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Why ESG Reporting and Good Corporate Governance Practices are Crucial for Malaysian Businesses

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In today's rapidly evolving business landscape, ESG (Environmental, Social, and Governance) reporting, as a part of good corporate governance, has never been more crucial for Malaysian companies. This emphasis on ESG reporting ensures that the audience feels well-informed about its significance in the current business landscape.

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By adhering to good corporate governance principles, Malaysian enterprises can mitigate risks and capitalise on opportunities that promote sustainable growth and investor confidence.

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This blog, authored by two experts in the field, examines the importance and myriad benefits of good corporate governance. With their extensive experience and knowledge, the authors highlight why these practices are indispensable for the contemporary Malaysian business environment and offer guidance on navigating the governance aspects of ESG reporting.

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Our Experts

Paul Larkin, owner of HiveDome Malaysia, the company behind MyGreenlight ESG reporting software, has extensive governance, compliance, and risk management expertise. Over several decades of working in accounting and developing software, he has established himself as a thought leader and trusted advisor in these critical areas.

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MyGreenlight brand ambassador Azizi Meor Ngah is a seasoned expert in corporate governance with a distinguished career in media, business development and consultancy for government bodies. His commitment to excellence in corporate governance has earned him a reputation as a trusted advisor and leader.

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Importance of Good Corporate Governance

We cannot overstate the importance of corporate governance, especially in the context of Malaysian business. Good corporate governance practices lay the foundation for ethical decision-making and operational transparency. These principles help companies navigate complex regulatory landscapes while fostering stakeholder trust.

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Enhanced transparency and accountability are critical in attracting investors who are increasingly focusing on sustainable and ethical business practices. Moreover, by adhering to good corporate governance, businesses can mitigate fraud, corruption, and financial mismanagement risks. This safeguards the company's reputation and promotes long-term viability and competitiveness.

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According to StepOnline's Paul Larkin, "It is crucial to highlight that the existing fiduciary duty of company directors may be enough to have them held liable for non-ESG compliance." Failure to submit accurate ESG reports could result in liability for directors or business owners. Thus, integrating robust corporate governance frameworks is essential for Malaysian companies aiming to achieve sustainable growth and bolster investor confidence.

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Principles of Good Corporate Governance

Corporate governance principles serve as the pillars supporting a company's integrity and efficiency. In Malaysia, these principles typically include accountability, transparency, fairness, and responsibility.

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Accountability ensures that decision-makers are answerable to stakeholders, providing a layer of oversight that promotes ethical behaviour. Transparency involves clear and accurate financial information, uncorrupted procurement procedures, and operational information disclosure, enabling stakeholders to make informed decisions. Fairness requires that all stakeholders, including shareholders, employees, and the community, are treated equitably.

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Responsibility mandates that companies consider the broader impact of their actions on society and the environment. By following these principles, businesses can foster a culture of trust and reliability, which is crucial for long-term success and sustainability. Implementing these principles helps minimise risks and leverage growth opportunities.

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Benefits of Good Corporate Governance

The benefits extend beyond mere regulatory compliance, offering substantial advantages to businesses. First and foremost, good corporate governance practices enhance investor confidence by ensuring transparency and accountability. This can bring increased investment and open up access to capital.

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Additionally, companies with robust governance frameworks often experience better operational performance, as clear policies and procedures streamline decision-making and reduce inefficiencies.

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Effective governance also mitigates fraud, corruption, and financial mismanagement risks, safeguarding the company's assets and reputation. Furthermore, adhering to sound principles can improve stakeholder relationships, as ethical practices and transparency foster trust and loyalty among customers, employees, and partners.

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Ultimately, these benefits collectively contribute to the long-term sustainability and growth of the business, making good corporate governance an indispensable element for any company aiming for success.

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Governance Structure

But how do you define good corporate governance within your organisation? Azizi Meor Ngah's advice is clear and practical. He emphasises the importance of "a clear and practical corporate mission statement and business policies, discretionary levels of authority for Board and C-suite executives, and regular updating of financial, technical and operating manuals."

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When these are in place, a company is in a better position to operate transparently with more accountability in every aspect of business.

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According to Azizi, critical elements in a robust governance framework include:

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Regular Board meetings with a minimum of 80% attendance are crucial for decision-making and ensuring that all board members are informed and involved in the company's operations and strategic planning.
The board composition must have a good gender ratio and people with relevant experience who are non-political appointments or have been proven bankrupt. These board members lead statutory and regulatory matters and the company's sustainability agenda, ensuring they align with the Government's Sustainable Development Goals (SDGs) and NCD.
Any appointments of board members to lead statutory and regulatory matters and the company's sustainability agenda should align with the Government’s Sustainable Development Goals (SDGs) and NCD.

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You may wonder how the diversity of your board contributes to better decision-making, but as Azizi explains, "When you have a mixture of talent, experience and people with regional or global exposure it helps to inject doable, bankable and viable ideas into the management system."

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It is also vital to ensure the board's independence and objectivity by "Having an appropriate shareholder agreement that embeds a voting system with the rotation of Chairman and a first right of refusal by any board member when resigning or recruiting a replacement."

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These agreements safeguard the integrity of the board. Additionally, compulsory board meeting attendance, as stipulated in the SSM or SC, can help ensure that decisions made for the company are fair and transparent.

Compliance and Risk Management Policies and Procedures

Azizi says, "Companies should assimilate their industry sector's best practices when it comes to ensuring compliance with regulations. They need to address all statutory requirements and implement relevant ESG requirements as part of the bigger risk management policy."

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The communication of these policies across an organisation can include "Town Hall style meetings, regular discussions at all levels on company policies and the issuance of company handbook policy."

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Risk Assessment

Azizi states that the top strategies for identifying and assessing risks are "Compliance with industry best practices, robust quality control, effective brand management, strong health and safety policies, and other regulatory compliances, which are essential starting points."

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However, having risk assessment structures and policies in place is not enough. Regular review and update of these policies are vital to ensure the processes are still relevant and fit for purpose. This proactive approach ensures that companies are always prepared for the evolving business landscape.

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According to Azizi, many companies review their risk management policies every five years, but he feels that "with the rapid changes and digital disruption, a company's risk management policy really needs to be reviewed every three years."

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ESG Reporting Frameworks

Examining the ESG reporting framework you are using and targeting the metrics most relevant to your business is crucial. Starting with your business's most critical ESG factors can set you up for a more successful report and better results. It will also help your company ensure that metrics related to double materiality, such as financial and impact, are the priority aspects for improvement within the business.

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According to Azizi, integrating ESG considerations into corporate strategy requires "the incorporation of sustainability policies in all the business plans, modelling, corporate strategy, and annual budgets."

Reporting Standards

With ESG reporting becoming obligatory for most companies in Malaysia, many businesses are trying to decide which framework to follow. Azizi advises that you consider "the Standards or Frameworks that are most relevant to your industry or financial taxonomy."

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With companies planning to IPO following Bursa Malaysia's framework, others choosing the Global Reporting Initiative (GRI), and many smaller enterprises following Capital Markets Malaysia's (CMM's) Simplified ESG Disclosure Guide (SEDG), finding the one that fits your sector best is important.

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When you have selected your ESG reporting framework, it is vital that you ensure the accuracy and transparency of your ESG reports. This reporting frightens many companies, particularly SMEs with limited resources. Azizi reassures businesses that it need not be too complex.

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"Basic data collection can be completed either manually or using IOT or both. Keeping on top of data is a must; in the same manner as financial accounting, it is essential for every business. It is vital to collect structured or unstructured (with automation format) data with the utmost accuracy."

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Whenever data is collected, it can be inputted regularly into an ESG reporting software, such as MyGreenlight, to ensure it is collated and ready for analysis at the end-of-year ESG report.

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Benefits of Governance Metrics in ESG Reporting

Stakeholder Trust

One of the most significant benefits of good corporate governance is the potential to improve a company's relationships with its stakeholders.

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"When a company meets the governance standards in its ESG report, it becomes more transparent, which leads to better, and more regular engagement with the stakeholders. When the relationship with its staff, customers, board and investors is improved, support from them is more forthcoming which can really help a company to grow."

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One example of where ESG reporting has enhanced stakeholder confidence was the Malaysian Department of Environment (DOE) endorsement of the Waste Heat Recovery (WHR) project by Invest Energy. Such a high-level stakeholder endorsement led to a partnership with Safran (manufacturer of Airbus/Boeing airline landing gears and brakes). The DOE could endorse the project thanks to Invest Energy's ESG report demonstrating its environmental, social, and governance standards, helping them secure the project.

Competitive Advantage

Another benefit of ESG reporting is that it can help position companies as industry leaders, giving them a competitive advantage over other businesses. Azizi explains, "Companies with ESG compliance and good branding can secure premium pricing, lower financing costs, and obtain easy market access." These all set a business up to be more successful than its counterparts who do not follow a reputable ESG reporting framework.

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Companies can leverage ESG reporting to differentiate from competitors "by adding ESG labelling to your products or services and receiving endorsements from leading premium buyers and overseas markets."

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Communicating your compliance with ESG standards can attract more customers and investors at a time when more and more people are seeking out more environmentally friendly, conscious, and ethical companies to trust. Integrating ESG compliance into branding can back up claims of being more eco-friendly or endorsing human rights without the risk of greenwashing.

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Challenges and Solutions

Implementation Challenges

While many companies are eager to adopt and implement ESG reporting, some challenges remain. Some of these are due to a lack of resources available for small and medium enterprises (SMEs). Providing hands-on training to staff or employing an ESG compliance officer may be beyond the capabilities of smaller companies.

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They may also struggle to raise awareness of the importance of complying with ESG metrics and even inform customers that they align with reputable ESG frameworks.

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The procurement phase is particularly tricky as the process is open to corruption and favours for friends rather than ‍selecting the best and most ethical company for the job. It is incumbent on a company to ensure that they purchase or engage services that are the right fit for them rather than a business that may offer compensation or bribes.

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Another challenge they may face is achieving high client expectations, gaining better premiums, or demonstrating to stakeholders that they are working towards better environmental, social, and governance standards within the company. They also need to remain competitive while implementing business plans or structure changes.

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Azizi says it is possible to overcome these challenges by holding "regular meetings with staff that bring them up to speed on the progress and direction the company wants to go. Having hands-on demos and instilling a 'do not give up' spirit in the team can overcome most issues. And, by involving stakeholders it's possible to do some collaborative trouble-shooting to see off challenges before they even arise."

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Continuous Improvement

Currently, most companies are only starting their ESG reporting journey, and the road to perfecting eco-friendly, social and governance standards is long. However, making a start and improving each year is the way forward. As businesses improve their ESG standards, they must stay updated with the evolving metrics and best practices.

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"Staying updated through conferences, webinars, customer requests and Government announcements will help companies reap incentives and avoid punitive actions," says Azizi. "It is vital to keep stakeholders, including employees, up to date on any changes arising from the regulators' requirements and buyers' needs while also closing gaps on any supply chain problems."

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A holistic approach to good corporate governance can help future-proof a business and make it more sustainable. Compliance with ESG reporting frameworks helps guide a company to better business structures, transparency, and a more respected brand image.

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Paul says, "In my view, if a company is well governed using existing laws and regulations, it will cover the governance requirements under the G in ESG. At MyGreenlight, we are in the perfect position to help businesses structure their policies to align with ESG reporting."

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If you need assistance getting your company up to speed with the new ESG reporting regulations, contact MyGreenLight to arrange an appointment. Let us take the stress of ESG compliance off your shoulders.

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