to set the right governance framework that can guide your organisation towards success with Sunview.
From clear policies and ethical standards to robust communication channels, we'll explore the key elements that empower businesses to thrive in an ever-changing world in our upcoming article – stay tuned.
Connect with us today to embark on this transformative journey.
