Friday 29 Mar 2024
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This article first appeared in Forum, The Edge Malaysia Weekly on June 14, 2021 - June 20, 2021

The case for building trust in business has never been more critical in these volatile times. A PwC study saw a 366% uptick in the volume of online conversations around trust in business in Malaysia when the World Health Organization (WHO) declared Covid-19 as a global pandemic. One year on, businesses have emerged as the single most credible and trusted source of information for most Malaysians, according to the 2021 Edelman Trust Barometer.

Businesses are at an important crossroads, as the role they play in society and the wider economy will pave the way for a more resilient future, beyond just shaping the nation’s recovery. How businesses are governed, including practices at the board level in addressing risks and opportunities, selecting and nominating directors, and managing their day-to-day operations, have an important bearing on trust in the capital markets.

It is timely that businesses are guided by the Securities Commission (SC) in enhancing stakeholder trust, with the recent release of the Malaysian Code on Corporate Governance (MCCG) 2021. Since its inception in 2000, the code has been recognised as a milestone in corporate governance reform in Malaysia. It has been instrumental in developing the quality of governance in business to improve trust in this institution.

The code further emphasises the impact of businesses on their stakeholders and how they can address one of the most pressing issues of our time — environmental, social and governance (ESG) issues.

As the actions of businesses have far-reaching implications on other supply chain players, the economy and the wider society, all eyes will be on companies, their boards and leadership as they heed the call and respond for the greater good.

In this article, we will reflect on how boards can lead the charge in building trust, recognising the need for greater transparency and increased investor and societal trust in the aftermath of the pandemic. We will highlight developments from the MCCG with a focus on sustainability issues, as businesses confront what it really means to rethink leadership in these extraordinary times.

ESG and its place in the code

Over the years, we have seen continued refinements in the code, from board responsibilities, performance, diversity, transparency in reporting to meaningful interactions with stakeholders. The code’s positive influence on corporate governance practices in Malaysia is well regarded.

Understandably, a key emphasis of the latest code is sustainability and ESG considerations. The boards are responsible for placing sustainability at the forefront when discharging their duties, from developing and implementing the company’s strategies and business plans to making decisions about risk management.

Elements of ESG first appeared in the 2012 code. Several noteworthy developments have taken place around sustainability locally over the years. For instance, the SC launched Malaysia’s first green sukuk in 2017 under its Sustainable and Responsible Investment Sukuk Framework, while in 2020, a new framework was launched to facilitate the offering of Islamic funds with waqf features to promote growth of the Islamic social finance segment.

Fast forward to 2021, the trajectory for ESG response by businesses has intensified. The pivotal role played by boards extends beyond just setting the ESG agenda to ensuring that their companies’ sustainability strategies, priorities and targets, and performance against these targets are communicated to their stakeholders, both internally and externally.

As corporates rethink their ESG commitments and how these need to align with their business and value creation strategy, they will need to critically consider how they can work hand in hand with senior management and the rest of the organisation to address ESG priorities. While the board sets the standard for accountability in how plans and targets are communicated, it is senior management’s role to manage material sustainability matters.

We observe that ESG is not given sufficient focus on the CEO agenda currently. Looking at climate change and environmental impact more specifically, PwC’s 24th Global CEO survey revealed that only 35% of Malaysian CEOs see climate change as a threat, while 38% are tackling it as part of their risk management approach.

Embracing ESG for the greater good

Board members and corporate leaders need to take cognisance of ESG issues and their implications to their institutions, as this will have a long-lasting impact on how the wider society perceives them. ESG needs to be viewed from a wider context in terms of how value is created and destroyed. This is an increasingly crucial indicator used by investors to decide where to put their money.

Your customers too are essential in ensuring that you continue to be in business. In PwC’s March 2021 Global Consumer Insights Pulse survey, 42% of Malaysian respondents said they bought from companies that were conscious and supportive of protecting the environment, shining a light on the importance of earning customer trust through ESG practices.

Statistics show that returns on ESG indices are outperforming those of their conventional index counterparts. MSCI World Socially Responsible Investing (SRI) Index returns outperformed those of the MSCI World Index by 507 basis points in the first nine months of 2020. As societal awareness of sustainability risks increases, this could further widen the performance between ESG and non-ESG stocks, tipping investor sentiment in favour of ESG investments.

Boards have a duty to upskill themselves in the area of ESG, so that they can make informed decisions on adopting ESG practices. The code highlights the ability of boards in tackling questions and deliberating on sustainability as an important gauge of how competent and ready boards are in performing their role.

Indeed, boards should identify their professional development needs and look out for training in these areas, including from certified providers or as part of lifelong learning courses available online. Given the fast-evolving ESG landscape, it will be wise to maintain an updated training curriculum to demonstrate board compliance and competencies effectively in this climate.

With the emphasis on skill sets, this places an added responsibility on nomination committees to identify potential board members with good working knowledge of climate change issues, as well as potential directors with deeper knowledge, especially for sectors that have a greater impact on ESG issues.

For organisations that have a greater stake in ESG issues, they may do well to appoint a dedicated sustainability committee to work with boards in managing these priorities on a more detailed or operational level.

Identifying good measures of success

The voice of institutional investors and groups is growing louder for organisations to set targets around emissions towards a decarbonised economy. For instance, Climate Action 100+, which is coordinated by various regional investor networks like the UK’s Institutional Investors Group on Climate Change (IIGCC) and the Asia Investor Group on Climate Change (AIGC), is calling for net zero emission commitments from organisations.

In Malaysia, several organisations have made pledges to achieve net zero by 2050. With several prominent organisations in the energy, telco, aviation and financial services space leading the way, this sends an important message to other corporates on the need to champion ESG practices in a very tangible and holistic manner to earn stakeholder trust.

Better ESG disclosure is certainly needed amid intensifying investor scrutiny on how businesses are responding to sustainability, more so in sectors like palm oil and rubber gloves that are associated with labour and sustainability concerns.

On the regulatory front, Bank Negara Malaysia and SC are pushing for the adoption of reporting standards among local financial institutions as recommended by the Task Force on Climate-related Financial Disclosures (TCFD).

Feedback from capital market participants, financial institutions and other stakeholders is taken into account to ensure that guidelines are inclusive. This includes Bank Negara’s recently released Climate Change and Principle-based 

Taxonomy guidance document, as well as SC’s own taxonomy on ESG, which is currently being developed and will address transition assets and facilitate fundraising.

Boards are increasingly expected to provide more granular disclosure, step up their target setting and gap analysis initiatives as well as close the necessary disclosure gaps. As the code emphasises the involvement of boards in disclosures, this calls for a stringent review of processes to effectively capture non-financial data, especially in promoting verifiable, accurate and robust data. An independent review of key assumptions and models is key to ensuring that targets and achievements are both science-based and can be defended.

The code also highlights that boards and senior management should be evaluated based on how well they address material sustainability risks and opportunities. This could potentially promote accountability and transparency in how boards carry out their responsibilities, be it through championing ESG within their organisations, nurturing a culture that embraces ESG efforts, or rewarding sustainable behaviours throughout the business.

Such outcomes would need to be transparently shared with their shareholders. Having a good understanding of consumer sentiment will be essential. Boards can use data to project customer demands and plan for the uncertain future.

Moving from profit to purpose

Literature and experience tells us that boards become more engaged in times of crisis. In 2020, no company could arguably say they avoided a crisis, or could have predicted a crisis like Covid-19. More than ever, boards will need to focus on their company’s crisis preparedness if ESG considerations are not given due attention.

Businesses are being trusted by stakeholders to lead the way, and engage with other institutions in multilateral conversations to progress responses to critical issues like climate change. Some recent positive moves include business commitments to net-zero targets, and carbon-neutral portfolios.

This is reflective of the government’s commitment for Malaysia to achieve a carbon-neutral status in the future, as aptly highlighted by Minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed at a recent Climate Governance Malaysia event.

Are we now at a tipping point for more business leaders to stand up and revisit their purpose and their progress against it? Certainly. In our conversations with boards, we have learnt that businesses have been focusing more on profit metrics in recent decades and rarely use purpose metrics to guide their decisions. A further shift in thinking is needed for companies to remain competitive and relevant, and boards need to drive these conversations.

We hope to see more businesses not just buying into the idea, but putting their money where their mouth is, to demonstrate that “doing business well should also mean doing good business”. When good business leads to earning long-term trust, you will know that this is a win not just for your organisation, but for the nation, and the wider society. That is a mandate worth earning.


Andrew Chan is sustainability and climate change leader and Dominic Chegne is risk assurance partner at PwC Malaysia

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