INTRODUCTION
The term Environmental, Social and Governance (“ESG”) is currently in the limelight of most if not all, symposiums in the corporate industry. Nevertheless, it was first introduced in the “Who Cares Wins” Report 2004 commissioned by the United Nations Global Compact with the ultimate goal to develop guidelines and recommendations on the means to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions. Up until today, the term itself has been interpreted and used widely by different professionals, stakeholders, investors and corporations.
Essentially, each element of ESG may be briefly interpreted as follows:
Environmental | : | An organisation's impact on living and non-living natural systems, including land, air, water and ecosystems1; |
Social | : | The impacts an organisation has on the social systems within which it operates2; and |
Governance | : | The organisation's approach on its internal policies for good corporate governance and to meet the expectations of stakeholders. |
EFFECTS AND INDICATIONS OF ESG CONSIDERATIONS IN THE FINANCING SECTOR
Arguably, financial institutions are the ones who have spearheaded the incorporation of ESG considerations in their businesses. For instance, banks in
As succinctly illustrated by the examples abovementioned, the contemporary trend is that financial institutions are reluctant to provide financial services to corporations which do not have proper ESG practices in place. Inevitably, this, in turn, would compel corporations to adopt ESG considerations in their businesses. Accordingly, the entire supply chain will be affected and will incorporate ESG considerations in its decision-making process.
EFFECT OF ESG FACTORS ON MALAYSIAN COMPANIES
In addition to the above, the boards of Malaysian companies, particularly, listed companies, are urged to include ESG considerations in their decision-making processes due to the following factors, inter alia, the Listing Requirements of
Private equity firms have also become progressively selective of their portfolio companies and have the tendency to turn down an investment opportunity due to ESG concerns5. Further, these firms are actively prompting their portfolio companies to incorporate ESG considerations in their business operations by offering a plethora of ESG resources to assist them to address their ESG concerns6.
In addition, the shareholders who strongly promote sustainability practices would ensure the boards consider ESG factors whilst making their decisions. In fact, the dissatisfied shareholders are entitled to exercise their rights to vote against the re-election of the directors for their failure to consider the ESG factors. This is well-illustrated in
Accordingly, the boards are now obliged to integrate ESG factors whilst operating businesses to remain relevant and to compete with their competitors. In fact, the boards could seek professional opinions from ESG experts to enhance the corporation's ESG practice. To ensure that Malaysian companies particularly, the small and medium enterprises, remain relevant in this ESG trend, the
It is trite to note that the incorporation of ESG factors should not be perceived as a compliance burden, but instead, as an opportunity for the corporation to enhance its sustainability practices. In fact, several multinational companies (“MNCs”) have seized the opportunity and established ESG committees which bear the responsibility to outline the strategy, framework and processes for the integration of ESG factors in the MNCs in alignment with their objectives. Research has also shown that a strong ESG practice has a positive correlation with the corporation's growth; the uplift of employee productivity; as well as the optimisation of the corporation's assets and capital9. This is supported by the emerging trend for non-listed companies to adopt ESG practices on a voluntary basis.
GREENWASHING
Briefly, an act or process of creating false impression or misleading investors or consumers on the environmental practices of a company or its product and services would amount to “greenwashing”. Without a doubt, the reward for adopting a good ESG practice is promising. However, companies should, at all costs, avoid making an unsubstantiated climate-related statement without putting in the necessary efforts, which amounts to “greenwashing”. One of the recent interesting headlines was on
COMMENTS
Despite the profound impact of ESG factors on contemporary business operations, no legislation relating to ESG has yet been introduced in
Footnotes
1. Bursa Malaysia, Sustainability Reporting Guide, (3rd edition, 2022)
2. Bursa Malaysia, Sustainability Reporting Guide, (3rd edition, 2022)
3. Standard 8.3(e) of the BNM Corporate Governance Policy
4. Bursa Malaysia, Sustainability Reporting Guide, (3rd edition, 2022)
5. PricewaterhouseCoopers, 'How Private Equity Funds Can Achieve Their ESG Goals' (
< https://www.pwc.com/us/en/industries/financial-services/library/achieving-esg-goals.html> accessed
6. Teck Wee Tiong,
7. Kathy Fong, 'BlackRock voted against re-election of
8. '
9. Witold Henisz,
< https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/five-ways-that-esg-creates-value#/> accessed
10. Tom Sims and
Co-authored by
Exploring The Emerging Impact Of ESG Factors On Corporations And Financial Institutions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Chin Lit Fwu
D3-3-8
Solaris Dutamas
No 1 Jalan Dutamas 1
50480
© Mondaq Ltd, 2023 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source