It is no longer a question of when a company needs to take action to run a sustainable and ESG compliant business. The concept of ESG, the abbreviation for the three pillars that are Environment, Social and Governance is more far-reaching than ever since it became fashionable in 2023.
Importantly, just as income distribution in a nation directly affects the poverty gap, the concern is whether an SME endeavouring to meet the expected ESG goals would end up facing more challenges than possibilities in its business compared to a large businesses. There is however also growing concern of whether failing to provide the government with ESG goals of the company, it would face legal implications. This article would explore the purpose of having ESG goals, the basic implementation of an ESG framework and the potential risks of nonchalance.
Many have written about the history of ESG, from its first appearance in the 2004 report title “Who Cares Wins.” This set the framework to develop the core concepts of the ESG pillars then, through the introduction of the Principle for Responsible Investment, Climate Disclosure Standards Board and Sustainability Accounting Standards Board. This enhanced the actual genesis of the ESG concept that dates back to 1970, found through principals of social responsible investing.
This article focuses on the modern day revival and need of the ESG pillars as a crucial catalyst of business sustainability for SME’s. Essentially, what an SME owner should bear in mind is that the concept is a necessity legally and commercially to all businesses across all sectors.
ESG compliance serves as an indicator to investors who prioritise sustainability of a business. Beyond just upgrading the business’s commercial front and moto to the world at large, being ESG complaint also increases the confidence of not just the shareholders but also members of the organisation of being in an organisation that has simultaneously minimised its legal risks and potential liability while uplifting its awareness for business longevity and opportunity on three major fronts that is, the environment, ethical human to human conduct, and transparency and accountability.
Quoting the description by the Corporate Finance Institute, the environmental criteria refers to how a company safeguards the environment, the social criteria looks at how relationships are managed among people whether within the company or beyond the products itself and the governance criteria relates to how a company is led, managed and run by the executives.
That being said, the concept which was seemingly complex is fairly simple to abide by. What more as an SME could partake in all ESG efforts without exclusive exemptions compared to large organisations, simply because these efforts are integrated with if not closely related to the business’s daily activities.
Coming back to the three pillars, citing an example, multinationals in the telecommunication and electronics business have been the catalyst and leaders in improving compliance with good environmental governance. Having ESG goals under this pillar is actually even possible for an SME that only fulfils the micro business category. The effort would just have to be scaled to fit the organisation’s size. Unlike criminal laws that imposes sanctions equally regardless of the size of the organisation but rather based on the severity of the offence, the extent of being ESG goals compliant would only reflect on the business’s attitude towards having good practices for business sustainability.
It is noteworthy that the measure of liability or sanction, if a business is to face a legal conundrum that involves the breach of laws that are observed under the ESG framework, will take into account the extent of ignorance, defiance and abstainment by the company of being in conformity with the ESG relevant laws and policies in place as well as its ability and ease of having complied with those legislation.
Simply put, the status of being an SME does not grant the business a get out of jail free card for ignoring the call to conform with the ESG concept in a company’s everyday business activities. One pro of having ESG concepts in the business is that separate consultancies to ensure laws are not breached in a particular sector of business could be avoided by utilising the framework of being ESG compliant as a foundation to ensuring all legal risks relatable to an organisation are vetted, addressed and guarded against.
The implementation of ESG practices that is in conformity or does not breach the law broadly speaking is not restricted to merely complying with the provisions through the letters of the law. It will also include launching, developing and implementing sustainable and reasonable as well as green practices, centres and products.
The ESG framework gives ample room and opportunity to SMEs in the micro, small or medium category with limited capital, that do not have the luxury of undergoing a trial and error experience or of appointing various consultancies prior to setting up to manage the business’s legal risks affordably.
The ESG framework allows these companies to be on the same footing commercially as the cash rich and funded start-ups to develop and implement material environmental, social and economic values, themes and practices based purely on their appetite, commitment and organisation’s depth and ability to explore and expand within and beyond the sectors that their businesses service. Safe to say, the investment capabilities towards introducing the business’s own ESG goals can be kept and managed within the business’s own capabilities without being subject to onerous government laws or policies. On the flip side, the SME while having minimised risks and liabilities would still possess a balance for investments to also increase the business sustainability and broaden their scope of services and market to other sectors and markets. Hence, turning a blind eye to ESG requirements would eventually put an SME even further on a back foot compared to the large organisations that voluntarily spend to comply with the requirement.
As a general guidance, organisations looking to adopt the ESG ethos may start by evaluating firstly, the sector in which the business is categorised in i.e. financial, legal healthcare, fintect, regtech, production, sales, real estate etc. Next, consider the size of the organisation, the management structure and the members that forms the organisation. Then, consider the business plan, expansion plans and target markets that the business has in mind.
The first step in building the organisation’s ESG ethos will give the management of the company an overview of all the legislation and policies the business will mandatorily have to comply with. For example, if the organisation had business in the financial or insurance sector then, proper registration with the Financial Services Act 2013 and adherence to Bank Negara Malaysia’s policy Regulations and Persatuan Insurance Am Malaysia’s guidelines would be key to sustaining legitimate business operations that could be monitored through mandatory reporting.
The second step largely concerns keeping up to date and in line with the moral, ethical and humanitarian business standards within the sectors and the commercial world as a whole. This is not fulfilled merely by boasting and featuring on the organisation’s social media their Corporate Social Responsibility (CSR) events or team building sessions. The ESG ethos is implemented through with the various legislations catered to empower, protect and educate members of the organisation from exploitation, victimisation and unfair workplace practices. To name a few of these would be the Employment Act 1955 [Act 265], the Anti-Sexual Harassment Act 2022, the Whistleblower Protection Act 2010 [Act 711] and commitment to be governed by human rights policies.
The third category is probably the broadest and would involve in depth research and most likely the need for legal consultation. While adopting the correct ESG components locally would give assurance to the boardroom and shareholders of sustainability of the business, a business plan that aspires to expand into global markets either through exporting products or setting up production plants abroad, faces a bigger hurdle of convincing investors that the organisation’s ESG strategies and principles are compatible and in line with global expectations and component. It is worth bearing in mind that while it is not mandated, in Malaysia since 2016 public listed companies have been required to have mandatory ESG reporting standards. On the other hand there is in fact an expectation for ESG reporting by all other the businesses including SMEs. It would not be long before ESG disclosure and mandatory ESG reporting is streamlined as a national standard for all companies considering that at least 25 other countries including the likes of the Philippines and to a certain extent Australia and Singapore have made it a norm across the board.
This would require the directors to ensure that the corporate strategy, research and developments, finance and personal relations units take fully responsibility for the information presented to the public and investors by taking into account that the business practices locally and in other jurisdiction comply with and have implemented equivalent ESG standards the business is required to uphold locally and in those countries. A failure to do so could render each unit in the organisation liable for varied causes of action in law. This as a whole makes the ESG effort not solely a hierarchical concern where only the top management are to blame but a company effort where the entire organisation is to bear responsibility for their contribution to a breach or contravention of good practices.
As explained, broadly put, the ESG goals of a company would have two purposes. That is to minimise risks and to broaden opportunity. For a company registered and domicile in Malaysia the new ESG emphasis should motivate employees to run operations in ways that enhance rather than degrade human to human, environmental and transparent practices. Not only does it garner investors confidence and boost sustainability it also promotes employee satisfaction by way of being associated with an ethical, responsible and modern day organisation.
Keeping up with the variety of ESG complaint guidelines, legislation and principles compels the Malaysian companies to mitigate environmental, human rights and social justice violations in its supply chain, downline and administration. SMEs in particular are not expected to provide a guarantee to operate under an assurance of being ESG complaint but the extent of compliance could be easily gauged through the voluntary disclosures expected by the government and more so the public. Beyond implications that involve loss of business and reputation, an SME runs a risk of bearing potential civil, tortious and contractual liabilities if found to have knowingly looked the other way when there was ample opportunity and means to implement various ESG components and instead disseminated or made false statements regarding its ESG policies.
In conclusion, undoubtedly, the ESG ethos is here to stay and having a head start would gift the organisation a front of accountability and longevity in the business sector. The continued consumer and employee pressure for corporate and administrative accountability respectively calls for organisations to develop ESG awareness, efforts and subsequently conscious implementation. Some countries have made it mandatory for directors and management level personnel to attend ESG training. National ESG legislation such as Germany’s Supply Chain Due Diligence Act is also being considered to be proposed by other countries.
Essentially, it should not matter that there are two choices of ESG disclosure at this stage, either mandatory or voluntary, as earlier explained, SME’s should consider that the laws mandating compulsory ESG compliance will be developed sooner than later. This will include a fixed standard and requirement for ESG reporting which will have to be backed by material facts and data collection.
This is likely to translate to setting a benchmark for businesses by measuring the quality and standard of its officially reporting, scoring and tier categorisation of organisations in terms of accountability and transparency. Leading through realistic and bespoke ESG goals catered for the business thus, may be the golden key for SME’s to attempt to level the playing field with their larger competitors locally and internationally.
