MEASURING the environmental, social, and governance (ESG) performance of supply chains is becoming increasingly important for businesses and investors.
One key aspect of ESG in supply chains is the measurement and reduction of greenhouse gas emissions. Many companies are setting targets to reduce their carbon footprint and transition to more sustainable practices.
To paint a picture — about 78% of multinational corporations (MNCs) will remove suppliers that endanger their carbon transition plan by 2025, according to a report titled Carbon Dated, released in 2021 by Standard Chartered.
The report looks at the risks and opportunities for suppliers in emerging and fast-growing markets including Malaysia as large corporations transition to net zero emissions by 2050.
It was also found that supply chain emissions account for an average of 73% of MNCs’ total emissions, while 67% of MNCs say tackling supply chains’ emissions is the first step in their net-zero transition, instead of focusing on their carbon output.
While corporations are set on their sustainability targets, this poses a challenge for the small businesses on the supply chain to ensure their business is conducted in an environmentally and socially responsible manner at every stage of the value chain.
The small and medium-sized enterprises (SMEs) lack knowledge and understanding, funds, talent, time, and other resources to adapt to new business realities such as investing in new technology and processes, or the tools and expertise to collect, store and analyse data.
This leads to limited visibility and inadequate data collection that will make it difficult for MNCs to assess the ESG performance of suppliers, and implement mitigation strategies effectively.
Are SMEs ESG-ready?
A survey was conducted by the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) on Malaysia’s Business and Economic Conditions from November 2022 to January 2023.
One of the topics that respondents were asked on was carbon tax; of the total respondents, 53% indicated that they have a poor understanding about it.
When asked if they were prepared for the carbon tax implementation, 65.2% said they were either not ready or did not know how to make preparations for it.
In that respect, ACCCIM treasurer-general and Small and Medium Enterprises Committee chairman Datuk Koong Lin Loong explained that SMEs today are still trying to survive post-pandemic.
“We went on ground, spoke to the SMEs to ask what they are doing now. They are still struggling with repayment and human resources — there are jobs but they cannot find the right talent, among other things.
“In a nutshell, they are still suffering from cash flow. As a result, they are too busy trying to get a healthy cash flow that they do not have the time, knowledge, funding or talent to invest in driving sustainability,” Koong pointed out during a panel discussion at Bank Negara Malaysia’s (BNM) Sasana Symposium 2023 that took place earlier this month.
The panel discussion titled Transitioning Towards A Greener Economy touched on the efforts to build climate resilience, the opportunities and challenges it presents, in the wake of Malaysia’s journey towards a greener economy.
It was also attended by BNM assistant governor Dr Norhana Endut, Tenaga Nasional Berhad (TNB) chief strategy and ventures officer Datuk Megat Jalaluddin Megat Hassan and CIMB Group Sustainability head Luanne Sieh, and was moderated by BNM Sustainability Unit director Madelena Mohamed.
Echoing Koong on the sentiments of SMEs, Sieh said that CIMB has free consulting for SMEs on sustainability, but “even then, the take-up rate is not high because they don't have the resources to even come to listen. That is a real struggle.”
A chain reaction
Challenges aside, and given the rising need for sustainability standards across the global value chain, SMEs need to understand that they cannot afford to be left behind and with it, understand the risks and potential consequences if they do not embark on the ESG journey.
Large corporations are incorporating ESG criteria into their decision-making processes; SMEs will find themselves improving competitiveness and attracting more business opportunities as corporations are more likely to choose suppliers that have embraced sustainable practices and whose values align with theirs.
One key aspect of ESG in supply chains is the measurement and reduction of greenhouse gas emissions.
Customers are becoming increasingly conscious of the impact businesses have on society and the environment, and are also purchasing more sustainable products. Data from audience segmentation tool YouGov Profiles in April 2022 revealed that more than six in 10 Malaysian residents preferred brands that are sustainable.
Strict regulations and policies such as carbon tax are being introduced, and if SMEs do not adhere to these, they risk paying fines or penalties.
Sustainability can boost the durability and profitability of a business in many ways including improved efficiency, cost reduction from recycling or repurposing materials, and a positive reputation.
Companies with a robust ESG record tend to have a stronger corporate brand value and this in turn will attract customers at the same time strengthen customer trust and loyalty, draw highly skilled talent, and investors’ interest.
Taking a step forward
At the end of the day, it is a joint effort — not only between the policymakers, financial institutions and SMEs but also MNCs that are placing sustainability requirements on their supply chain to provide support, guidance and facilitate in any way they can so all can benefit together to hit net zero emission.
The SME Sustainability Action Guide by UN Global Compact Network Malaysia & Brunei outlines a six-step framework for SMEs on how they can start adopting sustainability practices.
The first step is to learn and understand how sustainability practices impact their business through learning materials, programmes, consultations and more by industry enablers and financial institutions.
Following which, SMEs can assess and identify the sustainability aspects relevant to their business, and measure their performance against ESG criteria as this would help them engage their stakeholders, make a sustainability commitment, and set measurable targets.
Measuring the progress is crucial, and this can be done following a set of metrics by established ESG reporting frameworks to gain insights and make informed decisions to drive positive change.
In the long run, not only will SMEs eventually achieve the net-zero goal but will also be able to acquire more funds or capital from investors who heavily consider ESG factors when making investment decisions, should they have plans for business expansion.
