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Government direction on ESG firm

Government direction on ESG firm

The Star

2 August 2022

The government has set a series of credible commitments towards attaining environmental, social and governance (ESG) goals.

Over the next three years, the government aims to deliver on renewable energy (RE) capacity of 31%, and 40% by 2035 in line with the Malaysia Renewable Energy Roadmap.

By 2030, the government has also pledged various initiatives to be implemented on the three pillars of ESG, which are environmental, social and governance, reflecting its major commitment to achieve the national aspiration goals.

From the environmental perspective, Malaysia has vowed to reduce 45% of its economy-wide carbon intensity against its gross domestic product (GDP) in the next eight years.

Considering the social and governance factors of ESG, another key target the government has set is to eliminate forced labour practices.

It is worthy to note that its target to eradicate forced labour practices is not limited to the operations of local companies but also across the global supply chain.

For labour practice improvements, Malaysia became the second country in Asean to formally ratify the International Labour Organisation (ILO) Protocol 29, a protocol that looks at forced labour convention.

In November last year, Malaysia also become a pathfinder country under the UN Sustainable Development Goals (SDG) Alliance 8.7- a global alliance to accelerate efforts to eradicate forced labour, modern slavery and child labour around the world.

These efforts signifies the government’s commitment towards combating and eliminating all forms of forced labour in the country.

Furthermore, the country also plans to formulate the 'National Energy Policy' under the 12th Malaysia plan, in addition to conducting feasibility studies on carbon pricing, carbon tax and an emissions trading scheme.

This is also aligned with one of the key highlights of Budget 2022, whereby the formation of Malaysia's first voluntary carbon market (VCM) will be developed by Bursa Malaysia.

In the long run, Malaysia is also aiming to achieve net zero GHG (greenhouse gas) emissions by 2050.

It can be seen that with all these serious commitments, the government has played a key role to spearheading the ESG journey from a policy making perspective which then sets the right tone for the industry. However, the outcome of these commitments remains to be seen as some implementation requirements are still being developed.

According to PwC Malaysia partner Nik Shahrizal Sulaiman, the crucial role the government plays will also have a knock-on effect on the whole industry, particularly to the government-linked companies (GLCs).

“GLCs play a significant role in the economic supply chain. Therefore if our largest companies adopt ESG, these requirements will eventually shape and impact the whole industry as well,” he says.

Nik Shahrizal stresses that it is crucial for Malaysia to be aligned in its ESG commitments and keep the pace with its major trading partners including China, Japan, South Korea and the European Union that have net zero targets.

However, he says that the private sector, regulators and consumers also need to play their role in addressing ESG, pointing out that it is not just the responsibility of the government or GLCs.

That said, Ernst & Young Consulting Sdn Bhd Malaysia climate change and sustainability services leader and partner Arina Kok says there is a need for wider collaboration between the government and community stakeholders, including the “private sector, education and health institutions, NGOs and, the people” in the design and implementation of the green economy initiatives.

She recommends state governments to also be engaged in policy design from the outset to deliver green initiatives in their respective areas.

“For example, local state governments can be involved in housing retrofits, creating electric vehicle (EV) infrastructure and delivering pilot projects before scaling up nationally,” she suggests.

There should also be government-industry collaborations that can set out specific policy measures and initiatives, desired outcomes, timelines and necessary resources, Kok says.

“By publishing these plans, governments can broadcast how they are working towards environmental goals and set out the roles of the main players,” she explains.

To avoid the risk of failure, Kok proposes the government to set out careful consideration of the design and implementation of green initiatives.

Meanwhile, she says governments can also do more to educate people on the impact of their lifestyle choices, nudging them towards more sustainable consumption and behaviours.

Citing an example, she says the government can inform the community to make ethical investments, gradually switching to “clean energy” from energy-efficient electronics and vehicles to mindful household consumption of food and durables.

But for a start, KPMG Malaysia head of sustainability advisory Phang Oy Cheng believes it is only logical for GLCs to get onboard and set a trend for ESG performance management.

“In fact, GLCs should be encouraged to lead the way in ESG performance management and reporting.

“For example, majority of government-owned organisations in Thailand lead the way in ESG performance and reporting, many of which are among the top three performers in their sectors in the Dow Jones Sustainability Indices (DJSI),”she says.

As such, Phang adds companies must move beyond the idea that ESG is only for compliance reporting requirements, as per the Bursa Malaysia's listing requirements.

“ESG serves a fundamental role in data collection or corporate review by investors and stakeholders such as customers, potential partners and governmental agencies internationally.

“Having good ESG performance, reporting standards and demonstration of ESG risk management is no longer just a nice to have but is instead now an integral part of business risk management.

“Business owners and professional managers need to understand and ensure their organisations are up to speed with regards to ESG requirements,” explains Phang.

Internally, companies must also move beyond the idea of compartmentalising job scopes and begin collaborating with other departments because ESG cuts across all business functions and is beyond the purview of a single department, she opines.

Most importantly, Phang says the government needs to ensure that policies, programmes and initiatives touted are well-supported both financially and institutionally.

Should GLC’s play their role effectively in addressing ESG, Deloitte Malaysia sustainability and climate leader Kamarul Baharin says it will likely accelerate the adoption of the ESG practices in the corporate world.

“Stakeholders or investors of GLCs could keep pushing for GLCs to consider ESG in their decision making and embed ESG into their governance and strategies in order to accelerate the ESG agenda,” he adds.

However, Kamarul says pushing the ESG agenda could be an uphill task with conflicting demand for the government to press more urgent issues than ESG.

“As we grow our economy post-pandemic, there could be other urgent needs for the allocation of funds and resources.

“The ESG agenda is a long-term commitment that may not give short-term outcome – it may take a back seat to give way to more pressing issues facing the country,” he explains.

Nonetheless, Kamarul highlights that the government should continuously promote and demonstrate its commitment towards ESG values through its policies, regulations, and decision making.

“They should lead the way more vigorously by adopting ESG goals within its operations and public services,” he says.

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