With trends, some have their 15 minutes of fame, and others are here to stay. Environment, Social, and (corporate) Governance (ESG) seem to be the latter, in that it encompasses many vital points in your daily living, down to the finest detail.
Before the pandemic, the three letters ‘ESG’ were not as widely known and used by businesses, even more by investors in the local space. It was only when the world as we knew it was upturned by forced closures, bankruptcy, and unsustainable businesses that companies began to look at these three key points, and so did investors in return.
Gone are the days when keeping tabs on the performance of stocks in the market was enough for the average investor. More investors are taking into account the part they play in socially responsible investing, or sustainable investing. ESG issues are real-world problems, and investors want to put their money where their mouth is – by seeing their hard-earned money go into places that bring good impact, and not contribute to the problem.
With that, what is the importance of ESG when it comes to influencing one’s choices in investing, and how important is ESG investing in the bigger picture?
ESG is present in our everyday life
One of the barriers to decision-making is usually a lack of understanding. Asking the man on the street about their knowledge of ESG may result in confused responses along the lines of “something that only bigger corporations need to be concerned about”.
If ESG investing comes off as a concept that is too ‘big corporate’ to grasp – breaking it down into its three elements (environment, social, and governance) in everyday terms is a good start. Would you invest in a company that is known to pollute the waters or atmosphere with toxic gases at the expense of profit? Can you turn a blind eye to corporations that run sweatshops manufacturing t-shirts retailing at $500? How about buying stocks at an investment bank infamous for helping others launder money in offshore accounts?
Whether or not we are aware of these issues, or choose to advocate against them – these three elements are key points that every business needs to consider to not just survive but also thrive. As more investors are standing up and paying attention – silence about such issues is almost regarded as compliance.
Investing in ESG-compliant companies empowers us to keep them accountable
It is one thing to talk about current issues plaguing the planet, but can businesses walk the talk? Major corporations with sustainability arms pledge their commitment to the environment, their support for a community, or merely just promise their transparency – and investing in these companies allows us to hold them to their word.
Even if these pledges are a corporate stance for good publicity – shareholders and investors can pressure them into taking action and making better decisions. Consumers, too, are now making conscious decisions to support brands or companies whose values align with theirs. These campaigns are a message from the companies to consumers that they are walking the walk. In turn, it gives consumers a vested interest in where they are putting their hard-earned money.
ESG investing helps us to look at the bigger picture
In today’s rapidly evolving and volatile economy, it can be difficult to determine where our investments will end up in the next month, and what more in the next 5-10 years. However, with an ESG compliance or framework in place, companies can manage and future-proof their organisations against risks that could crop up in the future. This includes risks such as climate change (E), social welfare (S) and loss of shareholder confidence (G) in business practices – all of which could jeopardise financial standings.
As a result, these companies will be able to see fewer disruptions, downtime and see better financial results in the long run. ESG on its own is a long-term goal, where the benefits and rewards are reaped by putting in the hard work now, thus giving us the opportunity to take a step back and evaluate how our choices today will bring about a changed tomorrow.
ESG reporting is still evolving
Just last year, PwC together with MICPA (The Malaysian Institute of Certified Public Accountants Malaysia) ran a survey on investors’ impressions and expectations of ESG in Malaysia. One of their key findings was that only 3% of respondents agree that the current reporting of ESG in Malaysia is good – demonstrating the need for bigger-picture reporting and the call for consistency.
For now, one of the more well-known points of reference is the Bursa Malaysia FTSE4Good Index, which lists and ranks Public Listed Companies (PLCs) according to their compliance with ESG-related principles. Done in accordance with FTSE Russell ESG Ratings Methodology, it aims to support investors in making ESG investments in Malaysian-listed companies, encourage best practice disclosure and support the transition to a lower carbon and more sustainable economy.
The list of these companies in the index is also available to the public, so you can view each company’s current status (at the time of writing, the website is updated as of December 2022) as a reference. Some corporations have also pledged their commitment to the Task Force on Climate-related Disclosures (TFCD) – with Bursa Malaysia also providing instructions to assist corporations who attend to join.
While this may mean that how companies adopt ESG-compliant initiatives and reporting can differ from case to case, there is still a need for uniform standards and reporting – or else it could leave investors with more questions than they can find answers to in the long run.
By Grace Lim
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