ESG practices can contribute to the long-term sustainability and success of SMEs.
CONCERNS of another possible war, worsening climate change, cyber attacks, global supply chain issues, economic crisis and the Covid-19 pandemic have become catalysts for spiking environmental, social and governance (ESG) adoption rates among businesses of all sizes.
Suffice to say, businesses are aware there is a high possibility of losing out in the game if they do not incorporate ESG practices into their daily operations.
However, Malaysia’s business community — a majority of which is made up of small and medium enterprises (SMEs) — is still lacking awareness and understanding of ESG issues.
This has led to many paying lip service to exploring ESG practices or undertaking one-off initiatives to shout about ESG compliance, but realistically, the majority are unable to walk the talk.
Pointing out that SMEs represent 1,226,494 (97.4%) of business establishments in Malaysia, Entrepreneur Development and Cooperatives Minister Datuk Ewon Benedick says it is imperative for SMEs to hop onto the ESG bandwagon as soon as they can to avoid great impact on their businesses directly or indirectly through the supply chain across all sectors and industries.
“I firmly believe that one day, ESG and sustainability efforts will become the norm for all SMEs in Malaysia,” he tells StarESG.
Ewon says businesses need not implement radical changes to their business to embrace ESG. -LOW BOON TAT/THE STAR
Beginning with baby steps
A complex strategy with extensive measures are not needed for SMEs to begin their respective ESG journey.
Ewon strongly recommends SMEs to start measuring and understanding their current carbon emissions prior to ESG implementation.
“This will be helpful in serving as a baseline for setting emission reduction targets and implementing effective strategies.”
He then suggests SMEs should embrace a low-hanging fruit strategy as an initial step in their ESG or “green” journey.
“Dwelling excessively on the structural and financial aspects of ESG can hinder advancement in incorporating sustainability practices within their organisation.
“Making a difference to the planet does not need to be costly or mean making radical changes to your business.”
“It could be as simple as switching to a green energy supplier, recycling waste properly or simply switching off computers and monitors at night and going paperless,” says Ewon.
He adds that incorporating employee care such as motivating employees to retain talent, complying with the minimum wages order, workplace safety rules, can also be part of an SMEs ESG agenda.
Pointing out that conducting corporate social responsibility (CSR) activities and giving back to the community are also considered as ESG practices, he shares there are no-cost or low-cost measures that SMEs can easily adopt to kickstart their ESG journey, or hasten and enhance sustainability efforts.
> Energy conservation: Implement energy-saving practices such as turning off lights and equipment when not in use, utilising natural light, and optimising heating, ventilation, and air conditioning systems for efficiency.
> Water conservation: Promote water-saving habits within the workplace, such as fixing leaks, installing water-efficient fixtures, and educating employees about the importance of water conservation.
> Waste reduction: Establish a recycling program and provide proper waste separation bins. Encourage employees to minimise paper usage by promoting digital documentation and implementing double-sided printing.
> Sustainable transportation: Encourage employees to carpool, use public transportation, or bike to work. Provide incentives for eco-friendly commuting options.
> Employee engagement: Foster a culture of sustainability by educating employees about the importance of ESG practices and encouraging their active participation. This can include organising awareness campaigns, workshops and training sessions.
Adoption of ESG practices will impact operation, workforce and customers or end-users.
Bigger strides towards ESG
Once SMEs are comfortable with the simple ESG practices, they could consider taking further measures by identifying ESG issues relevant to their respective firm and industry to step up their game in the ESG space and raise resilience level in sustainability matters.
Ewon lists requirements of consumers, buyers, financing and the market as the important factors to consider.
Citing the Deloitte Global 2022 Gen Z and Millennial Survey, he shares that 64% of Gen Z (born between 1996 and 2010) would pay more to purchase an environmentally sustainable product, versus 36% who would choose a cheaper product that is as sustainable.
“The shift in consumer behaviour is a crucial factor that can affect the business greatly.”
He adds that large firms are demanding vendors and suppliers to adopt sustainability and ESG practices.
“Being ESG-ready is a huge plus for SMEs in bidding for contracts, access to local and global markets as well as sustainability procurement.
”Climate-related trade measures may pose market access risks for exporting SMEs. Exporters will need to be aligned with domestic regulations as well as rules in destination countries.”
On financing requirements, Ewon says adopting ESG practices can reduce the risk perceived by bankers and investors — allowing SMEs access to cheaper funding.
“On the flip side, non-compliance with ESG may result in SMEs experiencing difficulties in accessing financing or being side-lined by investors.
In some countries — European in particular — are imposing the adoption of ESG as a mandatory requirement for services and products to enter their market.
This means SMEs that produce their products or act as vendors to multinational corporations (MNCs) are forced to comply with the regulations or risk losing the contract.
Additionally, Ewon says clear communication from leaders can drive the company to do better, faster.
“Leaders must clearly communicate their commitment such as goals, action plans, and progress on ESG matters to stakeholders. Build up the corporate reputation among employees first, then consumers, and investors.
“Showcase how the company is living up to its organisational purpose and gradually improve the company’s ESG rating, which is used to measure the sustainability or ethical impact of the organisation.
“Also, increase transparency, which serves as a source of public accountability for leaders. This can be done by publishing all the good work undertaken on the firm’s corporate website,” he says.
SMEs could identify ESG issues relevant to their respective firm and industry to step up their game in the ESG space and raise resilience level in sustainability matters.
Reaping the benefits
It seems like a daunting task to get the basics of ESG right.
However, it may be easier than one might think if ESG is considered a journey that enables businesses to obtain clear benefits.
Noting that the adoption of ESG practices will impact operation, workforce and customers or end-users, Ewon shares the six key benefits of adopting ESG in business operations.
> Improve cost effectiveness with efficient use of resources and recycling of materials as well as reduce cost of operation.
> Enhance market access through the supply chain as large firms, multinational companies, government-linked companies are demanding for vendors and suppliers to adopt sustainability and ESG practices. Being ESG-ready is a huge plus for SMEs in bidding for contract, access to local and global market and sustainability procurement;
> Attract and retain workers. Younger generations are more aware of the impact of climate change on the environment and more inclined to work with ESG compliant companies. High level of satisfaction with commitment to societal impact, diversity and inclusion and sustainability may induce loyalty;
> Enhance access to financing. Adopting ESG practices means reducing the risk perceived by bankers and investors, allowing SMEs access to cheaper funding.
> Boosts competitiveness and resilience as economics sustainability can be attained whereby adopting sustainable solutions is an opportunity for SMEs to build greater business resilience and ensure survivability in the long run particularly post Covid-19 pandemic; and
> Build reputation and positioning. ESG compliance opens up new market segments and attracts new customers.
Capitalising on ESG
The 2015 Paris Agreement on climate change set the stage for sustainability to become part of the public consciousness.
Since then, a lot of key developments in ESG among the vast business sector have been witnessed in recent years.
Each company, from the largest to the smallest, have been scrambling to adapt to ESG practices and build resiliency into their business and strategy.
Those who do are future-proofing their business and building a competitive edge into their operations, those who don’t could risk perishing after a period of time.
Ewon opines that ESG practices can contribute to the long-term sustainability and success of SMEs.
“Implementing environmentally friendly measures, such as reducing energy consumption or adopting sustainable sourcing practices, can lower SMEs operational costs and increase efficiency.
“Similarly, incorporating social initiatives, such as promoting diversity and inclusion or supporting local communities, enhances the company’s reputation and attracts customers and talented employees.”
He adds that adopting ESG practices can open up new business opportunities for SMEs and enables them to navigate regulatory requirements as well as mitigate risks.
“Many large corporations and government agencies are prioritising suppliers and partners who adhere to ESG standards.
“By aligning with these practices, SMEs can gain access to larger markets, secure valuable contracts, and build stronger relationships with stakeholders.
“Meanwhile, governments worldwide are increasingly implementing regulations related to environmental protection, labour standards and corporate governance.
“By proactively embracing ESG practices, SMEs can stay ahead of these regulations, avoid legal issues, and build resilience against potential reputational and operational risks,” says Ewon.
He also reminded businesses that adoption of ESG is not just to earn money.
“SMEs can have a positive impact on the environment, local communities and the well-being of their employees. This not only aligns with the expectations of customers and stakeholders but also helps create a better world for future generations.”
Hastening ESG adoption
An Alliance Bank survey titled ESG Insights from Malaysian SMEs: Building A Better Future Together showed that Malaysian SMEs lacked awareness regarding the importance of ESG principles.
Prior to the survey, 86% of surveyed SMEs had never come across the concept ESG.
To drive SMEs towards ESG implementation and integration, Ewon highlights that SME Corp Malaysia will be rolling out PKSlestari - an initiative to encourage and accelerate the adoption of ESG among SMEs through development of a sustainable ecosystem.
He says the PKSLestari ecosystem that is being developed will consist of awareness and education programmes; SME ESG Assessment; policy support; market access; standards and compliance; as well as financing and incentives.
“A series of awareness and hands-on workshops nationwide (by region) via targeted industries such as oil and gas, electrical and electronic (E&E), medical devices, and more will be held.
“These awareness workshops consist of several modules which sheds light on ESG practices are, how SMEs can leverage on ESG and learn how to develop and implement ESG strategies.”
Encouraging SMEs to do a deep dive on the implementation of ESG in their business operations, Ewon says the hands-on workshops are helpful in helping SMEs develop customised business sustainability plans.
Besides workshops, PKSlestari promotes and encourages SMEs to undergo SME ESG Assessment to obtain sustainability-related data and benchmarking within industry.
It also serves as a bridge of engagement between regulators, multiple ministries and agencies including Bank Negara Malaysia, the Economy Ministry, Natural Resources, Environment and Climate Change Ministry, Bursa Malaysia, multinational and government-linked companies, and academic institutions.
“SMEs can utilise this bridge to develop the supply chain and enhance linkages, as well as seek attractive financial assistance on ESG for SMEs,” says Ewon.
Separately, he adds that SME Corp Malaysia had successfully organised the first awareness workshop on Mar 21, under the 2023 SME Sustainability Series: Charting the ESG Path for SMEs in collaboration with Petronas which was attended by 151 participants.
