By Abdul Hamid A Rahman
KUALA LUMPUR: In the Malaysian business landscape, companies prioritising environmental, social, and corporate governance (ESG) principles are poised to experience sustained higher valuations and long-term investment returns.
In parallel, KPMG in Malaysia – a global professional services firm noted that public-listed companies embracing ESG investments consistently demonstrate elevated valuation multiples, showcasing a positive correlation with increased shareholder returns and profitability.
Its head of sustainability advisory, Phang Oy Cheng, mentioned that various factors are driving ESG considerations in corporate decision-making, with attention also paid to investors’ demands, which enable access to funding and investments.
“More than two-thirds (69 per cent) of global chief executive officers (CEOs) have fully embedded ESG into their business as a means to create value.
“It’s also important to note that 35 per cent of global CEOs say they have changed the language they use to refer to ESG both internally and externally, reflecting a shift in the dialogue about ESG and signalling a trend toward prioritising the areas that make the most sense for their organisations,” she told Bernama.
Ultimately, Phang said that ESG considerations should be seen not just as a compliance matter but as an indispensable facet of business management, addressing the concerns of customers, collaboration partners, regulators and investors.
Successful companies that embed ESG principles
In KPMG’s Customer Experience Excellence 2023-24 report, Maybank has received notable recognition for not just its innovative practices but also for its significant strides in sustainable financing and transparent initiatives aimed at fostering a more sustainable future.
For example, the bank offers affordable and accessible insurance options to lower-income individuals; provides financial inclusion solutions to vulnerable communities and small businesses; conducts financial literacy programmes through its Maybank Foundation – initiatives which the bank announced has improved the lives of 871,200 households across ASEAN over 2021/22.
Meanwhile, Phang said the top-performing companies within the FTSE4Good Bursa Malaysia Index’s top 10 constituents also serve as a strong indicator of how effectively ESG principles can be integrated into corporate business models.
The FTSE4Good Bursa Malaysia Index is designed to highlight companies that demonstrate a leading approach to addressing ESG risks.
“Notably, the FTSE4Good has demonstrated consistent growth in total returns since 2014,” she said.
Citing another example of successful ESG integration, Phang pointed to global conglomerate Unilever’s efforts that have been recognized for its commitment to purpose-driven practices.
“In 2010, the company launched its Sustainable Living Plan, aiming to halve its environmental footprint while enhancing its positive social impact. In 2018, Unilever revealed that its Sustainable Living Brands are outpacing the rest of their business, with a growth rate of 69 per cent, and contributing to 75 per cent of the company’s overall growth,” she said.
Investor and stakeholder engagement
Phang said that investors’ demand for high-quality, timely and comparable ESG data is one of the drivers behind the issuance of sustainability-related rules and reporting standards.
“But regulation is not their only mechanism for obtaining ESG data; annual shareholder meetings continue to be leveraged by investors and other stakeholders to request for ESG disclosures where proxy votes speak louder than words.
“Increasingly, we observe investors are seeking clarity on net-zero and decarbonisation initiatives. From an investment perspective, they are examining how these strategies affect business sustainability as well as the required investments in carbon adaptation technologies.
“Hence the need for mandatory disclosure requirements, accompanied with reliable supporting data is crucial as insights from KPMG’s report reveal that 53 per cent of deals were cancelled due to material findings in an ESG due diligence,” she said.
Challenges and opportunities
As a sustainability advisory expert, Phang said that common challenges include the ability to integrate ESG strategies with the company’s overall long-term business strategy, securing board-level accountability for the company’s ESG strategy, and ensuring the ESG plan is embedded into every segment of the business covering the entire supply chain.
Another challenge companies face is in measuring their ESG performance.
“The KPMG ESG Assurance Maturity Index 2023 found that only 27 per cent of companies have robust policies and procedures to support the development of their ESG disclosures. Only 26 per cent have a clear audit trail to support their non-financial information.
“The key to an effective ESG practice is to align ESG practices with the overall business objective with well-defined milestones and accountable owners to commit the required resources to move the dial forward on value creation.
“Opportunities can also present themselves internally, as embedding ESG practices fosters higher efficiency with the implementation of purposeful structures and processes. This translates to operational cost savings and increased worker productivity,” she said.
Future trends
Increasing volumes of ESG-related information are being publicly disclosed and over the next few years, it might impact companies and their investors.
“However, disclosures have to stand up to objective scrutiny and this will drive the demand for external assurance of ESG data. Ultimately, it will be a regulatory requirement to obtain assurance in many jurisdictions and companies should prepare for this eventuality,” said the expert.
Phang explained that KPMG has identified five approaches for companies to ensure that their ESG disclosures meet preconditions for assurance.
“These five approaches include determining the applicable ESG reporting standards, building robust ESG governance and developing the right skills, identifying the applicable ESG disclosures and data requirements across functions, digitising the ESG data processes and ensuring high-quality data, and working with the value chain to collect ESG information,” she added. – BERNAMA
