Firms must comply with ESG standards if they want to be part of global supply chain

CLIMATE change is now a recognised risk and no business wants to be labelled as “environmentally damaging”.  

At COP 27 in November, the International Organisation of Securities Commissions (IOSCO) outlined regulatory priorities for sustainability disclosures, mitigating greenwashing and promoting integrity in carbon markets – which should serve as a wake-up call for companies making pledges to “net zero” greenhouse gas emissions.  

This action to promote good practices will pose a new problem for regulators as they crack down on “greenwashing” – the use of misleading eco-friendly, ethical or sustainable claims.  

Greenwashing has been singled out as major issue for investor safety as “overenthusiastic” companies might make unrealistic targets and commitments. IOSCO discovered numerous sustainability frameworks and standards, which leave room for abuse and pose a liability risk for company directors. 

One example is the suit against oil major Shell. Environmental lawyers ClientEarth, backed by a group of institutional investors, sued 11 directors in February. This landmark case seeks to hold corporate directors liable for their company’s claims and goals of achieving net-zero carbon emissions by 2050.  

According to local law firm Skrine, such a suit can be filed in Malaysia as this is a common law jurisdiction action. There have been suits against directors for breach of fiduciary duties. 

Aside from suits or shareholder activism, businesses that ignore and under-report climate change risks can also be in breach of local regulations.  

FDI risks  

Greenwashing accusations could hurt foreign direct investment flows into Malaysia at a time when the UN’s Sustainable Development Goals (SDG) are gaining traction among Western investors. 

When foreign investors back investments that promote environmental, social and governance (ESG) and SDGs, a recipient country benefits from the transfer of technologies, industry specific expertise and job creation in sectors that want to tap into lucrative global supply chains that adhere to sustainability practices.  

The recent Intergovernmental Panel on Climate Change (IPCC) sixth assessment report also provides fresh impetus to address greenwashing. 

The UN-backed report highlighted the historic global warming of 1.5° Celsius and how human-produced greenhouse gases, the majority emitted by corporations, are causing irreparable damage to ecosystems and communities.   

This was the main concern of the IPCC’s 2023 Business Climate Responsibility Monitor. The analysis examines the transparency and effectiveness of the climate plans of 24 multinational companies which call themselves “climate leaders”.  

Dodgy practices 

Google, Samsung, Amazon, Mercedes-Benz, H&M and Zara have established “net zero” goals, and a few even claim to be carbon neutral. Yet, the data shows that almost all present climate claims or future net-zero targets are inaccurate, inflated or deceptive. 

Many opt to “neutralise” their emissions through carbon credits (“offsetting”) or through internal methods within their own value chain (“insetting”) rather than committing to deep decarbonisation by setting credible targets to reduce emissions. 

Due to an excessive reliance on offsetting and insetting, these practices have done little to reduce current industrial emissions. As a result, the 24 companies would have reduced their carbon footprint by only 36% by the time they claim to have achieved net zero.  

These multinationals will need to reduce their real emissions by at least 90% if they are to make any meaningful contribution to 2050 global climate targets. 

To deter greenwashing as part of a broader initiative to align the country with global climate standards, Prime Minister Anwar Ibrahim announced on 8 March that Bursa Malaysia will introduce a sustainability reporting platform.  

The Centralised Sustainability Reporting Platform enables companies to calculate their carbon footprint, disclose common ESG datasets in a standardised emission reporting that conforms to global benchmarks, such as the Task Force on Climate-Related Financial Disclosures (TCFD). It complements Bursa’s existing 2016 guideline on ESG reporting.  

The platform acts as a repository for ESG disclosures. It reinforces sustainability disclosures and will hasten the reduction of carbon emissions throughout supply chains, including Scope 3 emissions. Scope 3 emissions are the result of activities from assets not controlled or owned by the reporting organisation but that indirectly affect its value chain. The platform will also assist local banks to develop green financing options and services that promote corporate sector decarbonisation. 

ESG adoption 

Risk-rating agencies like Sustainalytics and S&P Global, used by local and foreign investors alike, support some of TCFD’s recommendations, with focus on detecting and disclosing forward-looking transition risks, including carbon foot-printing and stranded assets. 

The platform is timely as it is in line with not only global best practices but will encourage the transition of local industries towards ESG adoption.  

If “carrots” like the platform are not effective, then the authorities must consider higher taxes and stricter regulations to deter vague net-zero pledges. Government revenue from this “stick” approach can then be redirected to climate-adaptation measures, especially for communities in climate disaster-prone areas, such as the states hardest hit by floods. 

Government-linked investment companies (GLICs) should also play a key role pushing the sustainable development agenda, as it will have a trickle-down effect, not only among their many subsidiaries but also with external suppliers and customers. 

As for micro, small and medium-sized companies (MSMEs) which face size-related resource constraints, skill deficit and knowledge limitations when adopting sustainable practices, SME Corporation Malaysia (SME Corp) is collaborating with Sirim Bhd to develop an ESG reporting system to assist MSMEs to evaluate and disclose their ESG performance.  

SME Corp in partnership with the United Nations Global Compact Network Malaysia and Brunei is also developing the Action Centre for Sustainable SMEs. It is a dedicated platform for SME sustainability and provides related programmes, such as an ESG evaluation, capacity building and online courses. 

It is important for MSMEs to participate, especially suppliers to corporations and government entities, as they make up 97.4% of businesses in Malaysia. A corporation’s supply chain also has the greatest impact on its social and environmental performance. Suppliers are responsible for about 80% of a company’s greenhouse gas emissions. Therefore, MSMEs have a crucial part to play in helping big businesses meet their ESG reporting goals. 

Greenwashing can occur at any point along the investment value chain. Putrajaya must continue efforts to ensure that trust underlies sustainable business practices, as it is an important enabler for Malaysia’s pivot to green sustainable development that will create high-skilled jobs, promote technology transfers and draw FDIs. 

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