Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on December 20, 2021 - December 26, 2021

Amid rapidly rising global expectations for businesses to adopt responsible, transparent and effective sustainable business practices, many companies are struggling to work out what it means to them, what they need to change and why.

With Bursa Malaysia advising companies to include environmental, social and governance (ESG) factors in corporate strategy, there is a growing need for companies to understand and mitigate ESG issues and trends that can threaten their businesses. This goes beyond the standard business and financial risks companies are used to managing and impacts policies, management systems and processes the organisation has in place to manage material non-financial risks that are specific to the organisation.

As with any material risk, the responsibility for ESG sits with the board, while the executive team is responsible for implementing the board’s ESG strategy. Environmental and social issues may vary by industry and may even be company-specific, depending on the exposures to specific risks, while corporate governance practices tend to be the same across industries.

Depending on where the company is on the ESG curve, this can be a long process and it is better to take the time to embed the principles and change through evolution rather than revolution.

This systematic approach to ESG is in sharp contrast to more traditional approaches where company efforts to improve the company’s image were through charity, philanthropy, and marketing not directly linked to the business. While social investment, community relations, green initiatives and corporate communications are important, they are a small part of a company’s sustainability or ESG programme.

As expectations have evolved and grown, organisations have to decipher an environment, social and governance landscape paved with complexity, including multiple international reporting frameworks and rating agencies, all with slightly different priorities and purposes, while activists are increasingly strident and effective.

ESG has become a key risk in Asia-Pacific, particularly for major Asian companies that trade internationally in Europe and the Americas, where access is being challenged by swiftly changing legislation and regulations covering climate change, other environmental impacts and social impacts, particularly human rights — where Asia-Pacific has significant exposure. Malaysia is no stranger to this. This was seen in the past year by Malaysian companies whose long-term and regular imports to the US were suddenly halted by the US Customs and Border Protection over human rights concerns brought to the attention of the agency by non-governmental organisations.

The global 2021 Resilience Barometer published by FTI Consulting, which reflects the views of more than 2,800 decision-makers in large companies in the G20 countries across the world, reports that about 83% expect to be investigated by regulatory or government agencies over ESG in the next 12 months, with the top three most vulnerable industries being renewables, extractives and the financial sector.

More than 80% of companies surveyed said they had increased their commitment to ESG, while even more, 85%, said they have shifted their approach from reactively managing ESG risk to proactively identifying new ESG-related business opportunities.

With more and more CEOs feeling the pressure to act urgently and decisively, there is danger of adopting short-term fixes that produce instant results but run the risk of backfiring. A solid ESG strategy plan needs to be carefully developed systematically to support long-term growth.

Here are seven common mistakes that companies make:

1. Focus on the ratings

Positive ratings help a company gain recognition, but their validity will be questioned if the underpinning sustainable architecture is lacking. Too much emphasis on “ticking boxes” takes valuable resources away from the key task of developing an ESG strategy and plan tailored to the company’s unique profile that will stand the test of close scrutiny. The multiple rating methodologies available on the market make it almost impossible to satisfy all viewpoints.

2. Tell the good news

Companies looking for quick wins often showcase positive examples of sustainable company practices and link them to published policies. This works only if the examples are supported by a consistent sustainability or ESG strategy and plan that guides all operations. If the examples are inconsistent with other company practices and published policy, then the company can expect to be found out and targeted by customers, partners, activists and governments. The stain of “greenwash” is hard to remove.

3. Policy is what matters

It is not about the policies. It is always about how the companies make those policies live in the company, guiding how it does business and defining its beliefs and values. Any gap between policy and practice is likely to be discovered and impact business results.

4. Manage ESG as a risk

Though understanding a company’s ESG risk profile lies at the heart of establishing an appropriate ESG strategy, it should not be managed as a risk any more than in the case of safety. Both safety and sustainability are core values for the company. They drive the vision and have to be factored into all decision-making in the company, particularly in developing business strategy and plans. They are managed differently to other risks. The board and senior management have oversight and responsibility for ESG and its integration into the business strategy. A key challenge for companies is finding the experience on the board to fulfil these duties given that the skills are so new and experience is limited.

5. Focus on compliance

Some companies present their ESG programmes in terms of compliance with rules and regulations over environmental, labour practices, health and safety and other key issues. This approach suggests a minimalist approach that may be at odds with stakeholder expectations based on risk and impact rather than rules. For example, companies operating in recognised high-risk countries for forced labour may be targets if their employee human rights training programme is exactly the same as it is in countries where risks are low.

6. Decentralise decision-making

The lack of a coordinated company-wide ESG delivery plan may give business sectors and corporate functions opportunities to select their own standards and approaches that best match their risk profiles. This is likely to introduce inconsistencies and double standards and potential exposures to higher risk. Companies must harmonise approaches to give the best possible fit.

7. Lack of assessment and monitoring

The lack of effective monitoring of ESG performance impedes the company’s ability to make progress and receive full credit for its ongoing initiatives. Creating mechanisms and methodologies to gather the right information for monitoring performance needs a painstaking and systematic approach but it is instrumental in establishing a successful programme and achieving continuous improvement.

The seven sins of ESG management may not necessarily be deadly, but they can prove dangerous if they lead to poorly managed or superficial approaches to management. By adopting a comprehensive ESG strategy that focuses on material issues, companies can take full advantage of the opportunity offered by a sound ESG management system to address risks, protect long-term shareholder value, as well as give better access to capital, talent and business opportunities.


Liz Kamaruddin is managing director and Nick Wood is senior adviser at FTI Consulting

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