New research by KPMG shows that the quality of sustainability reports by public listed companies in Malaysia is unlikely to meet investors’ need to assess environmental, social, and governance (ESG) risk. Phang Oy Cheng explains why companies should do more.
IN 2020, KPMG reported that 99 of the top 100 public listed companies in Malaysia publish sustainability reports – a statistic on par with global standards.
But KPMG’s latest research shows that while our compliance to reporting requirements is very good, the quality of those reports with regards to material environmental, social, and governance (ESG) issues is wanting.
The shortage of quality reporting is unlikely to meet the needs of investors who are increasingly concerned about ESG risks on value creation and preservation.
The COVID-19 pandemic has roiled the stock market and jolted investors in Malaysia into accelerating ESG approaches in investment activities. Investors want better management of unforeseen risks – including climate change and human rights risks – that could jeopardise investment values.
Consequently, Malaysian investors have begun channeling more funds into sustainable practices and green initiatives. That requires investors to set up internal governance, policies and procedures, and ESG risk management to assess investee companies.
All of which brings more scrutiny to the state of ESG reporting in Malaysia.
Not quite enough
KPMG finds that, generally, ESG reporting requirements in Malaysia fall short of linking ESG risks to the company’s business operations, strategy, and risk management.
Rather, ESG management is focused on yearly reporting as required by Bursa Malaysia Berhad.
Looking at the top 200 public listed companies in Malaysia by market value, they commonly reported on risks mainly related to compliance status. For example, 11% of the companies reported on corporate governance, regulations, and compliance (see Table below).
Meanwhile, environmental risks were considered as environmental management issues. And only 4% reported on climate change and greenhouse gas risks.
While it is heartening to see Malaysian companies emphasise compliance management, they need to do more.
Value in better ESG reporting
Companies should note that demonstrating good ESG performance is paramount to preserving corporate value. When investors and financiers evaluate potential targets, they primarily look first into the public reporting sphere (annual/ integrated/ sustainability reporting).
For example, companies have been more effective at securing sustainability linked loans by proving excellence in managing ESG risks, such as successfully reducing emissions on a yearly basis.
Business leaders should also note that despite the pandemic, more institutional investors have become signatories to the Principle of Responsible Investment (PRI).
The list of signatories has increased to 3,000 in 2020, while asset under management committed by the signatories towards sustainable finance is over US$100 trillion (about RM421 trillion) in the same year.
In Malaysia, there are 10 signatories to the PRI including heavyweights Employees Provident Fund (KWSP) and the Retirement Fund (Incorporated) (KWAP).
The institutional investors will likely do more to screen the ESG performance of its investee companies and further assess these companies’ ESG practices.
ASEAN has also seen an increase in issuance of ESG financing products. Cumulative green, social, sustainability bonds/ loans stood at USD 29.4 billion (RM124 billion) in 2020 – with Singapore leading the region.
Business leaders who wish to tap into this market could issue ESG financing products to attract international investors.
Recognising the benefits
It is time that Malaysian corporations recognise the value of good sustainability reporting rather than treat it as a mere compliance matter. Why limit your efforts to compliance reporting when there are many more benefits to be gained?
Business leaders should integrate the essence of ESG management into daily business management to prepare for the management of unforeseen risks. Doing so would help to not only preserve value, but create value too.
[Edited by Law Yao Hua]
Phang Oy Cheng is Executive Director of Governance & Sustainability, KPMG in Malaysia.
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