At both the international and local levels, addressing the Environmental, Social and Governance (“ESG”) topics has become a key corporate agenda in recent years, with investors and other key stakeholders placing increasing emphasis on environmental and social risks and opportunities.
Companies are recognizing that having a strong purpose can build trust, drive performance, and therefore underpins the generation of good profits over the long term. As a result, the way companies approach ESG has changed from largely compliance-oriented activities to one where ESG considerations are drivers for enhanced resilience, strategic advantage and further value creations, leading a shift among the companies working towards for the benefit of key stakeholders in a sustainable manner and not just shareholder wealth.
A. Securities Commission Malaysia (SC)
Given the increasing expectations of overall sustainability governance and board accountability on ESG, SC had in April 2021 issued the fifth iteration of the Malaysian Code on Corporate Governance (“MCCG”) with enhanced best practices pressing the need for companies to be resilient, the boards of directors of the companies shall take a much more holistic view of the business coupled with proactive and effective measures to anticipate and address material ESG risks and opportunities.
As outlined in MCCG, ESG strategies are the most effective when it is integrated seamlessly into the core business of a company. In adopting ESG, the board and management are responsible for the governance of sustainability in the company including the following:
1. The Board
• To take into account sustainability considerations when exercising its duties including the development and implementation of company strategies, business plans, major plans of action and risk management;
• To ensure the strategic plan of the company supports long-term value creation and includes strategies on economic, environmental and social considerations underpinning sustainability;
• To ensure the company’s sustainability strategies, priorities and targets as well as performance against these targets are communicated to its internal and external stakeholders;
• To proactively consider sustainability issues when it oversees the planning and performance of the company, to ensure the company remains resilient, is able to deliver durable and sustainable value as well as maintain the confidence of its stakeholders;
• To take appropriate action to ensure it stays abreast with and understands the sustainability issues relevant to the company and its business, including climate-related risks and opportunities;
• To identify a designated person within management to provide dedicated focus to manage sustainability strategically;
• To identify its professional development needs concerning sustainability and ensure these are addressed;
• To take into consideration the company’s performance in managing material sustainability risks and opportunities in determining the appropriate level of remuneration for directors and senior management; and
• To consider whether a change in its composition or of its skills matrix is required to strengthen board leadership and oversight of sustainability issues
2. Senior management
• To drive strategic management of material sustainability matters;
• To integrate sustainability considerations in the day-to-day operations of the company;
• To ensure effective implementation of the company’s sustainability strategies and plans;
• To continuously engage and consider the views of the internal and external stakeholders to better understand and manage the company’s sustainability risks and opportunities; and
• To tackle questions and deliberate on sustainability, as well as evaluate the sustainability risks and opportunities.
As highlighted in MCCG, the performance evaluations of the board and senior management of a company should include a review of their performance in addressing the companies’ material sustainability risks and opportunities. The outcomes from such evaluations should be shared with the company’s shareholders.
While the MCCG is targeted at Malaysian listed companies, non-listed entities including state-owned enterprises, public companies, small and medium enterprises (SMEs) and capital market intermediaries are encouraged to embrace this code on corporate governance. Non-listed entities should consider applying the practices in the MCCG to enhance their accountability, transparency and sustainability.
B. Bursa Securities Malaysia Berhad (Bursa Malaysia)
1. Corporate Governance Disclosures
In Malaysia, ESG reporting has been mandatory for all public listed companies (“PLCs”) since 2016. Under the Main Market Listing Requirements (“Listing Requirements”), Paragraph 15.25 of the Listing Requirements makes it compulsory for all PLCs to make the following corporate governance disclosures:
(a) an overview of the application of the principles set out in the MCCG by the board of directors to be included in the annual report of the PLCs; and
(b) the application of each practice set out in the MCCG during the financial year to be disclosed to Bursa Malaysia in the prescribed CG Report and announce the same together with the announcement of the annual report.
2. Sustainability Statement
It is also a mandatory requirement for all PLCs to include in their annual report, a narrative statement of their management of material economic, environmental and social risks and opportunities (“Sustainability Statement”). In making the Sustainability Statement, a PLC must include disclosures on the following:
(a) the governance structure in place to manage the economic, environmental and social risks and opportunities (“Sustainability Matters”);
(b) the scope of the Sustainability Statement and basis for the scope; and
(c) material Sustainability Matters and –
(i) how they are identified;
(ii) why they are important to the PLC; and
(iii) how they are managed including details on –
(aa) policies to manage these Sustainability Matters;
(bb) measures or actions taken to deal with these Sustainability Matters; and
(cc) indicators relevant to these Sustainability Matters which demonstrate how the PLC has performed in managing these Sustainability Matters.
Sustainability Matters are considered material if they reflect the PLC’s significant economic, environmental and social impacts, or substantively influence the assessments and decisions of stakeholders.
Besides, with the aim to elevate the sustainability practices and disclosures of the PLCs, Bursa Malaysia has in September 2022 proposed to enhance the above sustainability reporting framework in introducing the key enhanced sustainability disclosures (“Enhanced Sustainability Disclosures”) by requiring:
(a) disclosure of a common set of prescribed sustainability matters and indicators that are deemed material for all PLCs as well as the management of such matters;
(b) climate-related disclosures in line with Task Force on Climate-related Financial Disclosures’ recommendations;
(c) disclosure of the enhanced quantitative information including at least 3 financial years’ data on a rolling basis for each reported indicator and the performance target(s) in respect of each reported indicator if such target(s) has been set; and
(d) a statement on whether the Sustainability Statement has been subjected to internal review by the internal auditor or independent assurance performed in accordance with recognized assurance standards.
The implementation of the Enhanced Sustainability Disclosures under the Listing Requirements will be undertaken on phased approach (staggered effective dates tentatively on 31 December 2023, 31 December 2024 and 31 December 2025). Notwithstanding, Bursa Malaysia encouraged PLCs to comply with the Enhanced Sustainability Disclosures as early as possible prior to the relevant implementation dates.
3. Other Reporting Considerations
In addition, Bursa Malaysia has via its ESG Guidebook 2 (as published in June 2022) spelled out that effective ESG reporting is crucial for PLCs to communicate with their stakeholders and that PLC’s public disclosure of ESG performance is a key tool used by ESG rating agencies to assess the company’s ESG response. Some key considerations to take away for ESG reporting and disclosures as suggested by Bursa Malaysia:
• Identify applicable regulatory requirements for ESG reporting such as the Listing Requirements.
• Consider the frameworks and standards expected from key stakeholders.
• Develop data templates and collect relevant information and data for the current financial year.
• Determine the communication channels to share ESG progress, (e.g. formal report, website, press release) and work on the presentation and design to ensure good readability and assessment of impact.
• PLCs should collate feedback from stakeholders on their sustainability-related expectations and informational needs.
It has been a regulatory requirement in Malaysia for PLCs to disclose material ESG-related information. Reporting should be accurate, transparent and provide a balanced reflection of the PLC’s sustainability practices as well as its performance.
Apart from that, there are also emerging expectations from the local regulators for companies other than PLCs to act on ESG given the immense pressure received from stakeholders in the corporate world today. Companies are thus encouraged to adopt sustainable, socially responsible and ethical business practices in accordance with the regulatory expectations including those set out by the SC and Bursa Malaysia as discussed above.
This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
About the authors
Tan Lee Weei
Capital Market, Corporate/M&A, Regulatory & Compliance and Employment Law
Halim Hong & Quek
Ong Wee Nee
Capital Markets, Corporate/M&A, Regulatory & Compliance
Halim Hong & Quek
Bursa Malaysia ESG Guidebook 2 PLC Transformation Programme published on 10 June 2022