Environmental, Social, and Governance (ESG) investing has grown in popularity in recent years, especially after phenomena such as the COVID-19 pandemic and climate change have sparked widespread uncertainty and caused far-reaching consequences across many industries.
While many businesses come to a halt, early adopters of sustainable portfolios have proven that the value of an investment is no longer solely determined by returns.
Recently, ESG is taking on an even greater significance. Businesses now have the responsibilities and resources to accomplish positive climate action, building a more sustainable, resilient future and correspondingly yield better operating performance, higher long-term returns, and lower firm-specific risk.
Assets under management for sustainable funds have rapidly expanded and investors too, are paying more attention to this trend.
What is ESG?
By definition, ESG is a concept used by investors in capital markets to measure the sustainability and ethical impact of an investment in a company.
ESG is the umbrella term for sustainable and responsible finance components. It is a framework incorporating a firm’s non-financial performance (environmental, social and governance factor) into the investment-making process.
The Benefits of ESG to Your Business
Environmentally, ESG companies are looking into ways to reduce carbon footprint, determine their sourcing strategy and set a foundation for how to eliminate unnecessary waste. By complying with ESG standards, your company will:
- Commit to the target of achieving Net Zero emissions by 2050 and limiting the planet’s warming to 1.5°C.
- Reduce cost by implementing sustainability strategies such as redesigning equipment to improve manufacturing processes or prevent pollution up front, recycling and reusing waste, and tackling energy consumption.
- Fund green projects and investments by allocating capital to more promising and more sustainable opportunities such as renewables, waste reduction, etc. It can also help businesses avoid stranded investments that may not pay off.
Socially, businesses aim to build a meaningful diversity program, enhance employee health and make lasting changes in their community. Hence, you are encouraged to:
- Attract and retain quality employees while enhancing employee motivation by instilling a sense of purpose, as well as prioritizing employee’s welfare.
- Give back to the community. This act does not only benefit the receiver, but it also increases the employees’ job satisfaction as well as the suppliers and clients’ enthusiasm to the company
Lastly, building a strong governance foundation can diversify the business board, enhance business ethics, increase stakeholder transparency and protect privacy. Below are the advantages you wouldn’t want to miss:
- Millennial investors are the major force in the next two decades. Their interest in ESG funds have driven the rapid growth in ESG investment and this phenomenon is expected to continue to grow. By positioning yourself as a ESG company, you will be more attractive to the investors.
- Effective governance helps to control risk and ensure accountability to the shareholders.
- Governance guides your company to provide better understanding of company policy and how it will affect their stakeholders while showing transparency, promoting trust and building relationships with the community.
Realizing the current trend and the benefits that ESG has brought to the world, many large public companies are at the forefront of ESG strategies and are implementing sustainability measures. More and more smaller public and private companies are following their lead to commit capital to sustainable practices.
Well, environmental issues often drive social and governance practices.
For instance, since many years back, climate change has been a major effect on the ways that businesses plan, assess risk and deploy resources. Countries across the world, including Malaysia, have released various government policies to mitigate climate concerns.
4R to Practice ESG
From businesses to individuals, everyone can and should respond to these influences by developing and executing ESG strategies with four simple yet main steps: renewal, recovery, removal and reporting.
Renewal – Transition from fossil-based systems of energy production and consumption to renewable energy sources.
Recovery – Address improvements in energy efficiency.
Removal – Reduce greenhouse gas emissions.
Reporting – Measure and track sustainability performance, including internal and external performance audits.
In Malaysia, the power generation plan targets to increase the share of renewable energy (RE) in its installed capacity to 31% in 2025 and 40% in 2035. This aim is expected to be supported mainly by the strong solar sector growth in the country.
The double tax incentives, Capital Allowance (CA) and Green Investment Tax Allowance (GITA), offer relief of up to 48% of project cost when a business invests in solar, along with policies and programmes, renewable energy credits (RECs), declining installation costs, improved technologies such as battery storage, and creative financing solutions provide compelling reasons for businesses to invest in solar power as part of their ESG initiatives.
Furthermore, many businesses are involving energy performance assessments and independent audits to help expand opportunities for extra savings and better quality of life through the installation of “smart” systems and technologies and even steps as simple as substituting incandescent bulbs with LED or CFL bulbs.