Is ESG relevant to SME?
What is ESG?
ESG stands for Environmental, Social, and Governance. ESG considerations have become increasingly important in recent years as investors, financiers, consumers, governments, and many different stakeholders demand more transparency and accountability from businesses, and as companies recognize the long-term benefits of sustainable and ethical practices.
The Environmental component of ESG focuses on a company’s impact on the environment, including its use of natural resources, carbon emissions, waste management, and pollution control.
The Social component looks at a company’s impact on society, including labor practices, employee relations, community involvement, human rights, customer satisfaction, and data privacy and protection.
The Governance component evaluates a company’s leadership and management practices, including board structure and composition, executive compensation, bribery and corruption, internal controls, risk management, and corporate culture.
I’m SME – obviously ESG is not my agenda?
Think Again! The 12th Malaysia Plan (12MP) 2021-2025 is driven by the principles of sustainability, with a focus on the economy, social wellbeing, and the environment. The plan aims to achieve the goal of net-zero greenhouse gas (GHG) emissions by the year 2050. Many ways of how ESG are critical to SME:
- Losing Business: Many larger entities, such as corporations and institutional investors, have ESG policies and prioritize sustainability and ethical practices in their supply chain. Therefore, if a business does not have ESG considerations in place, they may lose customers who prioritize sustainability and ethical practices in their purchasing decisions. Additionally, businesses that do not prioritize ESG considerations may face reputational damage and legal or regulatory consequences, which can have a negative impact on their overall financial performance.
- Losing Financing Options: Investors and financial institutions are increasingly considering ESG factors in their investment decisions and financing activities. Companies that do not have ESG considerations in place may face difficulties in accessing financing or may have to pay higher borrowing costs due to increased perceived risks.
- Higher Costs of Business: Companies that do not prioritize environmental sustainability may face increased costs related to waste management, pollution control, and compliance with environmental regulations. Bear in mind that the Malaysian government has hinted on the introduction of Carbon Tax in the future.
- Benefits like Tax Reliefs: Various forms of tax breaks, incentives, and discounts through the Green Initiative. This includes the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) offered by the Malaysian Green Technology Corporation (MGTC), as well as an extension of the Investment Tax Allowance (ITA) for purchases of green technology assets and Income Tax Exemption (ITE) for utilizing green technology services and systems.
Share me some examples of ESG policies?
Environmental considerations: Small businesses can reduce their environmental impact by implementing energy-efficient practices, reducing waste, and using sustainable materials. This can not only help the environment, but also reduce costs and increase operational efficiency.
Social considerations: Small businesses can demonstrate their commitment to social responsibility by implementing fair labor practices, promoting diversity and inclusion, and supporting their local communities. This can help build trust and loyalty among customers, as well as attract and retain talented employees.
Governance considerations: Small businesses can improve their governance practices by implementing transparent decision-making processes, maintaining accurate financial records, and ensuring that all stakeholders have a voice in the company’s operations. This can help build trust among investors and other stakeholders, as well as reduce the risk of legal or reputational issues.