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13 March 2024

Why Should We Care About ESG?

By Ir. Dr Chong Kok Hing

This article aims to raise awareness and practical pointers in the area of ESG, especially in the Sarawak context.

ESG stands for Environmental, Social, and Governance

Investors use ESG ratings to evaluate and monitor companies and their commitment to ESG

ESG stands for Environmental, Social and Governance. It is a term that we frequently hear in this fast-moving world. ESG is not new, as it appeared loosely a century ago. However, lately, it has been implemented intensely due to the vuca (volatility, uncertainty, complexity, and ambiguity) world we live in. ESG would indicate how well a company’s business is regarding its environmental impact, social responsibility, and how it is governed.

It should be a concern for all business owners to ensure business sustainability. Many agree that Sarawak is blessed with abundant natural resources, human capital talents and growth potential. Therefore, we should ensure excellent stewardship in the area of ESG. 
 

Why ESG?

A study done by Bloomberg revealed the United States assets under management with ESG strategies increased to about 17% from 2020 to 2022 (USD35 trillion to USD41 trillion). The following are the key drivers of ESG: demand for alignment with organizational or individual values, investor demand, regulatory and compliance pressure, enterprise risk management, and competitive advantage.  

In 2023, the Sarawak government was the first in Malaysia to enact an anti-climate change law to implement strategies to reduce greenhouse gas emissions and achieve net zero carbon emissions in the state by 2050. Hence, solid and implementable ESG strategies will provide an opportunity to tap into new markets and expand into existing ones, reducing costs by decreasing or avoiding resource use. It enables companies to manage risk better, leverage opportunities, and generate strong long-term returns.  

How do we know a company’s ESG performance?  

Through ESG rating. Prudent investors commonly use ESG ratings to evaluate and monitor companies. It is a tool that measures a company’s ESG commitment, performance, accountability, and exposure to environmental, social and governance risks. Some examples of ESG ratings include the MSCI ESG Ratings, Sustainalytics EGS risk ratings, Bloomberg ESG Scores, FESE Russell’s ESG Ratings, ISS Ratings and Rankings, S&P Global ESG Score, and the Moody’s ESG Assessments and Climate Risk Scores.

 So how do we implement ESG in an institution regardless of human capital size and financial status? One way would be to brainstorm with key stakeholders to establish operational ESG matrices that are:

  1. measurable, decision-useful, and verifiable
  2. not restricted by a single standardized approach.

For companies considering going further in their ESG reporting could consider one of the following options: 

  1. The GRI guidelines are global standards for corporate sustainability reporting based on multiple modules that a company can choose from based on what is material for the organization

  2. The Sustainability Accounting Standards Board (SASB) standards are industry-specific disclosure standards with a purpose to communicate financially material, decision-useful sustainability information between companies and investors

  3. The Task Force on Climate-Related Financial Disclosure (TCFD) is a guidance framework that focuses on management strategies and governance (e.g. governance, risk management, strategy, matrices, and targets) for reporting on climate risk, and

  4. The International Sustainability Standards Board (ISSB) launched consultations on two proposed standards: one on general sustainability-related disclosure requirements and one on climate-related disclosure requirements.  

Suppose your company is interested in the corporate sustainability assessment and is ready and has agreed to make the resulting ESG score public. In that case, you can try the S&P global Corporate sustainability assessment for free.  

What are the challenges in implementing an effective ESG?  

One of the critical challenges in implementing an effective ESG is the demand for a reliable ESG program and disclosure with accurate material and decision-grade-consistent data. The other key challenge is an unprepared workforce, which could be addressed by integrating ESG into business by providing relevant upskilling opportunities and key performance indexes. 

 If you wish to learn more about ESG in your context, you could follow the following simple steps:

  1. Think of one of your favourite products
  2. Find the corporate sustainability report
  3. Which environmental issues are highlighted as most relevant to their business? (e.g. energy management, waste management, water management, greenhouse gas emission, biodiversity loss, etc.)
  4. Do they have any goals around these issues, and
  5. Repeat this exercise as often as you like to familiarize yourself with real-life environmental factors corporations address. 

Ir. Dr. Chong Kok Hing is a senior lecturer at the Faculty of Engineering, Computing and Science. His research interests include thermal fluids, renewable energy, biomass combustion development and performance, sustainable energy management, building services, and educational research. Ir. Dr. Chong is contactable via kchong@swinburne.edu.my