Mapping the sustainability landscape
KUCHING: The ways of doing business has evolved with time. Long gone are the days of operating a business purely for the want of generating profits; these days, it is crucial to consider of the impact our businesses have on our enviroment, society and economy as a whole.
In the midst of doing business, sustainability isn’t normally at the forefront of the minds of company leaders. It was thus a game-changing move back in 2015 when Bursa Malaysia released a 76-page Sustainability Reporting Guide, outlining ways for Corporate Malaysia to get on the sustainability bandwagon.
This came as there has been an increased focus on the way businesses are run globally, with greater attention given to how businesses impact the economy, environment and society.
“A holistic approach to business management, taking into consideration the economic, environmental and social (EES) risks and opportunities alongside financial implications, is being seen as a measure to generate long term benefits and business continuity,” Bursa said in the report.
“In light of this shift in focus, this Sustainability Reporting Guide seeks to provide guidance on how to embed sustainability in your organisation and help you identify, evaluate and manage your material EES risks and opportunities.
“This will then aid you in your preparation of the Sustainability Statement in accordance with the Listing Requirements of Bursa Malaysia.”
This guide highlights the business case for sustainability, providing case studies to illustrate how sustainability may add value to organisations.
The guide is intended for all issuers listed on Bursa Malaysia’s Main and ACE Markets. Listed issuers are strongly encouraged to refer to this Guide in the implementation of sustainability practices, as well as reporting.
Bursa Malaysia developed this guide in recognising the fact that organisations may be at varying levels in understanding, and in their disclosures of sustainability information.
“We recognise that moving to best practice sustainability performance and disclosure is a journey and that preparing the Sustainability Statement can be challenging especially for early reporters or smaller listed issuers.
“Therefore, you are encouraged to apply this guide bearing in mind your own circumstances and in the context of your business operations.
“You may also choose to move beyond this guide and adopt a reporting approach in accordance with international sustainability reporting frameworks or guidelines such as the GRI Sustainability Reporting Guidelines.”
Reassuring investors, building reputations
On a public-listed platform, sustainability reporting is a vital element in boosting investor confidence as it gives a stamp of approval of the organisation’s impact towards environtment, society and economy.
The focus on environment, society and governance (ESG) reporting heightened when Bursa launched a the FTSE4Good Bursa Malaysia (F4GBM) Index in December 2014. The index contains companies with strong ESG practices.
Bursa chief executive officer Datuk Tajuddin Atan said that the introduction of the F4GBM index would allow investors to look at value from a new perspective – one that took into consideration non-financial aspects such as a company’s environmental and societal initiatives.
“Investors, shareholders and clients are expecting greater responsibility and transparency from companies and their investments and the F4GBM will be the reference point and benchmark that companies can aspire to in efforts to step up the standards in stakeholder value creation,” he said during its launch,
As of its latest review back in June 2017, a total of 43 constituents make up the index.
Another key move made last month by the Securities Commission Malaysia is the release of Guidelines on Sustainable and Responsible Investment (SRI) Funds to facilitate and encourage greater growth of SRI funds in Malaysia.
The new guidelines – which enable funds to be designated as SRI funds – will widen the range of SRI products in the market and attract more investors in the SRI segment.
“Capital markets play a critical role in facilitating fund raising and investments for sustainable initiatives.
“The introduction of the SRI Funds Guidelines is another significant step towards further development of the SRI ecosystem in the Malaysian capital market, reinforcing our positioning in the regional SRI segment and global leadership in Islamic finance,” said Tan Sri Ranjit Ajit Singh, SC chairman.
“Developing the SRI was identified as a key area of growth for the Malaysian capital market under the Capital Market Masterplan, and in 2014 the SC introduced the SRI Sukuk framework, now widely acknowledged as a pioneering regulatory development that integrates the principles of Shariah with those of SRI,” Ranjit added.
To note, in July 2017, the world’s first green sukuk was issued in Malaysia under the SRI Sukuk framework.
With Islamic funds being recognised as part of the SRI universe, Malaysia is currently the largest SRI funds market in Asia (excluding Japan). It has 30 per cent share of the region’s US$52 billion fund assets. Malaysia is also the second largest Islamic funds market globally (by domicile) at 29 per cent of the US$56 billion global total asset under management (AUM).
The SRI Funds Guidelines will apply to fund products within the SC’s oversight, such as unit trust funds, real estate investment trust funds, exchange-traded funds, and venture capital and private equity funds.
These guidelines will also introduce additional disclosure and reporting requirements that aim to encourage greater transparency in investment policies and strategies of SRI funds.
Crucial for plantation players
The importance of sustainability is crucial in business, and even more so for commodities such as plantations.
There is a need for commodity players to produce without causing harm to the environment or society. In palm oil, the Roundtable of Sustainable Palm Oil (RSPO) certification is a global assurance to the customer that the standard of palm oil production is sustainable.
“Palm oil producers are certified through strict verification of the production process to the stringent RSPO Principles & Criteria for Sustainable Palm Oil Production by accredited Certifying Bodies, and can be withdrawn at any time in case of infringement of the rules and standards,” it detailled on its website.
All organisations in the supply chain that use RSPO certified sustainable oil products are audited to prevent overselling and mixing palm oil with conventional (or non-sustainable) oil palm products.
These organisations can claim the use of RSPO certified sustainable oil palm products “on pack” by using the RSPO Trademark.
Sustainable palm oil production is comprised of legal, economically viable, environmentally appropriate and socially beneficial management and operations.
The case surrounding Malaysia’s IOI Corporation Bhd was an example of how sustainability – or the lack thereof – impacted operations.
In March 2016, the Roundtable on Sustainable Palm Oil (RSPO) suspended its certification for the entire IOI Group for four months beginning April 2016.
This suspension came following a decision by the Complaints Panel and endorsed by the RSPO board of governors on March 25, 2016 in regards to the complaint against PT Sukses Karya Sawit, PT Berkat Nabati Sawit, PT Bumi Sawit Sejahtera – all subsidiaries of the IOI Group.
These subsidiaries were alleged for non-compliance with some of RSPO’s rules on possessing environmental permits, clearing fragile land in Indonesia.
At the time, analysts said while the sales premium from certified sustainable palm oil (CSPO) only represented a small percentage of IOI Corp Bhd ’s revenue, the damage would be to the company’s reputation as a sustainable palm oil producer.
RSPO has also confirmed that even in the event of a suspension, IOI’s existing inventory of certified sustainable palm oil (CSPO) remains unaffected and can continue to be sold as CSPO.
The only direct effect of this suspension is that IOI will not be able to earn CSPO premium on oil, which represents a very small percentage, less than 0.5 per cent of its revenue, said IOI Corp.
“This is negative for IOI Corp as it could affect the group’s sales of certified sustainable palm oil to its customers in Europe; and it could dent the group’s reputation and image as a sustainable palm oil producer,” said CIMB Research on the matter.
This did not take into account potential loss of customers or additional costs incurred to purchase CSPO from third parties to fulfill contracted CSPO volumes to customers, it said.
Meanwhile, Hong Leong Investment Bank Bhd (HLIB Research) viewed this as a potential downside risk to IOI as the suspension of RSPO certification would impact its downstream operation.
“Its customers, especially those in EU and the US, might switch to other suppliers in order to comply with their sustainability policies,” it highlighted in a note, adding that IOI’s downstream operation accounted for about 30 per cent of its total FY15 operating profit.
This was not the first RSPO certificate suspension for IOI Corp. Back in 2011, RSPO suspended certification process for all IOI group’s activities due to a complaint by several NGOs and communities in Sarawak regarding IOI’s estates in the state. This suspension was lifted on February 4, 2013.
Maybank Investment Bank Bhd’s research side believed IOI “would not deliberately run afoul of RSPO principles.”
In August that year, RSPO lifted the suspension on IOI Corporation after about four months.
RSPO its board of governors had endorsed the complaints panel’s recommendation to lift the suspension of RSPO cetrtification for the entire IOI Corp group.
“The complaints panel is satisfied that IOI has met the conditions set out in its letter to IOI dated March 14, 2016, based on the actions that IOI has taken and implemented since then,” it said.
PwC: Building confidence via sustainability assurance
Clearly, customers, investors and organisations are pushing for information about companies’ sustainability performance and it has become a real challenge for companies to respond efficiently and effectively.
For multinational companies, it is also a challenge to report information that is based on consistent data from across the organisation.
Effective sustainability reporting and assurance are a powerful part of communicating with stakeholders about how you are performing against your objectives.
Companies that embrace this are likely to have an advantage over their competitors and boost value for shareholders.
However, it can be a significant challenge to make your sustainability information more reliable, efficient and effective – for the benefit of both external stakeholders and internal management.
BizHive Weekly speaks to PwC Malaysia executive director of assurance Michelle Chang and manager of assurance, Syahrir Iman Suib, on sustainability assurance and their outlook for Malaysia:
Q: Tell us more about your history of sustainability assurance – how long have you introduced this service in Malaysia? What does it do for the client?
Chang: PwC Malaysia has been providing sustainability assurance services to Malaysian corporates since 2008.
We provide independent third-party assurance of reported non-financial information which includes amongst others, carbon emissions, energy usage, lost-time injury frequency rate, tonnage of recycled waste.
Globally, the two international standards that are most commonly and rigorously applied by assurance providers on sustainability reports are ISAE 3000: Assurance Engagements other than Audits or Reviews of Historical Financial Information (ISAE 3000) and AccountAbility (AA) 1000 Assurance Standard (AA1000 AS).
ISAE 3000 is the most common standard adopted by PwC globally and in Malaysia. In certain territories, PwC has also applied AA1000 AS for assurance purposes in the event organisations adopted this for their reporting.
ISAE 3000 is issued by the International Federation of Accountants (IFAC) and establishes principles and essential procedures for assurance engagements concerning non-financial information typically reported in environmental, social and sustainability reports.
Sustainability assurance is typically performed on selected key performance indicators (quantitative non-financial sustainability data) based on limited assurance in accordance with ISAE 3000.
There are three key elements of an assurance engagement which comprise the following:
A three-party relationship consists of the assurance provider, a separate party responsible for the information to be assured (for example, company management) and the intended user of the external assurance report (for example, board members and readers)
Subject matter includes typically reported data, statements, structures, and processes (for example, carbon emission reporting processes and data)
Evaluation criteria consist of the benchmarks used to evaluate or measure the subject matter of an engagement (for example, GRI sustainability reporting G4 standards, assurance standards, company policies and guidelines)
Q: Why in your opinion, is sustainability assurance important in Malaysia? What is its designed role?
Michelle: As more companies realise and recognise the importance of sustainability disclosures, it is no longer solely a board or shareholder priority.
In an increasingly complex and connected world, building trust through rigorous and transparent reporting and assurance helps an organisation to meet its stakeholder needs, and provide valuable insights on how the organisation is addressing its risks and opportunities.
Stakeholders are looking for information that is clear, relevant and reliable – information they can trust.
This means finding the right information, capturing and integrating it, challenging its reliability and connecting the storyline with the organisation’s business strategy and performance.
In Malaysia, the regulators are playing a major role in pushing the sustainability agenda by making it mandatory for listed companies on Bursa Malaysia to have sustainability reporting as part of the disclosures in their annual reports.
Reporting is a great way for organisations to start the ball rolling by incorporating sustainability as part of their business strategy and direction, if they have not yet done so.
Organisations can only have information to report on if they have done something about it.
Otherwise, it will be rather challenging for organisations to find the relevant information to disclose if they do not have the requisite processes and data in place.
Whilst it is currently not mandatory for Malaysian listed companies to have the sustainability data in their sustainability report to be assured on, independence assurance is highly recommended as this strengthens reporting integrity and credibility.
Sustainability assurance helps to distinguish one corporate sustainability report from the rest, ensuring the reliability, credibility and value of the information reported.
The FTSE4Good Bursa Malaysia Index recognises sustainability assurance as an added incentive in assessing companies based on its criteria for admission into the index.
Leaders strive to be as confident in their environmental and social data as in their financial reporting, by seeking independent third-party assurance.
1. Strategic alignment – linking sustainability actions and performance with the organisation’s business strategy
2. Improved controls and processes – internal procedures in the management of sustainability data can be more effective and robust
3. Quality – earning executive and board confidence in disclosing reliable sustainability information publicly
4. Credibility – giving investors, suppliers, customers and other market players information they can trust
5. Risk management – integrating environmental and social issues with enterprise risk management processes
6. Dow Jones Sustainability Index (DJSI), Carbon Disclosure Program (CDP) rankings – differentiating your organisation as an industry leader by verifying responses through external assurance
Q: In your opinion, what do you think is the impact of sustainability assurance towards the corporate climate?
Syahrir: Sustainability assurance aims at building trust and confidence for the various stakeholders of businesses.
By challenging the reliability of the reported sustainability data, sustainability assurance strengthens reporting integrity and credibility and provides stakeholders with information that’s accurate and reliable.
By giving stakeholders the information they can trust, sustainability assurance could increase a company’s value.
Q: What are your future efforts to highlight or promote this service in the country?
Michelle: Despite having introduced this service since 10 years ago, sustainability assurance is still a relatively new term to most corporates in Malaysia.
With more organisations now focussing on sustainability as part of their business strategies and incorporating it as a way of doing business, we are hopeful that business leaders will find the strategic alignment that sustainability assurance can provide in building trust and value for their stakeholders.
There is a need to create more awareness amongst business leaders of the impact of sustainability assurance on the organisations’ reported sustainability information to stakeholders.
Organisations are encouraged to conduct an assurance readiness assessment (pre-assurance) to prepare them for public reporting, a process that can help reduce disclosure risks, audit time and costs.
This assessment helps organisations to identify the gaps they may have in the data collection processes, and improvement opportunities can be implemented before the data needs to be publicly reported.
Q: Any other comments to readers in Sabah and Sarawak?
Syahrir: The use of an independent third party to provide sustainability assurance on non-financial data disclosed in sustainability reports is relatively new in Sabah and Sarawak with only a handful of businesses currently having assured their sustainability data externally.
However, with increasing stakeholder expectation for responsible sustainability reporting Sabah and Sarawak, and globally at large, we can expect that more organisations would appreciate and welcome the value of sustainability assurance to their businesses.
With Bursa Malaysia’s requirements, we expect that sustainability assurance to be the next wave for organisations to consider as more business leaders and stakeholders seek to ensure that only relevant and reliable information is being disclosed publicly.
Similar to external assurance given to financial statements of businesses, reported sustainability data that have been externally assured are also seen as more robust and more reliable, enhancing trust.
What is sustainability reporting?
Sustainability reporting has become more mainstream, as companies attempt to respond to stakeholders’ expectations for more transparency regarding how sustainability matters impact a company’s strategy, operations and long-term prospects.
What is sustainability assurance?
This service helps companies identify and prioritize sustainability issues, set goals that support the alignment and integration of the sustainability vision into overall corporate strategy, implement processes, controls, systems and dashboards to measure progress and allow for consistent, accurate and reliable reporting.
Affirmations of good practice
ACCA is a patron of sorts to affirming sustainability in Malaysia, giving recognition to those organisations which report and disclose economic, environmental and social information in line with Bursa Malaysia’s Sustainability Reporting Framework and global sustainability reporting standards and frameworks.
There is a steady growth in sustainable investments both locally and internationally and that investors are becoming concerned about sustainability issues and are beginning to appreciate the positive correlation between sustainability and environmental, social and governance (ESG) factors as well as financial performance.
Sustainability will be the new normal for organisations operating in domestic and international markets as a result of rapidly changing landscapes in legislation, investment customer preference and societal pressures.
The government has also embarked on an initiative to chart the direction of Malaysia for the next 30 years to year 2050.
The Transformasi Nasional 2050 (TN50) is a continuation of Vision 2020 with the aim of bringing Malaysia to greater heights.
Based on the engagements and aspirations collected thus far, one of the emerging themes of what are particularly important to Malaysians is sustainability.
“With this in mind, the TN50 initiative will be expanded to support the ACCA MaSRA. The ACCA MaSRA has been a key platform to educate organisations on the growing importance of sustainability practices and benefits to business as a whole, whilst giving recognition to best practices,” ACCA said in a statement.
“This is our 14th year running the award in Malaysia. With the new Bursa’s Sustainability Reporting Framework and in light of various developments in the national and global ecosystem of sustainability, ACCA will continue to support the country’s sustainability agenda.”
During a previous instalment of the winners, Datuk Dr Lukman Ibrahim, ACCA Malaysia Advisory Committee president, said the winners of the ACCA MaSRA lead the way in demonstrating how sustainable business practices are an essential part of corporate risk management, and are ultimately crucial in determining a company’s investability quotient.
“ACCA has been encouraging conversations around sustainability reporting and corporate transparency since the 1990s because we strongly believe that sustainability should be at the heart of all businesses,” he said.
“Through the ACCA MaSRA programme, we’ve been able to observe an increasing number of companies in Malaysia demonstrate accountability and strategic drive that is at par with international practices.”
ACCA MaSRA 2017 will focus on the following 10 primary criteria which are in line with Bursa Malaysia Sustainability Reporting Framework and the same criteria used last year, covering Organisational context, Stakeholder inclusion, Materiality, Scope, Governance, Strategy, Management process, Performance, Assurance and Communication.
For over two decades, the association has been promoting environmental, social and governance (ESG) reporting for businesses as an integral part of mapping their impacts beyond traditional financial accounting practices.
This falls back on its belief that accountants are well placed to apply their skills and experience to help their organisations achieve a more sustainable future.
ACCA has undertaken extensive research project work and collaborations on sustainability matters. It works with standard setters, governments and regulatory bodies to ensure that standards and regulations concerned with corporate sustainability are fit for purpose.
“We actively participate in projects led by the Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC), Climate Disclosure Standards Board (CDSB), Sustainability Accounting Standards Board (SASB) and the Natural Capital Declaration (NCD) as well as in the United Nations 2012 Rio +20 Earth Summit.
“Recognising the importance of ethical, social and environmental issues for tomorrow’s finance professional, we have developed our syllabus to ensure they are included as part of our ACCA qualifications.”
Source: Borneo Post Online