Thursday 28 Mar 2024
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This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on July 18 - 24, 2016.


Investors the world over are putting their money in companies that adopt sustainable business practices. Those who ignore this growing trend do so at their peril.


Malaysia’s sustainability story

Seeing that responsible investing is gaining traction globally, Malaysian companies have stepped up efforts to improve their ESG practices.

The Association of Chartered Certified Accountants (ACCA) Malaysia says sustainability reporting is rapidly becoming an annual mainstream exercise, based on the growing participation at its Malaysia Sustainability Reporting Awards (MaSRA). 

Vilashini Ganespathy, ACCA Malaysia’s head of policy and members, notes that 51 companies took part in MaSRA last year, compared with only 11 in 2002. The concept of sustainability reporting was in its infancy when ACCA initiated the annual event. At the time, many companies saw sustainability reporting as a “tick-box exercise”, she adds.

“The judging panel has noted the growing number of standalone sustainability reports being produced in the last five years [separate from company annual reports]. The motivation behind the increasing awareness among companies to practise and report their sustainability efforts can be credited to the evolving needs of stakeholders, which includes investors, who are more sophisticated and expect more from businesses beyond the financial deliverables,” says Vilashini. 

“ACCA’s own research found that 69% of investors surveyed have become more sceptical about company-provided information since the global financial crisis, while 63% place greater value on information generated outside the company. Interestingly, 93% expressed support for the concept of integrated reporting, which requires a company to report its strategy, governance, performance and prospects in the context of its external environment, leading to the creation of value in the short, medium and long term. In other words, reporting beyond the conventional financial data.”

In the last few years, more government-linked companies and small and medium enterprises (SMEs) have bagged awards, taking on multinational corporations such as Nestlé (M) Bhd. The winners have included telecommunications giant Axiata Group Bhd, multinational conglomerate Sime Darby Bhd and Khazanah Nasional Bhd-owned Cenviro Sdn Bhd. 

Axiata group chief corporate officer Mohamad Idham Nawawi says the company believes good sustainable practices will have an impact on its bottom line in the long run. Axiata has operations in nine countries.

“We are in a highly regulated industry; countries and government will see the value of our approach as opposed to a newcomer, which would have to build the infrastructure from scratch,” says Mohamad Idham. 

In Bangladesh, where Axiata has had a presence in for 20 years, the company offers its prepaid mobile users free life insurance coverage. And in Sri Lanka, where it has been operating for 15 years, its accident coverage is a nominal 10 US cents a day for subscribers, who would otherwise have no access to insurance. All this while, it has been expanding its mobile connectivity. 

Multinational food and beverage producer Nestlé was one of the early adopters of sustainability practices. It agrees that investors no longer look at company profiles based on their profits alone.

“Instead, there is increasing scrutiny and emphasis on the sustainability practices of a business. In recent years, there has been greater progression towards the concept of ‘creating shared value’ from ‘corporate social responsibility’,” says Eliza Mohamed, Nestlé Malaysia’s group corporate affairs director.

“The growing trend in embracing corporate sustainability can be seen in businesses across the globe, as many have begun to adopt international sustainability reporting standards such as GRI Sustainability Reporting and FTSE4Good.” 

Like Axiata, Nestlé is among the few companies in the country that adhere to the Global Reporting Initiative (GRI).

“Ultimately, we are and will always be long-term focused rather than short-term driven. Essentially, it is about doing well by doing good, and this long-term focus underpins our concept of creating shared value … that [ensures] we first create value for society for the company to be successful over the long term,” says Eliza.

“For us, it is about implementing responsible sourcing in our supply chain because consumers and other stakeholders increasingly want to know where their food comes from and how it is produced.” 

Nestlé works alongside its non-governmental partners globally to map out its supply chain and conduct supplier audits as well as farm assessments to ensure the procurement of ingredients complies with its responsible sourcing guidelines.

Nets Printwork Sdn Bhd, which won the MaSRA award for Best Sustainability Reporting among SMEs, has made sustainability the central aspect of its corporate management. As it operates in a production print environment, the company has installed carbon neutral press machines and uses biodegradable or recyclable material for printing. 

“In terms of productivity, we do see a higher return from the new eco-featured machine compared with the old one. This has led to higher productivity and lower maintenance cost,” says Teh Soo Tyng, its sustainability strategy and programme director.

“However, cost is still a major concern for buyers. When we introduced eco printing, we noticed that clients lowered their expectations on the green criteria when they compared the price with that of conventional printing. But the demand for eco printing and eco labels, such as the Forest Stewardship Council (FSC), Sirim Eco Label and Carbon Footprint Label, is growing each year.”

Teh says the firm also extends its objective of going carbon neutral to staff by incentivising those who opt for LED light tubes or bulbs in their homes and if they carpool to work.

Cenviro, a wholly-owned subsidiary of Khazanah, which has received a commendation award for reporting on stakeholders’ engagement, says sustainability has helped the company reduce costs. “We have always looked at innovative ways to improve our operational performance by recovering useful materials or blending waste, to be used as fuel for our incinerators. This has reduced some of our fuel needs and helped to increase margins. Sustainability practices help companies to reduce cost, but smart companies also understand that they can drive revenue and profit,” says director Shahazwan Mohd Harris. 

As the company is currently owned by the state’s strategic investment fund, it is not seeking any other investors yet. “This will probably change in the future, as Khazanah considers the next steps to monetise its investment in Cenviro. Khazanah started looking at sustainable development as a sector to invest in in 2008, and Cenviro is in this sector,” says Shahazwan. 

“Interestingly, we have received indications of interest, either to invest in the company or to partner it in projects and investments … from foreign investors and operators in waste management, technology and sustainability in general.” 

Shahazwan says having a sound sustainability plan in place puts the company in a favourable position among strategic investors, specifically in Malaysia and Southeast Asia, where such investment opportunities are rare and limited. “Cenviro has worked with advisers to evaluate the importance of sustainability practices to investors. The data shows that companies with good sustainability practices outperform and consistently attract more investors. This is especially true in developed markets. But even in developing markets such as Asean, this has proven to be true.”

This reflects the findings of the BCG MIT-SMR survey. According to Felde, although the number is not fully representative, about 65% of Malaysian companies believe that good sustainable performance is important to investors, which is more than the global average. Of the total number of respondents surveyed, 0.6% were from Malaysia. 

“More than 80% of the companies also observed that sustainability performance is important to remain competitive — now or in the future — so slightly less than the global average, but also high. However, only 65% of Malaysian companies say they have a sustainability strategy in place,” he says.

Felde, however, points out that fewer than 20% of Malaysian companies’ say their sustainability activities have added to their profits, which is less than the global average of about 25%. He says most companies struggle to create a positive value case, where returns are greater than investments. This is the key to implementing a successful sustainable development strategy. “Hence, we can conclude that Malaysian companies struggle even more than those in other regions.”

Despite the many studies showing that companies have adopted sustainability business practices, this is not yet the norm, says Felde. He points out that many of them use the concept as a marketing tool rather than to provide real value add.

The survey found that sustainability indices are no longer investors’ sole source of information as some of them also use their own analytical tools when deciding on investments. According to the BCG MIT-SMR survey, only 36% of investors say a company’s inclusion in a major index is an important factor when it comes to investment decisions. One reason is that the data in many sustainability indices are self-reported and usually vetted for completeness, not accuracy.”

For this reason, Felde says it has been a challenge for indices to remain relevant. “Investors do not base their investing decisions only on one financial index but also look beyond the ranking (for example, their own calculations on return expectations). So, why should they rely on only one sustainability development index?”

While sustainability data and analytical tools are a work in progress, the report suggests that such information will increasingly be used to drive investment decisions. “Our research during the past year indicates that many investors are trying to improve their investment models so they can anticipate governance issues that lead to corporate scandals,” says Felde. 

According to the report, 50,000 companies are annually subjected to ESG evaluations by 150 rating systems on about 10,000 performance metrics. The diversity of organisations, systems, ratings and metrics has led many sustainability managers to the verge of “survey fatigue”. Corporate social responsibility offices often spend months just collecting data. 

Nevertheless, responsible investing is the way forward. While some Malaysian companies have taken a step in the right direction, the shift towards sustainable development is still at an early stage.

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