ESG is the acronym for environmental, social and governance – the key pillars companies use to measure sustainability when doing business.
While Malaysia is still in its infancy when it comes to ESG compliance and integration, plans are already under way. ESG forms one of the major themes in the 12th Malaysia Plan which is on advancing sustainability, with Malaysia being committed to becoming a carbon-neutral nation by 2050.
This initiative has increased the need for ESG compliance in corporate transactions and to evaluate the business practices of a company and its future financial performance, which is, the long-term value of investing in the company. From a legal perspective, due diligence is conducted on each individual element of “environment”, “social” and “governance” to assess whether a business complies with local and international sustainability guidelines, frameworks, and regulations.
For “environment”, depending on which sector the company belongs in, common areas for review include examining a company’s waste management process and pollution prevention measures. A step-up with ESG in mind will now mean examining whether stakeholders in the supply chain adopt ESG sufficient practices to address climate change, for example utilising clean energy and buying carbon credits.
On the “social” front, investors should look out for continuous efforts not only to provide basic protection to employees, but also to offer support beyond monetary compensation.
While laws such as the Occupation Safety and Health Act 1994 and Employees’ Minimum Standards of Housing, Accommodations and Amenities Act 1990 exist to protect and provide welfare to workers in Malaysia, ESG due diligence enables the more subtle value-adding factors of a company to be uncovered. These factors may include the integration of diversity and inclusion policies, adequate training to promote individual development, and any other effort by a company to strengthen its relationship with its employees and the community.
From the “governance” perspective, it is recommended that diligence is done on a target company’s internal polices in addition to their anti-money laundering and know-your-customer policies to guarantee good corporate governance and to keep track of their sustainability goals.
Bursa Malaysia is one of the regulators leading this initiative and it recently introduced enhanced sustainability reporting in the listing requirements on the Main Market and ACE Market to promote sustainable practices and disclosures.
It is prudent to note that not all companies walk the talk – there are a plethora of businesses that use ESG and sustainability as a marketing tool to cash in on the rise of such focuses. This practice is known as “greenwashing”, which may promote consumer skepticism and undermine real efforts by companies that are genuine about their ESG goals. Identifying greenwashing has become increasingly difficult as sustainability initiatives become more integrated into the mainstream.
Therefore, investors and advisors alike must be wary of such practices when conducting ESG due diligence and implement effective procedures – to the extent of examining the supply chain – to ensure the accuracy and fairness of the information provided by a target company.
As awareness on ESG issues continues to grow, so will the risk of adverse legal and reputational consequences against companies that fail to uphold ESG standards. It is recommended that businesses, in consultation with legal professionals, start developing a sensitivity to sustainability issues so that they can navigate its changing landscape.
This article is contributed by Alex Cheong of Christopher & Lee Ong.
