COVID-19: What does this mean to Environmental, Social and Governance (ESG) practices in Malaysia

Introduction

The current global focus is the containment of this global threat and many business still remain unaware of the inherent link to crises such as the virus, to Environmental, Social and Governance (ESG) considerations. What businesses would need to very quickly realise, is that the concerns and issues pertaining to human rights, health and safety, technological innovation, environmental management, including response to pandemic, represents the new iteration of ESG conversation amongst stakeholders including the regulators and investors. How businesses respond will give clarity in the stakeholders’ expectations and judgement on the governance oversight and corporate values in the long term.

 

Understanding COVID-19 presents the similar impact from other ESG risks such as climate change 

We need to understand that pandemics and other ESG related risks are interrelated. Many would interpret the COVID-19 pandemic and climate change as different issues with different impacts. However, these two are major global crises that pose threats to millions of lives. Climate crisis is in fact also regarded as a global health emergency. According to the World Health Organisation (WHO), air pollution from Greenhouse Gas Emissions (GHG), costs 7 million lives each year. It is also found that the toxicity level in the air shortens lives worldwide by almost three years on average.

At the current moment, our global consciousness is directed towards our survival during this global pandemic crisis. During this period of time, we have seen a regression of economic activities around the world. This has resulted in a plunge in the global GHG emissions growth. It is estimated that the outcome of China’s lockdown in February 2020, Carbon emissions was reduced by 200 million tons, around half the UK’s annual emissions. The question is, how we mitigate and manage climate change impacts that are also risks to the global health and of course to the environment once the pandemic is over and businesses and production sites resume in a rapid pace to make up for the economic loss during the pandemic?

We have witnessed the possibility of food shortages arising from COVID-19 due to the operational interruptions of the supply chains everywhere. What we have learned from other pandemics such as SARS, is that food price hikes and market panics becomes a common place in infected areas. The sobering truth we must come to acknowledge is that climate change would have an even  greater impact on food security as unpredictable global climate scenarios and natural disasters occurrences would impact the overall production of food crops to feed the increasing world population.

 

What is expected from government and regulators? 

Regulators such as Bursa Malaysia (Bursa), Securities Commissions (SC) and BNM has increasingly putting the pressure on companies to be improve in how they manage, monitor and disclose their ESG risks and opportunities. The regulators would certainly raise the bar to push companies to connect ESG risks and opportunities with business risks and strategies.

Pandemic risk will certainly be a highly discussed topic to be accounted in sustainable development. COVID-19, similar to other infectious diseases such as Ebola, Influenza, SARS, MERS contributes to large-scale mortality and morbidity,disrupt trade and travel networks, and stimulate civil unrest. For the government and regulators, this certainly will be a threat to economic and social stability, as well as the impact from environmental perspective that is not only detrimental to the environment, but has human health outcomes via infectious disease emergence, and this link is not customarily integrated into planning for sustainable development.

There should be a push towards the development of polices and frameworks to manage the interactions between all ESG risks, such as pandemic outcomes of climate change, supply chain disruptions due to extreme weather events, and how future businesses will need to respond to these risks.  

 

What is expected from companies and businesses?

The pandemic has clearly taught companies that businesses can change overnight. Human health and safety have always been the top priority, and this leaves no sectors behind. The impacts of COVID-19 can be witnessed throughout the value chain. Businesses need to analyse their business model and strategise to how to respond to any sort of unprecedented risks, including ESG risks in the future.

 

What is expected from the Board and Top Management?

Business leaders are expected to be able to anticipate the long-term and trends and outlook and are responsible to monitor the patterns of these emerging threats that may impact the business and the stakeholders. The Board of Directors (Board) and Management should review how business is disrupted, how to reduce exposure for future events, and how the business can be better prepared next time. The Board and Management should also review the importance to manage ESG risks that could potentially give severe financial impacts to the business like COVID-19. The Board and Management need to be wary that ESG risks are constantly changing and may be long lasting such as climate change and unexpected Malaysian and global political shifts over the past few years, and businesses that have assumed broad support for a globalised economy have seen their strategy to be ineffective.

The Board and Management should gauge better understanding of the safety and well-being of not only the employees, but the potentially the affected public at large. They should evaluate the viability of the enterprise from a short-term, medium-term and long-term perspective and be prepared with the necessary changes to the corporate strategy to ensure that viability. The Board and Management are expected to increase engagement with shareholders and other stakeholders on corporate operations, impact to strategy, and other important concerns and how they are responding to the impact of the COVID-19 crisis, including other ESG issues. They are also expected to increase engagement with relevant regulators and other government agencies to discuss and seek guidance on how they can collaborate to rise from the pandemic outbreak.

 

Robust Risk Management

The current challenges and uncertainty of the future requires companies to reevaluate their risk management that balance business and ESG impacts, given that ESG cohesion is already gaining scrutiny from stakeholders such as regulators and investors, even before this pandemic crisis.

The outbreak and the global spread of the COVID-19 is certainly going to have a substantial impact on both the global and the Malaysian economy. Some sectors such as Tourism, Retail and Food & Beverage (F&B) will be affected more than others. This possess greater risks to the business including operation risks and cyber risks. The situation is evolving every day with the number of cases in Malaysia only expected to increase, and has put a test of both the crisis response readiness and the agility of risk functions.

The challenge before companies is to now a establish a response plan to COVID-19 due to  its lack of direct precedent. However, companies can utilise  the experience from analogous situations, monitor the market situation and learn from industrial practices and recommendations to mitigate risk.

Companies should review the existing risk management processes to ensure they are adaptable to the dramatic changes in the market or would require a new risk modelling for internal and external risk-policy. In events that the market is not functioning normally, risk modeling is expected adapt to the new regime and taking account of how quickly and effectively the models respond to the change or crisis. For instance, the pandemic outbreak has forced Financial Institutions and their risk functions to form crisis plan to undertake the necessary measures to ensure the health and well-being of societies, employees and clients. Risk functions should be empowered to make advise and make decisions without having to consult a bureaucratic governance body. Companies could consider forming cross-functional teams that span across, Risk, Compliance, Human Resources, Operations, Finance and evaluate the business and ESG risks holistically.

The need to fully integrate ESG risks into the existing business Enterprise Risk Management (ERM) has become clear.  This integration will require a detailed and accurate consideration of the complex drivers and impacts of ESG risks. This will uplift companies approaches to ESG management and contribute to achieve the overall global ESG commitments.

 

Revamping Business Continuity Plan 

A conventional business continuity plan would prepare companies for a one-off event, but many are not able to prepare them for the complexity COVID-19 brings, a threat that could potentially be sustained  over months or longer.

ESG has gained traction even before the emergence of the virus. Regulators and investors flocked to companies that have taken steps to manage ESG risks related to matters such as climate change, board diversity or human rights issues in the supply chain. COVID-19 has caused major disruptions in the financial markets and it could provide investors with more of an incentive to evaluate companies on their ESG management. Overall, the pandemic had showcased the more comprehensive factors that are important to investors that include disaster preparedness, resilience and continuity planning and employee working from home (WFH) management.

Rather than a simple checklist exercise, companies should stimulate drills on potential crises based on real test of the companies’ time and ability to respond to an actual crisis. Internal communication is an absolute essential especially during the time of crisis. The management needs to seek ways to keep the workforce to remain calm, motivated and as efficient as possible. Virtual team meetings, emails and other communication via digital platforms will demonstrate compassion and confident that the companies would battle through the crisis while the health and safety of the workforce remains priority.

The employees, and other stakeholders such as suppliers and customers may reach out with a great deal of questions, and frequently. The worst scenario is to have different responses to the same question. This could be overwhelming for the companies if there is no proper system in place to determine the adequate number of capacity and the focal point to respond to the stakeholders.

COVID-19 has also reminded companies on the importance for sustainable innovation as this safeguards the companies’ operations in the long-term. In recent event, business leaders are becoming anxious of the outcome of the pandemic on their business continuity.

ESG plays a huge role in innovation and has become a vital component that innovation leaders view as the fundamental aspect to ensure business continuity and sustainable growth. Innovation is focused on long-term resources and environment efficiency, rather than short-term revenue. A good business continuity plan would ensure that resources are not consumed faster than they can be regenerated and the need to focus on to be able to sustain production during disruption periods like the present.

 

Supply Chain Management During ESG-related Crisis

The apparent impact of the pandemic is the immediate major disruption to supply chains, mainly due to the lockdown or restriction od movement orders, depending on different countries. COVID-19 demonstrated the necessity to rethink the conventional supply chain models as the pandemic has already exposed the vulnerability of many companies that has high dependence on their suppliers to fulfil their need for raw materials or finished products.

Once the pandemic is over, most sectors will resume operations and reactivate their entire supply chain with a deeper consideration of  the differential scale and timing of the impact of pandemic mean that global supply chains face disruption in multiple geographies. Companies have to shift away from the normal practice of merely meeting costs reduction targets, reduce inventories, and drive up asset utilisation.

Companies should opt to invest in supply chain management technologies to improve management and monitoring across the value chain, where functional silos are broken down and the chain become connected to their complete supply network to better prepare the company in facing unpredictable supply shocks. In the long term, there is a need for visibility into supply chain data, and ability to provide services digitally across borders. Transformation of the supply chain management determines whether companies have secure and diverse, cost-effective and most importantly, the availability of supplies in the future.

Another key effort required from businesses is to improve supplier risk communication before, during and after disruptions. This would enhance companies’ supply chain resilience to vulnerabilities related to the overall management long supply networks. Companies should establish credible networks, consisting of suppliers, customers, peers, the government and regulators that are focused on supplier risk management.

It is also imperative to incorporate supply chain disruption as a mandatory part of the supplier performance evaluation metrics. Supply chain and transport risks should be assessed as part of procurement, management and governance processes. During the evaluation, suppliers should be communicated to participate in a supply-chain mapping programme to respond to any event such as the pandemic outbreak and these supply mappings can be a useful tool to provide solutions during the crisis.

 

Data and Cybersecurity 

Leveraging on advanced technologies such as the Internet of Things (IoT), artificial intelligence (AI), robotics, and 5G, companies must  be designed to anticipate and meet future challenges, even at times of the pandemic outbreak, trade war, regulatory change, labour dispute and supply chain issues. The increasing demand for remote interactions amid the pandemic has demonstrated the need for 5G technology as a long-term infrastructure. The convenience, fast speed and elevated connection density drives it to be the solution for remote interactions that companies are currently exploring.

Challenges arising from the COVID-19 accelerate the use of existing and new technologies and tools as consumers are under the MCO, and millions are ordered to work from home and digital connectivity takes even more of a hold on everyday habits. This habit is likely to continue as it is more convenient and this is the way of the future, regardless where we are.

Even before the pandemic outbreak, the enhancement in Information Technology (IT) infrastructure has transformed and benefitted many businesses. The Fashion, Travel and Entertainment industries are the lead for consumers to enter the online retail sphere. To mitigate the risks of losing their businesses, stalls and large chains alike have taken to online platforms.

Through its Financial Sector Blueprint 2011-2020 to transform Malaysia into a cashless society, BNM is targeting to increase the number of e-payment transactions, on average of 200 transactions per person, as opposed to 44 transactions when the initiative began. BNM also aims to reduce the cheque use by 50% from 207 million to 100 million annually.

Increasing number of businesses now are looking to tap into the e-commerce market consumers are becoming more comfortable and confident to use online transaction. However, as companies shift towards digitasation and automate operations, the issues concerning cyber risks emerge as every element of the digital enterprise vital cybersecurity implications. Cybersecurity impacts are normally linked to customer satisfaction, service quality as well as risk management of a company. As companies seek to establish more digital customer experiences, they would require determining the methodology to align the dedicated functions to manage fraud prevention, security, and product development so relevant controls could be designed, such as authentication, and create experiences that are convenient and secure. As companies collect, manage and store massive data analytics, they must determine how to identify risks created by data sets that integrate many types of incredibly sensitive customer information. They must also incorporate security controls into analytics solutions that may not use a formal software-development methodology.

 

Option for a Circular Economy 

The world has seen a continuous and unprecedented increase of material demand where the global production of goods and the extraction of materials have increased. This equates to major biodiversity loss and water stress and contributes to climate change.

What we can learn from the impacts of COVID-19 is that it is not only a health crisis of severe proportion, but also reflects the broader trend of more planetary crises to emerge. This is the wake-up call for an imminent restructuring of the global economic order. Should we face any future crisis similar to COVID-19, while maintaining the same economic model, governments, financial institutions, and corporations will face the same complications with the current crisis. It is time to incorporate the risks and threats of not only pandemics, but also climate change, biodiversity loss to shift towards green, circular economy.

Failure to manage environmental risks for example, may increase the chances for more pandemics to occur. According to Zurich Insurance Group’s Head of Sustainability Risk, deforestation will accelerate zoonotic diseases. Climate change has contributed to the rapid transmission patterns of infectious diseases such as Zika, malaria and dengue fever, resulted in human displacement. The outcome is this increases displaced populations’ vulnerability to health threats such as measles, malaria, diarrheal diseases and acute respiratory infections.

The circular economy aims to reduce resource use by recycling of materials and reusing products, extending their lifespan and maintaining their economic value. This systems-level approach to economic development designed to benefit businesses, society, and the environment.

What we can also take from the current crisis is that, we have placed an emphasis of how much we consume while considering how we manage our waste.  Moving forward from the time of the pandemic is for businesses to strategise for business resumption. As highlighted in the earlier part of the article, the lockdown orders (of public and business premises operations) have reduced the levels of GHG emissions. Companies should take the opportunity to assess, evaluate, design, analyse and identify opportunities for product and services multi-use, resource efficiency, incorporating waste mitigation, and end of life reuse as core design principles and continue to support the COVID-19 influenced trend of waste mitigation, use and reuse habits that most consumers are by default now fully engaged in.

Conclusion

We are witnessing how a health crisis in one region of the world can cause a global economic, social and psychological crises around the world. Like COVID-19, implication from other ESG threats do not observe national or even physical borders, including Malaysia. These issues can be managed only through collective action and transforming with how we approach to connect every issue especially emerging ESG threats and manage them as a holistic manner.  The coronavirus pandemic is a wake-up call to stop exceeding the planet’s limits. After all, ESG issues such as deforestation, biodiversity loss, and climate change all make pandemics more likely.

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