ESG workshop

Last Wednesday, my wife and I attended a half-day workshop on the Simplified ESG Disclosure Guide (SEDG), presented by a consulting group. It was part of a larger event, the ASEAN Finance and Central Bank Deputies Meeting. We were almost denied entry as our names weren’t on the attendee list, but after some confusion, the matter was resolved, and we joined a group of about 30 people, mostly from SMEs. Unfortunately, we missed the first hour due to unexpected traffic congestion, but the workshop was simple enough for us to pick up the missing information as we went along. Luckily, there were still three more hours to go.

The workshop turned out to be pretty interesting. ESG gets talked about a lot, and while I could throw around terms like Scope 1 and Scope 2, their definitions never really sank in. But after today, I finally have a proper understanding of what’s required. What I did know before was that ESG is more than just a buzzword—the Securities Commission and Bursa Malaysia place great emphasis on it, and public-listed companies are already required to disclose sustainability-related information in their annual reports. Many of them will have to step up their ESG compliance even more in the coming years.

For SMEs, though, things are a little different. They’re not yet legally required to follow the same ESG disclosure frameworks as public-listed companies, but that doesn’t mean they can ignore it. Big corporations, especially multinationals, are increasingly insisting that their suppliers align with ESG principles. It’s just a matter of time before ESG compliance becomes a must-have for SMEs wanting to do business with them.

Anyway, back to ESG. The E part of ESG—Environmental—is what most of us are generally familiar with. The first thing that comes to mind is energy consumption—the electricity we use to power our offices, businesses, homes, etc. Everyone knows the first step is replacing traditional lighting with LED fittings. But there’s much more to it than just cutting down on electricity bills. ESG also looks at emissions reduction, waste management, water conservation and responsible sourcing of materials. That’s where Scope 1, Scope 2 and Scope 3 emissions come in.

• Scope 1 covers direct emissions from a company’s own operations, like fuel burned in company vehicles or factory machinery.
• Scope 2 covers indirect emissions from purchased electricity or energy used by the company.
• Scope 3 is the tricky one—it includes emissions from a company’s entire value chain, meaning suppliers, customers and even the end use of a product. This is often the biggest part of a company’s carbon footprint, but also the hardest to track and reduce.

The S in ESG stands for Social, and this covers things like human rights, labour standards, employee management, occupational health and safety, as well as diversity and equity. It’s about how companies treat their staff, their suppliers and even their customers. Are workers paid fairly? Do they have a safe working environment? Are businesses actively promoting diversity and inclusion? These are all part of ESG’s social component.

And finally, G stands for Governance, which is all about how businesses conduct themselves. I always knew that submitting proper audited financial reports was important, but I didn’t realise that governance also includes things like leadership transparency and ethical business practices. Companies need to disclose information on their board of directors and senior management, including diversity, independence and conflicts of interest. Then there are things like having a proper code of conduct, anti-corruption policies and whistle-blowing mechanisms—all of which fall under Governance.

The workshop really drilled home the importance of ESG, especially for the SME representatives there. But I can already see the challenges ahead for SMEs trying to implement these guidelines. Tracking emissions, especially Scope 3, won’t be easy. Neither will restructuring policies to ensure full compliance. Still, there’s no escaping it. Eventually, the big industry players will demand ESG compliance before doing business with anyone, and companies that don’t adapt might find themselves left behind.