Source: BURSA MALAYSIA | Published: May 2024
Institutional investors have made it clear they expect the companies they own to adhere strictly to ESG standards. This is in line with the rise of sustainable investing.
However, in a survey of Malaysians carried out by Palindrome Communications, 75% of respondents said that they thought the level of understanding of ESG within their organizations was low. This appears to show that awareness of ESG in the country has still not reached acceptable levels.
Environmental, social, and governance (ESG) has been discussed in boardrooms, corporate governance reports, webinars, the press, and blogs. But how did ESG get started and what are some of the different facets of the subject? What are the key differences between the concepts of sustainability and ESG, and how do they relate to each other in the context of evaluating a company's performance and impact?
Sustainability Vs ESG
Sustainability and ESG are closely related concepts but have distinct focuses. Sustainability is a broader concept that refers to the ability to meet present needs without compromising the ability of future generations to meet their own needs. It encompasses environmental, social, and economic dimensions and seeks to address the long-term balance between these pillars. Sustainability considers the impact of actions and decisions on the planet, people, and prosperity (also known as the "triple bottom line").
On the other hand, ESG specifically refers to a set of criteria used to assess the environmental, social, and governance performance of a company. It is a framework for evaluating the sustainability and ethical practices of businesses. ESG metrics provide a lens through which investors, stakeholders, and analysts can evaluate a company's operations and behaviour. ESG metrics are increasingly used to assess risks and opportunities associated with investments and to drive positive impact in line with SDG.
History of ESG Ratings
Who Cares Wins, a United Nations study from 2004, is usually regarded as having the first widespread mention of ESG in a contemporary setting. All corporate stakeholders are urged by this research to adopt ESG over the long term. The study addressed everyone: managers, directors, investors, analysts, and brokers. Along with awareness at the corporate level, there was also more worldwide attention being gained in general. People's concern for diversity, respect, and sustainability in the workplace increased.
These days, the financial sector employs ESG ratings extensively due to the demand for sustainable investment solutions from big asset owners, as well as small retail investors.
What Three Elements Make Up an ESG Report?
Environmental
Environmental factors ("E") refer to a company's impact on the environment, such as its carbon emissions, energy usage, and resource management.
Social
Social factors ("S") encompass the company's relationships with its employees, customers, communities, and other stakeholders, including aspects like diversity, labor practices, human rights, and community engagement.
Governance
Governance ("G") focuses on the company's leadership, internal controls, transparency, and accountability, including aspects such as board composition, anti-corruption, and risk management.
Which Are the Major Rating Agencies and What Do ESG Ratings Rate?
Many ESG rating agencies exist, but in Malaysia, under the initiative of Bursa Malaysia, the evaluation of companies takes a distinctive approach using the FTSE4Good Bursa Malaysia methodology. This robust framework allows for a comprehensive assessment of companies based on sustainability criteria. The FTSE4Good Bursa Malaysia Index Series serves as the guiding reference for this evaluation process, providing detailed guidelines and insights. For further information on the FTSE4Good Bursa Malaysia Index Series, readers may refer to the comprehensive document here.
The FTSE4Good Bursa Malaysia (F4GBM) index was launched in December 2014 with the purpose of evaluating the performance of publicly-listed companies (PLCs) that demonstrate robust environmental, social, and governance (ESG) practices. The selection of constituents for the F4GBM Index is derived from the FTSE Bursa Malaysia EMAS Index, encompassing PLCs across various market capitalisation segments, including small, medium, and large.
In July 2021, the F4GBMS Index was introduced to specifically track F4GBM constituents that also adhere to Shariah principles, as determined by the Shariah Advisory Council screening methodology. Both indices undergo rigorous semi-annual reviews in June and December, benchmarking their performance against international standards. The evaluation of companies is based on comprehensive analysis of their public disclosures, such as annual reports, sustainability reports, and corporate websites.
These indices form an integral part of the esteemed FTSE4Good Index Series, which operates under the purview of the London Stock Exchange Group (LSEG) and is globally recognised. They maintain alignment with prominent global frameworks, including the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), and the Task Force on Climate-Related Financial Disclosures (TCFD) framework. For in-depth information on the FTSE4Good Bursa Malaysia (F4GBM) index, please refer to the following link:
FTSE4Good Bursa Malaysia (F4GBM) Index
Where Can You Get ESG Information on Listed Companies?
Bursa Malaysia aims to promote shared responsibility among corporate executives in driving environmental, social, and corporate governance (ESG) efforts effectively, making sustainability initiatives a collective priority. To achieve this, Bursa Malaysia is implementing the Centralised Sustainability Intelligence Platform (CSI Platform), envisioned as the "single-source-of-truth" for ESG data. This innovative initiative serves as a national repository for listed companies' sustainability disclosures, facilitating efficient management of supply chain carbon emissions and incentivizing decarbonization through green financing solutions offered by banks. By leveraging technology, the CSI Platform enables data-driven decision-making, allowing for the effective presentation, aggregation, and communication of ESG data to various stakeholders. Bursa Malaysia seeks to play a catalytic role as an influencer and facilitator in Malaysia's transition to a green economy, encouraging more companies to participate in green global supply chains through the platform.
This is in line with Bursa Malaysia Enhanced Listing Requirements in which listed issuers need to start disclosing data for common sustainability matters after 2023. Under the new requirements, Main Market listed issuers must incorporate specific disclosures in their Sustainability Statements. These disclosures include a set of prescribed sustainability matters and indicators considered material for all listed issuers (common sustainability matters). Additionally, they are expected to provide climate change-related disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations (TCFD-aligned disclosures). The Sustainability Statements should also contain at least three years' worth of data for each reported indicator, along with corresponding targets and a summary of such data and performance targets in a prescribed format (enhanced quantitative information). Finally, the issuers must include a statement indicating whether their Sustainability Statements have been internally reviewed by internal auditors or independently assured (statement of assurance). These new requirements aim to enhance transparency and standardization in sustainability reporting among Main Market listed issuers.
Investing in Sustainability
By converting investor funds into investment opportunities with risks that correspond to anticipated rewards, traditional investing creates value. To improve long-term results, sustainable investing integrates conventional investing with environmental, social, and governance-related (ESG) knowledge. It seems that investors are beginning to realise that some ESG factors have an economic impact, particularly over the long term, and that it is crucial to take these variables into account.
By incorporating ESG factors, sustainable investing creates a deeper understanding of how value might be created in the future. A diverse range of stakeholders is considered when it comes to sustainable investing, in line with how businesses are evolving.
The Importance of Sustainable Investing
Demand for investment companies to adopt the sustainable investing model is increasing as interest in sustainable investing continues to soar. The alternative of maintaining the status quo leaves the investment business vulnerable to decline at a time when the industry is confronted by increased end-client and regulatory demands as well as difficult economic conditions.
By taking ESG ratings more seriously, businesses can improve financial performance while abiding by ethical demands.
References
Atkins, B. (2020, June 8). Demystifying ESG: Its History & Current Status. Forbes. Retrieved November 25, 2022, from
https://www.forbes.com/sites/betsyatkins/2020/06/08/demystifying-esgits-history--current-status/
ESG – a brief history of its development – Part 1 – CarbonView. (2022, May 11). ESG – a Brief History of Its Development – Part 1 – CarbonView. Retrieved November 25, 2022, from
https://carbon-view.com/esg-a-brief-history-of-its-development-part-1/
GRI - Demystifying ESG raters and rankers. (n.d.). GRI - Demystifying ESG Raters and Rankers. Retrieved November 22, 2022, from
https://www.globalreporting.org/news/news-center/demystifying-esg-raters-and-rankers/
What is ESG Data and How to Use it? (n.d.). What Is ESG Data and How to Use It? Retrieved November 25, 2022, from
https://greenly.earth/en-us/blog/company-guide/what-is-esg-data-and-how-to-use-it
Tags: ESG
