Challenges in ESG Reporting

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Sustainability Reporting – what challenges to expect

 

Sustainability Reporting is now common and we are seeing companies have progressed in their reporting maturity over a short period of time.

Generally, the purpose of Sustainability Reporting is to demonstrate performance as well as for companies to build reputation as a ‘Sustainable Company”.

Before companies get excited to be self-labeled as ‘Sustainable’, there is a key factor that companies need to govern and manage to ensure a Sustainability Report is able to meet its purpose and objective.

                                                

DATA

Data demonstrates performance. This is how companies can build reputation through transforming data and presenting it through success and aspiring stories. To derive this, it starts by establishing a robust data collection and management governance and procedure.  This can be a complicated and tedious process.

These includes the following:

·         Identify WHAT needs to be collected

·         Identify WHO to be involved in the process

·         Identify WHERE to obtain the information

·         Identify HOW to effectively collect and manage data from end to end

 

Ideally, the aim is to establish a robust and credible data management standard operating procedures (SOPs).

 

Identify WHAT needs to be collected

The data required to be reported would depend on the reporting framework or standards chosen as well as the outcome of the materiality assessment, but this may not be ideal in application as different metrics have different reporting boundaries, which represent the description of where an impact occurs arising from an organisation’s operational activities or relationships with other entities.  It is crucial for reporters to take the effort to understand the reporting boundary of any given issue. For instance, office building energy use, specifically energy consumption for heating and electricity can be either Scope 1 or Scope 2 GHG emissions depending on whether the energy used is provided that own company or purchased from an external provider or source. In the case of heating, there may be on-site combustion at own premises or offices or other facilities, in which case the emissions from fuel use for heating would belong under Scope 1 emissions. If, however heating is provided by an external provider then the emissions from the purchased heat would be reported under Scope 2.

               

Reporters should also consider the possibility that not all the data collected is necessary to be disclosed as it is. To take the same example as above on the GHG emission, regardless of whether the said emission is Scope 1 or Scope 2, the data is just considered as ‘activity data’ which would need to be further multiplied with the relevant emission factor for the purpose of reporting.

 

 Identify WHO to be involved in the process

Much of the data required for ESG reporting is likely already available within the organisation. However, since this data may not be part of a formal collection process, it is needed to identify the data managers responsible for it. Begin by interviewing those data managers who are likely to have some of the information needed for ESG reporting. When discussing data requirements, provide a clear overview of the expectations and alignment with regulatory requirements and reporting standards, as administrative staff may know other relevant data owners and can help identify additional data managers. This step is particularly crucial if organisation has multiple facilities, buildings and assets. The more complex the organisation is, the more data managers needed to be involved in the reporting process.

 

Identify WHERE to obtain the information

Once have identified all the data managers, it’s essential to map the business processes from which they gather the data. For certain data points, such as Social data from HR, the source will be clear. However, it’s important to document the location of all data sources to ensure consistency and continuity.

It's crucial to document all data sources to ensure that personnel changes don’t disrupt the continuity of ESG reporting. Disruptions caused by staff turnover in ESG reporting are a common issue for companies, often because data source documentation wasn't performed during the initial report creation. When the data manager familiar with the relevant data sources for a particular ESG issue leaves, reporting for that issue can come to a standstill.

 

Identify HOW to effectively collect and manage data from end to end

Documentation requires efforts and time, but it is worth and critical that you do this for each indicator to be reported:

• Is the data or information sourced from internal or external?
• Is the data sourced from single data point or to be consolidated from multiple business sources?

• Who is the current data manager or do they partially own data with other data managers?

 

By keeping an up-to-date document detailing how each indicator is reported, you can ensure the continuity of your reporting process. While this may seem like an obvious step, it's often overlooked by first-time reporters, as its importance becomes clear only when it’s time to prepare the next report a year later. When preparing your first report, always keep in mind that this will be an ongoing, annual process moving forward.

  

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation  

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Sustainable Procurement: Is it worth pursuing?

 

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Introduction

In recent years, with issues such as COVID-19 and with the current volatile market, the resilience of supply chain is deemed more critical than ever. Companies have started to integrate Sustainability into its operations but the focus now is to ensure it is expanded across its value chain or in other words; procurement.

 

Sourcing from suppliers that are sustainable, may help companies to mitigate risks arising from supply disruptions due to environmental events or regulatory changes. Moreover, companies that mitigate social and environmental issues across the value chain will help to mitigate reputational risks.

 

It easier said than done

Integrating Sustainability across the value chain requires a lot of collaborative approach and sound governance and processes – and this is also complex as companies are dealing with shortages in tools, data and internal capabilities. This is backed by the findings from a study by McKinsey. According to this study, one of the exercises indicates that, 70% of the sample informed that their companies is not aware of where Scope 3 emissions were generated in their value chain. Apart from that, 90% of the sample highlighted that they face difficulty in identifying the right actions to move the needle on ESG topics. Also, in terms of target setting, almost 75% highlighted that they face issues in this area.

 

The SMEs are the backbone of the economy – globally they represent up to 90% of businesses. The SMEs are also facing the scrutiny and pressure from all angles to adopt sustainable practices and operations. This is due to their supply chain ecosystem that includes large corporations that are setting higher ESG standards and requirements.

 

Logically, implementing sustainability is always a good cause for any organisation, regardless of their size. While larger corporations have been able to progressively integrate ESG into their business, many SMEs struggle in their journey to do the same, due to a lack of technical skills, knowledge and capital.

 

 Is it worth it?

Not only sustainable procurement results in good reputation for the company, but it can also have a positive impact on the company’s relations with its stakeholders, especially the customers and investors. These two stakeholder groups are now more focus than ever to scrutinise ESG considerations integrated across companies’ supply chain and will support those companies that have a clear and practical sustainable procurement plan and monitoring. Customers and investors would also be more likely to do business (over a longer period of time) with companies which have lower exposure towards non-ESG compliant suppliers.

 

Current and potential employees are also looking into how serious companies are towards sustainable procurement, especially those that value environmental and social responsibility. Employees nowadays do not want to be affiliated with companies with poor sustainability practices in its procurement process and management. Additionally, employees would also expect companies they are working for to also have a sound and robust sustainable procurement strategy and plan.

 

Sustainable procurement is not all just about environmental and social benefits, but can also have potential economic value. Companies with good sustainable procurement practices will have competitive edge, and can reduce costs, improve efficiency, and gain a competitive advantage over their peers in the same sector.

 

On top of that, sustainable procurement would also improve supplier relations as well as business continuity. Early adoption and transition in sustainable practices ahead of mandatory regulations or imposed by specific jurisdictions, can benefit organisations in securing and building networks of quality and sustainable suppliers as part of its value chain.

 

Conclusion

Sustainable procurement is expected to be a norm moving forward. We are seeing more pressure from sustainable companies to embed Sustainability across its business operations. Engagement with suppliers on Sustainability are seen to be intensified and more and more suppliers are also on the look out to obtain relevant certifications, tools and resources towards being more sustainable. More or less, both organisations and suppliers are aware that sustainable procurement will bring economic benefits and would remain relevant and competitive in the market over the long term.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Net Zero Commitment – Is Malaysia in the lead?

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Introduction

A few years ago, Malaysia was under the radar due to human rights issues. However, things are starting to change – with strong adherence to global standards as part of the country’s approach to address the ‘Social’ aspect particularly in dealing with labour standards. It is anticipated that Malaysia is setting its path on the right track under the ‘Social’ aspect particularly with the aim in reducing reliance towards foreign labour from enhanced digitalization and automation, moving forward. 

Now that we have some assurance that the ‘Social’ aspect is heading twards the right direction, the next question is – how about the ‘Environmental’ aspect?

Climate Ambitions

‘Environmental’ aspect is broad but for the purpose of this article, let us narrow it down to the current focus under the Environmental aspect i.e. Climate Change.

There are a lot of discussion around the topic, but one clear response to it for companies across industries is the establishment of Net Zero pathway; a complex and challenging subject for all, globally.

Amongst ASEAN countries, to date, Malaysia has seen to be having the clearest and comprehensive approach towards Net Zero. Neighboring countries such as Thailand and Indonesia have committed to achieve carbon neutrality by 2050 and 2060 respectively, while other ASEAN nations that mostly establish aspirations to the overall Sustainable Development agenda and reduction of greenhouse gas emissions – not specifically on Net Zero.

There is however, a similar trend across ASEAN in regards to the view on Net Zero as a response to combat climate change and emissions. As an example, Malaysia had made a stance to abstain from constructing new coal power plants and at the same time accelerating the retirement of existing coal capacity. Similar approach is being taken with countries such as Thailand, Vietnam and Indonesia that aim to diminish reliance on coal and increase investment in greener and sustainable energy alternatives. 

Based on the report on ASEAN countries Energy Transition Index (ETI), which benchmarks countries performance on their energy infrastructure and systems, and their readiness towards transition to greener and sustainable energy, there is a clear distinction with the ASEAN countries rankings.

Even as a developing country, Malaysia is ranked higher than the southern neighbor, Singapore, which is one of the developed nations and more economically advanced.

One of the observations made was that countries are challenged with the issues of investments in renewable energy (RE) being economically limited and moving at a slow rate. Eventually, and as based on historical data, there is projected reduction in Renewable Energy costs and the return on investments (ROI) surge from Renewable Energy, this would address the current challenges and would eventually scale up such investments. However, we need to note that there is also current contractual obligations from traditional power producers that is unavoidable, but critical to shift towards transition.

Governments would need to step up to facilitate the transition and industry is expecting governments to chart pathways and roll out policies and frameworks to enable the same. For Malaysia, the government had recently issued roadmap on energy transition called the National Energy Transition Roadmap.

National Energy Transition Roadmap

Research shows that nations that have sound ESG and climate agenda tend to create positive impact on foreign investment (FDI) through enhancing its attractiveness via mitigation of medium and long-term risks linked with ESG risks across all aspects. With investors have started to demand ESG criteria integrated into their investments mandates, nations that are aligned on adhered to global signatories or standards such those under the United Nations, would be deemed more attractive  to investors that set ESG compliance within their investment practices. This trend have grown rapidly in recent years and is forecasted to continue.

On 27 July 2023, Malaysia’s Minister of Economy launched the Part 1 of the country’s National Energy Transition Roadmap (NETR 1). Subsequently, on 29 August 2023, Malaysia’s Prime Minister launched the expanded and complete National Energy Transition Roadmap (NETR), which expands on NETR 1. The NETR sets Malaysia’s aspiration of accelerating the nation’s energy transition and sustainable growth agenda. It establishes a pathway to transition the national energy mix, reduce GHG emissions, generate significant investment and employment opportunities, and promote a just and responsible transition.  The NETR identifies 6 energy transition levers to facilitate Malaysia’s transition to clean energy, and outlines the Malaysian Government’s 10 flagship catalyst projects across these levers. The 6 levers are: (i) Energy efficiency, (ii) Renewable energy, (iii) Hydrogen, (iv) Bioenergy), (v) Green mobility, and (vi) Carbon capture, utilization and storage. The expanded NETR outlines 50 key initiatives and five cross-cutting enablers, in addition to the 10 flagship catalyst projects unveiled in Part 1.

Early in 3Q2023, the Malaysia government expedited the implementation of the NETR, to progressively and structurally transition Malaysia from dependency on fossil fuels towards greener alternatives. The implementation will be done across 10 pilot projects with an estimated cost of over RM620 billion. 

The high cost invested is due to NETR that stretches over long-term, but there is potential foreign investment will be made to scale up the NETR substantial implementation deliverables. NETR will place Malaysia at the forefront in green manufacturing within ASEAN Foreign participation and will note only enable Malaysia to reach its climate goals, but also become the green manufacturing hub within the ASEAN region.

As Malaysia strive towards Net Zero, in line with the structured execution of the NETR, there is potential for the country to tackle simultaneous issues it faces a weak currency and declining foreign ownership particularly in the equity market. This is direct impact from NETR that would enable the restructuring the economy and also ensuring strong and sustainable GDP growth in years ahead.

Conclusion

Malaysia is currently seen as a leader in the ESG and this includes on the climate agenda. NETR shall further elevate the country’s position to be amongst global peers and this too will set the expectation for local companies to pursue its own climate agenda and ambition.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation  

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What is the Role of Internal Audit in ESG?

 

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Introduction

Environmental, Social and Governance (ESG) has now become integral in business strategies and operations. It is no longer a nice-to-have agenda for companies. ESG contributes towards value creation, in both financial and non-financial aspects.

Acknowledging this, is important, but we need to also take account that ESG also recognizes a new risk type i.e. Sustainability Risks. Companies are still strengthening internal processes towards managing Sustainability Risks and this includes enhancing its governance structure, strategies, business goals, initiatives and also on disclosures.

Sustainability Risks (and opportunities) are relevant for both businesses and operations, and sit across companies’ functions. That is why, having a robust structure with clear roles and responsibilities across the three lines of defense is imperative, to ensure ESG is managed holistically and aligned with overall business model.

One of the questions that has been discussed lately is – what is the role of Internal Audit in ESG?

But before that, there is a need to reiterate the importance of ESG for stakeholders.

 

Stakeholder pressure – regulators and investors as main drivers

 A robust and holistic ESG strategy and roadmap has now become essential to address regulatory requirements and stakeholders expectations. ESG strategy and roadmap also serves as competitive advantage, and catalyst for overall value creation. Companies are constantly under the scrutiny of regulators on the ESG resilience in addressing the evolving changes and requirements over short, medium and long term. On top of that, stakeholders are expecting clearer and more meaningful alignment of ESG strategy and roadmap with companies long term corporate strategy. Internally, stakeholders namely employees, are setting higher standards on the Sustainability agenda at organisations they are working with, that would impact talent recruitment and employee satisfaction.  One thing to note here is that, the primary source for stakeholders to understand on a company’s ESG strategy and roadmap, is through reports and disclosures.

  

Internal Audit’s Role in ESG

Internal audit is now becoming more and more critical in ensuring quality of ESG disclosures as a whole, as they can provide objective assurance and advisory pertaining to the credibility of ESG data and information. As with financial reporting, the independent and objective assurance that internal audit can provide should be an integral part of a company’s ESG disclosures.

 

Sustainability Assurance

·         Sound and robust ESG disclosures require maturity in ESG systems and controls and internal audit should be one of the very first parties to have oversight prior it goes to external third party auditor

·         Internal audit should always aim for ESG disclosures to be based on metrics that are relevant, accurate and consistent that would benefit the stakeholders and organization

·         Internal audit should embed ESG into regular periodical audit plans and should be business-as-usual

 

Sustainability Advisory

·         Assess scope and areas that are less well-defined and build an ESG control environment towards meeting regulatory expectations and industry best practices

·         Propose ESG reporting metrics (internal and external reporting) and data management processes, to ensure the coverage of meaningful and accurate ESG data for the organization and its stakeholders

·         Advise for better ESG governance to ensure organization has relevant synergy across departments and functions

 

Conclusion

Internal audit should by now looks beyond identifying risks and controls in place. There is a need towards integrating ESG within the scope and methodology, and there must be linkages towards organization strategy, risk management and governance structure to facilitate internal initiatives, programmes, KPIs, controls as well as infrastructure are effective towards supporting organisations’ ESG agenda.

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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Green Talent – key towards net zero

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In the previous article, we talked about why a company culture is important in the overall ESG agenda. Now, let’s talk a little bit more specific. What is the role of the workforce on the current ESG buzzword i.e. climate and net zero.

Companies need to understand that Human Resources (HR) play a key function to ensure a successful business transition towards net zero.

The race towards net zero and the greening of the economy has started and will continue to have significant impact on the on employment and the required skillsets. Just like other capitals, investments in human capital in building a talent pool of green skills is important towards enabling a company to transition towards low-carbon, resource efficient and green operations.

Green skills do not sit within a specific sector. It covers a broader spectrum where it applies to a wider set of current functions and management levels. Currently, the industry is witnessing a ‘green enrichment’ job descriptions where skillsets and knowledge related to ‘green’, net zero, low-carbon, green products, renewables and many more, are becoming a common requirement.

On top of that, the industry is also seeing new emerging jobs catered for green skillsets especially in the area of renewable energy and energy efficiency and green technology.  

Green skills should also be supplemented with generic skillsets such as stakeholder engagement, adaptability, risk management and problem solving as these skillsets required by a green talent.

The demand for green talent is on the rise and the competition is stiff. According to multiple studies, the scarcity of green talent is across all industries and sectors. For instance, a recent survey from Funds Europe highlighted that more 70% of financial services firms viewed that they are facing ESG skills shortage, and only a small minority of firms (13.5%) are providing training on the risks resulting from climate change, which exacerbates the challenge.

Without a doubt, HR must up their game towards building the required skillsets and capabilities of green talents as this will ensure sustainable succession planning to meet companies’ green transition.

Some of the practical steps to be taken as guidance are as follows:

 

Green Talent Competency Assessment

HR needs to have a clear definition of the requirement criteria for green skills and knowledge in order to conduct a strategic and purposeful green skills competency assessment. There are a few frameworks out there such as the one developed by Bursa, that could guide HR to develop the sets of criteria specifically for green (and overall Sustainability) talents, but HR needs to further refine based on the company’s business model and its green ambitions and goals.

 

Green Talent Roadmap

HR should craft a structured resourcing plan including talent up-skilling pathways for identified employees critical for moving the green agenda of the company. This resourcing plan should be approached from within the company (internal) and from outside of the company (external) e.g. identify key employee groups, retain and attract green talent with green skillsets.

 

Green Talent Capability Building

Employee development should be an on-going process by leveraging on vocational education, training modules, learning programmes, green certifications, as well as on-the-job training to develop and strong talent pool with green talents and succession planning. This should be across different levels i.e. awareness, fundamentals, intermediate and advanced.

 

Monitor and Respond

The initiatives to up-skill the green talents need to be monitored in terms of its effectiveness. Are they meeting the requirements for a specific function? How is the participants’ feedback? Is it enough? Is it too basic? Are there any other new programmes that need to be rolled out? Does the overall plan need to be revamped? These are some of the questions HR needs to monitor and to eventually respond in order to address any gaps and improvement plans to ensure successful execution of develop green skillsets.

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

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Why company culture is critical for ESG

 

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 Company culture; is something that is not easy to change and manage. But it is common understanding that it determines the enabling success of a company towards achieving its goals and aspirations, including for Environmental, Social and Governance (ESG) agenda.

Human Resources (HR) has a huge role to play in ESG; not merely by providing data for annual Sustainability Reporting, or driving Sustainability-related programmes for the workforce. Even though that ultimately the ESG agenda would most likely come from the Chief Executive Officer or the Chief Sustainability Officer, HR has the potential to ‘make or break’ the whole ESG agenda of a company through culture change of the company to embrace ESG and its objectives.

The fact that we need to understand – building any culture within the organisation is not easy, especially ESG culture. To begin, culture building must begin with the organisation’s authentic identity. What it means by ‘authentic’ is that it must not be based on borrowed or aspired clichés. Therefore, each organisation’s approach on ESG should be unique and integrated in its own context of ambition, and its key internal and external stakeholders’ expectations.

Employees should also have the say in deciding how aspirational they want ESG outcomes to be and how strategy needs to be developed and executed to achieve them. Do they want to be ESG leaders, or followers? Do they want to go beyond regulatory requirements? Each employee functions would have various views and all should be taken as important as the direction being set at the top level. Hence, it is important for organisations to factor in material views and align with the overall short, medium and short term ambitions.

But organisations also need to be abreast of immaterial views that may mislead towards achieving the intended outcomes. Communications is key where effective communications on the oragnisation ambitions should be made accessible and sufficient, where the tone at the top should be set and committed. Various ways can be adopted and with multiple channels to cater to the needs of the stakeholders for engagement whether informally or formally.

To embed an ESG-centric culture, it is important that key behaviours are ingrained across the organisation. This revolves around the materialisation of adopting characteristics and mindsets of long-term focus, collaborative approach, accountability and resilience. This is due to the fact that ESG is constantly evolving and requires prompt adaptation for organisations. With these characteristics, organisations can ensure the transition to an ESG-centric culture is achievable and sustainable.

 

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

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Role of Treasury in ESG

 

Role of Treasury in ESG

 

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Introduction

Sustainable Finance is widely known as the consideration of environmental, social and governance (ESG) factors into financing (including investing) and decision making processes. For the financial sector, ESG factors, which are broad in scope, have not been traditionally part of standard financial analysis. However, now, more than ever, ESG integration into financial analysis has not only become relevant, but critical.

 

The difficult first step

Regardless of sector or region of operations, ESG integration into business model has always been a challenge. Unfortunately, for treasure, this is even harder. This is because treasury is partly tied to the organisation’s policies which means ESG integration into the treasury functions are not 100% control by treasury directly.

However, there are a few key initial steps that worth to be taken; and it can start with an acknowledged framework that maps the potential contributions of treasury to ESG factors and guides its integration, and this can be based on a few established frameworks that can meet the above objective.

But, there hurdle here is; what framework to adopt as the regulations and standards are still unaligned globally. One of the ways to approach this is to adopt the common and most widely accepted framework such as the United Nations Sustainable Development Goals (SDGs). This shall enable clear linkages to the goals that contribute to each and/or combined elements of ESG. Another option is the green, social, and sustainable bond principle frameworks of the Climate Bond Initiative (CBI).

By adopting these frameworks, it provides guidance and directions to evaluate ESG eligible project financing.

Contributions of treasury to ESG

Green financing is not the only way corporate treasury can contribute towards supporting sustainability. In terms of its operations, sustainability can be achieved through digitalisation in its processes, record management and bank statement management. Innovative technologies like robotic process automation, blockchain, and artificial intelligence should also be implemented to increase efficiency in an ESG friendly ways. These initiatives will cover the environment impact of sustainability. In terms of social, corporate treasury should encourage diversity, equity and inclusion by providing equal opportunities for everyone and creating an inclusive working environment.

On top of that, the role of treasury can be further more extensive. Firstly, treasury can set ESG-related requirements to be met by new business partners. Secondly, for existing business partners, treasury can create advocacy and awareness for them towards complying with these requirements. Treasury can also build credible relationship with credit rating agencies focusing on the areas of ESG.

A structured model should be established and implemented to ensure an effective integration of ESG in treasury. This model should include a clear overview of potential treasury contributions to ESG factors, once they have been selected, and the building blocks needed to achieve those contributions.

 

Monitor and Measure

It is important that the progress of ESG integration in treasury is monitored and tracked in a structured manner and also using credible metrics and benchmarks. However, we need to acknowledge that development of metrics and benchmarks for ESG integration tracking is still in the nascent stage and it comes with some complexities, in terms of identification of types of indicators, as well as standardization. Nonetheless, it still can be done effectively with consideration of a few key approaches.

First and foremost, it must be made clear on the mapping of each treasury contribution, and this should be done separately. From here, metrics and benchmarks need to be developed separately for each contribution based on materiality to the company and stakeholders. Apart from that, the metrics and benchmarks should always be updated as the ESG integration matures so there will be efforts towards improvements.

Examples of product offerings and operational metrics and corresponding benchmarks are:

·         Assessing external review of Sustainable Financing framework to measure the perceived the ESG elements of financing

·         Tracking digital workflows, through a digitalised form processing and records ratio

·         Measuring  the increase in output of a processes in place to monitor the effectiveness of technological innovation

 

Conclusion

ESG as a whole is constantly evolving, and so is the role of treasury in ESG. It is important for the treasury team to keep up to date with the latest development of ESG, particularly on Sustainable Finance as well as how operations c

 

All views and opinions expressed on this site are by the author and do not represent any particular entity or organisation 

 

 

 

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