Understanding ESG: Environmental, Social, and Governance
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Introduction
Environmental, Social, and Governance (ESG) considerations have become pivotal factors in today’s business landscape. As stakeholders increasingly prioritise sustainability, social responsibility, and ethical governance practices, companies recognise the significance of ESG frameworks. By integrating ESG principles into their operations, organisations can enhance their long-term viability, mitigate risks, and contribute positively to society, aligning their goals with the broader objectives of sustainable development and responsible business practices.
What Is ESG?
ESG stands for environmental, social, and governance. It is a term used to describe the three critical factors considered in evaluating the sustainability and ethical impact of a company’s operations and practices.
| Aspects | Explanation |
| Environmental | – Focuses on how a company interacts with and impacts the natural environment. – Includes factors such as the company’s carbon emissions, waste management, resource usage, pollution, climate change adaptation, and efforts to promote environmental sustainability. |
| Social | – Examines how a company interacts with its employees, customers, communities, and other stakeholders. – Encompasses labour practices, employee diversity and inclusion, human rights, customer satisfaction, community engagement, philanthropy, and product safety. |
| Governance | – Assesses the company’s internal structures, policies, and practices that govern its operations. – Includes factors such as board composition, executive compensation, shareholder rights, transparency, anti-corruption measures, risk management, and adherence to ethical business practices. |
ESG factors have gained significant attention recently as investors, stakeholders, and society have recognised the importance of sustainable and responsible business practices. Companies that effectively address ESG issues are seen as more attractive to investors, demonstrate long-term resilience, and contribute positively to society and the environment.
What Is An ESG Framework?
An ESG framework provides a structured practice and guidelines for assessing, measuring, and reporting a company’s environmental, social, and governance (ESG) performance. Both international and Malaysia-specific frameworks guide companies’ ESG reporting and disclosure practices.
Here are some examples:
International ESG Frameworks:
- Global Reporting Initiative (GRI)
GRI is one of the most widely used frameworks globally. It provides comprehensive sustainability reporting guidelines, including indicators and reporting principles, covering various ESG aspects. GRI’s guidelines are internationally recognised and adaptable to different industries and organisations.
- Sustainability Accounting Standards Board (SASB)
SASB provides industry-specific standards for reporting financial material sustainability information. It identifies and defines ESG issues material to each industry, helping companies focus on the most relevant ESG factors.
- Task Force on Climate-related Financial Disclosures (TCFD)
TCFD focuses specifically on climate-related risks and opportunities. It provides recommendations for reporting on climate-related information, emphasising governance, strategy, risk management, and metrics related to climate change.
Malaysia-specific ESG Frameworks:
- Bursa Malaysia’s Environmental, Social, and Governance (ESG) Reporting Guide
Bursa Malaysia, the stock exchange of Malaysia, has developed a comprehensive ESG Reporting Guide. It provides specific guidelines and requirements for listed companies in Malaysia to disclose ESG-related information, including key performance indicators and reporting principles.
- Securities Commission Malaysia’s Sustainable and Responsible Investment (SRI) Sukuk Framework
This framework provides guidelines for issuing Sustainable and Responsible Investment (SRI) Sukuk in Malaysia. It establishes principles and criteria for assessing the environmental and social impacts of projects financed through SRI Sukuk.
When preparing an ESG report, it is essential to consider international frameworks for global best practices and Malaysia-specific frameworks to meet local regulatory requirements and expectations.
Companies can adopt one or more of these frameworks based on their industry, stakeholder expectations, and reporting goals. The selected framework(s) will help structure the report, define relevant metrics, and ensure alignment with recognised ESG standards.
What Is An ESG Report?
An ESG report, also known as a sustainability report or corporate responsibility report, is a document that delivers a thorough overview of a company’s environmental, social, and governance performance. It is a means for companies to disclose relevant information and communicate their sustainability efforts and impacts to stakeholders, investors, and the public.
An ESG report typically includes the following elements:
- Company profile: An introduction to the company, its mission, values, and business activities.
- ESG strategy: An overview of the company’s approach to managing ESG issues, including its goals, policies, and commitments.
- Environmental performance: Information on the company’s environmental impact, such as energy consumption, greenhouse gas emissions, waste management, water usage, and efforts to mitigate environmental risks.
- Social performance: Details on the company’s social initiatives, employee-related practices, community engagement, human rights considerations, diversity and inclusion efforts, health and safety performance, and stakeholder engagement.
- Governance practices: Information on the company’s governance structure, board composition, executive compensation, risk management practices, compliance with regulations, and ethical business conduct.
- Key performance indicators (KPIs): Metrics and data that quantify the company’s ESG performance and progress. These may include specific targets, trends over time, and benchmarking against industry peers or ESG frameworks.
- Stakeholder engagement: Description of how the company engages with and responds to the needs and concerns of its stakeholders, such as customers, employees, communities, and investors.
- Future goals and initiatives: Outline of the company’s future plans and commitments related to ESG issues, including targets for improvement and initiatives aimed at addressing challenges and opportunities.
ESG reports are voluntary, but many companies choose to produce them as a way to demonstrate their commitment to sustainable and responsible practices, enhance transparency, and build trust with stakeholders. ESG reports can be standalone documents or integrated into annual reports or other corporate disclosures.
How To Prepare An ESG Report in Malaysia?
Preparing an ESG report involves a systematic and thorough process. Here are some steps to consider when preparing an ESG report, taking into account both international practices and specific considerations for Malaysia:
Step 1: Understand relevant frameworks and guidelines
Educate yourself with internationally recognised ESG frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task Force on Climate-related Financial Disclosures (TCFD). Additionally, consider local guidelines and regulations in Malaysia, such as Bursa Malaysia’s Environmental, Social, and Governance (ESG) Reporting Guide.
Step 2: Identify material ESG issues
Conduct a materiality assessment to pinpoint your company’s most significant ESG issues. Consider stakeholder expectations, industry-specific risks and opportunities, and regulatory requirements. This process helps prioritise which ESG factors to include in your report.
Step 3: Set goals and metrics
Establish specific, measurable, and time-bound goals and metrics that align with your identified ESG issues. These goals allow you to track your progress and demonstrate improvements over time. Consider using indicators from recognised frameworks and adapting them to suit your company’s context.
Step 4: Collect and analyse data
Gather relevant data and information on the identified ESG issues. This may involve internal data collection from various departments, surveys, audits, and stakeholder engagement. Ensure the data is accurate, reliable, and covers the reporting period.
Step 5: Report structure and content
Develop a clear structure for your ESG report that aligns with the selected frameworks and guidelines. Include an executive summary, company profile, ESG strategy, and specific environmental, social, and governance performance sections. Use quantitative and qualitative data, case studies, and narratives to illustrate your company’s performance and initiatives.
Step 6: Stakeholder engagement
Engage with stakeholders throughout the report preparation process. Seek their input, incorporate their perspectives, and address their concerns. This helps ensure your report reflects a balanced view of your company’s ESG performance and demonstrates responsiveness to stakeholder needs.
Step 7: Seek internal and external assurance
Consider obtaining internal or external assurance to enhance the credibility and reliability of your ESG report. This can involve independent verification or validation of the report’s accuracy and adherence to reporting principles.
Step 8: Continuous improvement
Treat your ESG report as an evolving document. Regularly review and update your report to reflect changes in your company’s ESG practices, goals, and performance. Incorporate feedback from stakeholders and learn from best practices and emerging trends.
Remember, preparing an ESG report requires ongoing commitment and engagement from various departments within your company. It is essential to integrate ESG considerations into your business strategy and operations and view the report as a tool for continuous improvement and transparency.
Summary
To sum up, Environmental, Social, and Governance (ESG) factors have become increasingly important in assessing a company’s sustainability and ethical performance. ESG frameworks provide valuable guidance for companies in assessing, measuring, and reporting on their ESG initiatives.
While ESG frameworks encompass environmental aspects, additional standards such as ISO 14001 and Forest Stewardship Council (FSC) offer specific guidance and focus on particular environmental areas. Companies may consider incorporating these standards into their environmental management systems and reporting practices to demonstrate their commitment to environmental stewardship.
When preparing an ESG report, it can be beneficial for companies to seek assistance from a professional consultancy specialising in ESG reporting. ESG reporting is valuable for transparency, accountability, and continuous improvement, fostering stakeholder trust and driving positive change in the business landscape.
Feel free to reach out to the One Island Consultancy team if you have any questions about the framework, reporting, or ESG training and certification in Malaysia.
