By Faroze Nadar, Executive Director of Global Compact Network Malaysia
For the first time in a significant global population lifetime, we are facing a social crisis like never before. The COVID-19 pandemic has rewritten our rules of engagement, has collectively reshaped our short-term norms and will impact our mid and long term behaviors. For businesses, already there are various predictions of life post the pandemic such as the lessening of individual privacy, the rise of virtual working norms and the de-globalization of supply chains.
From an environmental front, various reports have shown how pollution has receded in many cities, a much needed respite and a (small) boost to our efforts against climate change. Many social media messages are circulating touting this episode has provided a much needed breathing space for our overstressed natural ecosystem. Closer to home, we have seen a 90% drop of vehicles commuting in Kuala Lumpur during the RMO period, with a back of an envelope calculation based on decreased consumption of petrol, providing a figure of 70 tonnes of carbon reduction per day. Compounding these positives figures would be the drop in pollution halted by our mostly idle local manufacturing, industrial and services sectors.
But behind such environmental positive news, there lies a dark scenario of an impending economic crisis that would rival and even exceed any recession we have seen in modern history. Already we are seeing the budding of such a scenario due to the month long movement control order, causing havoc on our businesses and the government forced to step in by launching the biggest stimulus package in our history. Despite the stimulus, we are hearing many SMEs will not survive this testing period, with some predicting a 50% closure rate that will result in 4 million Malaysians losing their jobs.
For the bigger Malaysian corporates, many have activated their Business Continuity Plans and are bracing for tough times ahead. Based on our engagement with a number of large businesses from various sectors, all have shared their sustainability budget have either been frozen or slashed amidst uncertainty on the final economic impact that the pandemic will have on their organizations bottom line. But is reducing required investments for a business to better perform on corporate sustainability, the right thing to do during times of economic distress?
Corporate Sustainability Performance proving sustainable
Historical data proves maintaining and increasing sustainability related investments pays off for business growth:
- According to a Bloomberg analysis, the average ESG fund fell by about 12 percent this year. That’s a big tumble, but it’s just half the decrease seen by the S&P 500 Index over the same period. A separate analysis of about 200 U.S. funds by Morningstar, a financial services firm, also found that, although ESG funds have taken a hit, they’re faring better than their conventional counterparts and are overrepresented in the top quartiles of their peer groups, in terms of their performance
- Unilever serves a best practice case study. During the 1997 Asian Financial Crisis, many companies in Indonesia resorted to cost-cutting measures such as downsizing and lowering production costs. However, Unilever Indonesia (UI) used a different strategy that allowed them to capture a bigger market share and a bigger profit margin by the end of the crisis. It maintained its business relationships with the SMEs, in which large numbers of people living in poverty were interacting with the company value chain. Moreover, UI records show that the number of permanent employees increased throughout the financial crisis, and it began to purchase more ingredients locally to focus on expanding the domestic market. By 1999, UI had a record performance, with after-tax profits of RM 140.7m and in 2000 after-tax profits of RM 214.7m. It has been able to expand and succeed when many other firms have ceased to trade. Staff suggested ideas that succeeded in reversing sales declines of 50 percent or more in several categories during the onset of the crisis.
Future trends are also singing the same tune:
- ESG funds are growing exponentially in size. According to data from Morningstar Inc., a group of 300 mutual funds that integrate ESG factors into their investment decisions attracted $21.4 billion in new money in 2019, compared with $5.4 billion in 2018.
- Since 2017, 10 SRI Sukuk have been issued with a total value of RM4.3 billion. Anticipating the need and a new wave of such financing, the Securities Commission has recently launched their sustainable and responsible investment (SRI) roadmap. This in part will support the estimated RM45 billion Malaysia needs to finance its long term sustainable development goals
- Malaysian banks are starting to offer Sustainability Linked Loans (SLL) with cumulative value of several billion ringgit. The first of the SLL loans by HSBC Amanah was provided to Yinson Holding Berhad to transition towards a low carbon economy actor.
In the coming business as usual scenario, accessibility to investors and capital will be more dependent on a business’s sustainability credentials. In a recession scenario, where credit will be hard to come by, sustainable Malaysian business will be at the forefront to unlock access to the new capital frontier of sustainable finance. This in turn will provide the needed resources for investment into sustainable technologies and innovative approaches that will guarantee mid and long term business growth.
At the J.P Morgan 5th Global ESG Conference held last week (which was done in a virtual format), BlackRock (the largest global fund manager) highlighted that COVID-19 represents a sustainability crisis. He mentions that this being far from a “Black-Swan” event, it is what risk experts would call a “Gray Rhino”: a highly obvious, highly probable, but still neglected danger. More importantly, Climate Change is another obvious “Gray Rhino”. And in fact, the relationship between the two Rhinos – Climate Change and Global Diseases – is well established and growing.
Sustainability Credential as a Business Advantage
In investing in sustainability practices, it is important for Malaysian private sector to understand that it is beyond environmental factors. As the ESG name suggests, equal importance needs to be placed to the Environment, Social and Governance factors of an organization’s internal and supply chain operations. Beyond investors, many buyers and consumers are becoming more sustainability risk averse in their buying decisions. Where and how should Malaysian businesses invest in being more sustainable?
Consider these innovation starting points:
- Climate Change is the fundamental risk for ESG investors. Hence investing in Climate Change scenario planning will enable businesses to be more resilient and responsive to required mitigation and adaptation requirements.
- How your supply chain behaves impacts your standing. Depending on your industry, a business supply chain and suppliers can constitute as much as 90% of their sustainability impact. This makes knowing and managing environmental and social supply chain risks top priority for sustainability focused organizations.
- For SMEs, especially in the B2B space, this means your sustainability footprint is linked to your buyer’s sustainability expectations and non-conformity may mean being excluded from purchasing decisions. A scenario planning of the evolving sustainability demands of your industry and buyers will allow for future proofing your operations and products.
- Be as transparent, traceable and assured with your sustainability data. Many investors rely on public data to determine a sustainable business and having accessibility to industry sustainability data will also allow businesses to understand their own baseline and set performance expectations.
It cannot be denied that the Malaysian private sector, both big and small, are in for tough times ahead. However, data and facts are proving that investing in being sustainable is a critical business advantage for both large and SME corporations. The COVID-19 pandemic will accelerate how sustainable performance will be the new business innovation to remain relevant in light of a consumer base that will now be highly sensitized to both environment and social benefits and expectations. Global Compact Network Malaysia in partnership with Capital Markets Malaysia has launched a Center of Excellence to enable the Private Sector to leverage corporate sustainability as an engine of growth.
Taking cue of how HSBC Malaysia inspired the Malaysian banking sector to waive compounding interest rates during the loan moratorium period or at how Lazada has connected Cameron Highland farmers to consumers to avoid produce wastage, being unsustainable will only quicken the demise of laggard sustainability centric companies. So when deciding on and rolling out your business continuity plans, corporate sustainability must be a core part of it. To quote Philipp Hildebrand, Vice-Chairman of BlackRock:
“We believe that the overall message is clear, COVID-19 and the upcoming recession will not mark the end of the necessary transition towards a more sustainable financial system and economy. They could drive the “greatest reallocation of capital of the 21st century”.