This article first appeared in Forum, The Edge Malaysia Weekly on November 29, 2021 - December 5, 2021

There is no denying that businesses have felt the heat over environmental, social and governance (ESG) risks, accentuated by the pandemic, in recent times. The driving force for change is evident, with several important developments in Malaysia reinforcing the adoption of ESG across various industries and businesses.

The Joint Committee on Climate Change (JC3), set up in 2019, is one such milestone. Co-chaired by Bank Negara Malaysia and the Securities Commission Malaysia, it encourages the local financial sector to collaborate on building climate resilience. A dozen JC3 members have committed to early adoption of Bank Negara’s Climate Change and Principle-Based Taxonomy that was issued in April 2021. The Malaysian Code on Corporate Governance (MCCG) 2021, released in the same month, further reinforces the need for ESG at the highest levels of an organisation. This underscores the need for boards to strengthen their oversight and integrate sustainability considerations into the business.

The call for organisations to transform their businesses through target setting and transparent sustainability disclosures got louder in the weeks leading up to the 2021 United Nations Climate Change Conference (COP26). The formation of the International Sustainability Standards Board (ISSB), announced during COP26, is a significant step forward for ESG reporting, introducing globally consistent standards and presenting opportunities for more harmonised sustainability reporting.

Not surprisingly, PwC’s 2021 Global Investor ESG survey finds that ESG has become a make-or-break consideration for leading investors globally. Almost half of investors surveyed globally (49%) say they are willing to divest from companies that are not taking sufficient action on ESG issues. A significant 59% say a lack of action on ESG issues would make it likely for them to vote against an executive pay agreement while 83% say it is important that ESG reporting provides detailed information about progress towards ESG goals. Investors are leading the way in putting sustainability at the forefront of their investment processes, recognising that doing so will help their portfolio managers better manage risks and improve their investment decision-making.

The overlapping requirements of the various ESG frameworks and reporting practices in the market have long been a pain point for preparers and users, catalysing the creation of the ISSB. Referred to as “alphabet soup”, the requirements often confuse both preparers and users. Preparers are often confused over which framework is required to provide adequate and relevant disclosures for stakeholders. For the users, certain frameworks may not clearly explain the organisation’s sustainability strategy, why they are chosen, how to achieve the targets set or how to monitor and measure progress consistently.

A good starting point to connect the dots is applying the Integrated Reporting <IR> Framework issued by the International Integrated Reporting Council (IIRC) in 2013. The <IR> Framework is a principle-based framework, enabling the organisation to set out its own unique story on how it creates value for its stakeholders. This allows the organisation to concisely communicate the underlying business value that is well integrated with its strategy. This includes the organisation’s sustainability strategy and how management protects and enhances this value, and provides insights to stakeholders.

With the ISSB announcement, the Integrated Reporting Framework, which is currently part of the Value Reporting Foundation (VRF), is expected to evolve, strengthening its impact in communicating value, through the consolidation between the Climate Disclosure Standards Board (CDSB) and the VRF into the ISSB.

A standalone sustainability report, which is commonly used in Malaysia, often misses the mark in communicating how value is added to the organisation as a whole and how that in turn creates value for the organisation’s stakeholders. As such, this limits the effectiveness of the sustainability strategy. For example, help extended to local communities could be more focused if done intentionally with key societal and business outcomes in mind, compared with sporadic corporate social responsibility (CSR) initiatives such as donations to various causes.

As shared in the table, a good sustainability strategy is one that is integrated with the organisation’s purpose and overall strategy. PwC’s recent Global Investor ESG survey supports this, with 82% of investors saying ESG needs to be embedded in the corporate strategy, while 66% of respondents say they are most confident ESG issues are being addressed if someone in the C-suite is accountable.

The burning platform for better reporting is here. We can see it in the calls by investors, customers and employees.

Using <IR> as a framework to help companies navigate the maze of ESG frameworks and standards will help companies communicate value with impact and authenticity. <IR> can work as an umbrella with room for expanded disclosures relating to specific ESG matters. An example is using guidelines by the Task Force on Climate-Related Financial Disclosures (TCFD) to provide more disclosures on climate-related risks, or the Global Reporting Initiative (GRI) to expand on ESG matters, or linking strategy with the United Nations’ Sustainable Development Goals (SDGs).

Using integrated thinking to reinvent strategy (including sustainability) and align the business model will drive impactful transformation within the company. The result is clear and measurable outcomes for the company’s stakeholders and better insight through consistent reporting, supported by verified data. That is building trust in action — a future we can work towards by connecting the dots one step at a time.

Pauline Ho is net zero lead partner and Tay Choon Ling is assurance director at PwC Malaysia

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