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ESG: What’s in a Name?

It is common for us to now hear companies chanting the “ESG” mantra. But what is ESG?

ESG essentially comprises the following: [E] for Environmental; [S] for Social; and [G] for Governance. Most, if not all, companies are very much familiar with the [G] component. This is particularly when laws and regulations have been passed to ensure accountability and good practices are enforced and more so when companies had to expedite setting up their anti-bribery management system as required under the newly-enforced section 17A of the Malaysian Anti-Corruption Commission Act to ensure a corporate culture of good governance and integrity.

The ESG initiative, however, goes far beyond governance. Although good governance is an integral pillar for the functioning of a company, the remaining two pillars, i.e. the [E] and [S] elements, which may be novel to some, are equally crucial. The value in integrating these three pillars in a company’s business is proven by various studies to lead to more sustainable investments which would then yield numerous benefits for the public. In fact, companies which adopt ESG principles may also attract investments from certain captive funds as well as enjoy the benefit of lower funding costs.

Whilst larger listed companies especially those with a global presence have long embraced the ESG principles, others may not grasp or are convinced by such ideas or ideals altogether.

In a recent statement given by the Bursa Malaysia’s CEO following the release of Bursa’s results for the financial year ended Dec 31, 2020 (FY2020), Datuk Muhamad Umar Swift said that only 75 companies are qualified for the FTSE4Good Bursa Malaysia Index, which is Bursa’s measure for ESG compliance. Although this number increases yearly, it is still relatively low compared to the total number of companies listed on Bursa Malaysia.

Bursa Malaysia’s emphasis on the ESG pillars is encouraging and helps investors make reliable and sustainable investments. In fact, now more than ever, with the Covid-19 pandemic, the need and demand for ESG-driven investments in Malaysia is accelerated. Potential investors are on the lookout for companies which are more resilient in facing market uncertainties and regard is given to businesses which look beyond merely profit factors. The Covid-19 pandemic for instance has made the [S]ocial component of any business stand out. Companies that place importance on societal issues and the well-being of their employees are hailed whilst companies that degrade employees or their work conditions would often encounter adverse views and effects on their reputation and business performance.

The [E]nvironment component also remains high on the agenda for investors particularly with respect to climate change issues. Environmental issues are real and require urgent attention. Therefore, companies definitely need to play their roles to address these issues.

The adoption of the ESG pillars however requires companies to assess their needs and the challenges involved. Without clear guidance/guidelines or uniform standards to be adopted, companies would certainly struggle to identify the existing ESG-related risks which their businesses may face and how to minimise/eliminate them. They would also need to be able to identify whether they are indeed committing to their ESG goals rather than just “greenwashing” or “socialwashing” them.

Despite not having push factors such as Bursa Malaysia driving the ESG agenda, companies which are not listed on Bursa Malaysia should also consider incorporating the ESG pillars into their corporate philosophy. The trend now is for companies to adopt ESG policies to enhance their business.

A point to note is that with a plethora of regulatory requirements to comply with, companies should also be mindful of the ESG-related regulations and the enforcement actions which may be taken for breach of these.

Our Regulatory Compliance & Enforcement Department is able to provide in-depth and pragmatic advice to our corporate clients in designing a workable ESG framework/commitment. This includes the whole process of identifying, managing and minimising ESG-related risks and opportunities which may loom over a business.

This article is intended for general information of the clients of our Firm. It should not be regarded as legal professional advice. If you require further information on how we may assist you in navigating your ESG agenda, please feel free to contact us.

 

Jal Othman
Partner
Tel: (603) 2031 1788 ext 204
[email protected]
Yoong Sin Min
Partner
Tel: (603) 2031 1788 ext 242
[email protected] 
Dhaniah Ahmad
Partner
Tel: (603) 2031 1788 ext 392
[email protected]
 

 

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