KUALA LUMPUR: Companies stand to lose substantial investment opportunities without environmental, social and governance (ESG) compliance, which has become an increasingly important criterion for inclusive, equitable and sustainable growth.
Market observers believe the current trend of adopting the ESG standards would make good business sense as it leads to sustainable development for both companies and the communities.
Sunway University economics professor Dr Yeah Kim Leng said companies should capitalise on the opportunities presented in ESG standards, following the United Nation's Sustainable Development Goals (SDGs) blueprint to end poverty, reduce inequality, and spur economic growth while tackling climate change.
"Non-ESG compliance will result in loss of investment opportunities with avoidance by foreign investors (investment funds) and sanctions imposed by international authorities," he told the New Straits Times when contacted recently.
The SDGs were set up in 2015 by the United Nations General Assembly, with an ambition to achieve a better and more sustainable future for all by 2030.
Yeah said the Covid-19 pandemic and economic downturn had accelerated companies' adoption of ESG standards to entice potential investors.
"ESG standards influence most foreign investments. So this is the best time for companies to restructure and reposition themselves to push these SDGs agenda," he said.
However, most small businesses would find it challenging to comply with ESG standards and not obligated to do so due to lack of funding and in-depth understanding of the principles.
Citing an example, Yeah said companies can start investing in cleaner and efficient energy to reduce carbon footprint in their business operations.
"Renewable products and services allow sustainable consumption and production to reduce yields of non-renewable materials and energy resources," he added.
On social site, Yeah said companies should continue with the corporate social responsibility (CSR) programme to ensure employees welfare would continue to be taken care of in terms of healthcare and fair labour practices.
Meanwhile, he said practising good governance by avoiding illegal business operations would be vital to building trust, integrity, and fair corporate practices.
"Companies need to find ways to adapt the ESG practices, which in turn would help Malaysia to achieve the SDG goals, covering the 17 development goals," he added.
Kenanga Research head of sustainability Marie Vaz concurred that it would be necessary for corporate to transition from CSR to ESG, given the increasing attention and emphasis investors are paying to ESG compliance.
"It would make sense for them to do so. However, CSR alone is no longer enough. CSR is not a bad thing, obviously, but it is not enough anymore. Most CSR efforts are random and just a measure of greenwashing. It may not even address the overall negative impact the business is causing," she told NST.
Vaz said companies should enhance their efforts to apply ESG standards by providing better transparency and reporting thoroughly via quantifiable metrics collected and reported regularly to address ESG gaps in the business, such as labour management issues.
She said Task Force on Climate-related Financial Disclosures (TCFD) and Global Reporting Initiative (GRI) were the ESG standards that companies could adopt.
Asked whether it would be an expensive move for companies to instil ESG standards in their operation, Vaz said the cost could be "manageable".
"ESG standards will be positive in the long run in terms of the better valuation if companies are committed to better ESG," she added.
Other cost-saving benefits include installing solar panels to reduce electricity costs and contribute to better energy efficiency while saving the environment.
She added other measures require cost, but it would be beneficial in the longer run.
Vaz concurred that listed companies without ESG compliance could be detrimental to investors selling down on the stock.
Yeah said sustainability rating began to gain momentum among the listed companies as their ratings would give based on ESG compliance.
"They (listed companies) gear up towards fulfilling the ESG and SDG requirements given more comprehensive global compliance. Most companies already expand ESG compliance to encompass 17 SDG goals, which serve as a yardstick for companies.
"It is a comprehensive asset for performance goals for companies to pursue, reflected in the country's achievement of the SDG goals, fulling their commitment to meet the goals by 2030," he added.