EARLY this month, a United Nations-backed panel of climate scientists and economists raised the concern that a gush of money is being poured into fossil fuels while little is being channelled into clean energy.

       The panel warned that finance is both driving the climate change problem and at the same time being a “critical enabler” in the energy transition.

       Despite the surge in interest in environmental, social and governance (ESG) over the past few years, it remains something difficult to define. ESG may not be as clear cut as compared to being syariah-compliant because it lays on a broad spectrum of three components - environmental, social and governance.

       For instance, one might think that plantation firms cannot be ESG-compliant as planters have been called out for labour-related ESG issues and face stiffer challenges from environmental risks.

       But according to ESG specialist Andrew Chan, planters in the country can be deemed ESG-compliant should they meet the country’s minimum environmental requirement and contribute to the economy and support social goals.

       “They are legal businesses that have a valid licence to operate, contribute to job creation and the larger scale of their operations make commodities affordable for the community.

       “So, some investors may choose to be involved with these businesses, but filter them based on which adopt better ESG practices,” he says.

       He adds that companies involved in heavy industries can also be deemed as ESG-compliant should they “reasonably balance” the ESG factors within their business model.

       “No company is going to be at the top of every single component. Investors make the call on investing based on their philosophy, as each one has a different philosophy and stance on ESG,” explains Chan, who is PwC’s South-East Asia sustainability and climate change leader.

       Chan points out that ESG does not just look at the nature of the company’s business, but also takes into account the areas that are relevant to the business and their progress in managing the ESG risks.

       Even if the business is in a green sector, Chan explains that the company would not automatically have a strong ESG performance.

       Given the broad spectrum of the ESG matrix, he says there are “50 shades of green” with diverse views about the ESG performance of companies, saying that investors need to decide which end of the spectrum they want to be on.

       For instance, last month, the Employees Provident Fund (EPF) launched its “EPF Sustainable Investment Policy” to guide the fund in making more informed and holistic investment decisions by integrating ESG considerations in their investment management processes.

       The fund jotted down its expectations for sectors with higher ESG exposure, which include the priority issues of climate change and workers’ well-being.

       The EPF’s clear expectations define the fund’s view of ESG compliance.

       Chan says he has seen investors in extractive companies use their shareholder voice to encourage firms to embed better ESG practices.

       “Investors would voice out to firms to include investments in lower carbon production approaches,” he discloses.

       KPMG Malaysia head of sustainability advisory Phang Oy Cheng urges senior management and board of directors to develop sound ESG management programmes, which provide sufficient information to make necessary decisions with regards to rising ESG risks.

       This is because international requirements such as the anticipated reporting requirements from the International Sustainability Standards Board (ISSB) and Task Force of Climate-related Financial Disclosures (TCFD) would be increasingly mandated by countries, she notes.

       Phang says it is no longer possible for companies to just focus on meeting reporting requirements such as Bursa Malaysia’s requirement on sustainability reporting, or the global reporting initiative’s (GRI) sustainability reporting framework.

       “Companies must focus on performance relating to their environmental management, including issues such as climate change, water management and waste management beyond compliance requirements.

       “These management programmes should also focus on providing financial information relating to costs, spends and budgets linked to the business strategy of the organisation,” she opines.

       For oil and gas (O&G) and automotive companies that generally appear to produce not environmentally friendly products, Deloitte Malaysia sustainability and climate leader Kamarul Baharin says businesses can consider alternative sourcing opportunities and invest in renewable energy or clean tech.

       “Companies can also go carbon-neutral by removing the company’s carbon footprint from the environment and work with the value chain toward achieving a green circular economy,” he adds.

       For example, automaker Ford Motor Company uses sustainable fabrics in its vehicles and 80% of both its Focus and Escape vehicles are recyclable.

       The company also focuses on fuel efficiency, particularly on the six-speed transmission, offering a clean diesel heavy-duty pick-up truck.

       On the other hand, Shell is looking for ways to create energy by decarbonising and focusing on electricity.

       From 2019 onwards, the O&G company offered all of its British residential customers 100% renewable electricity. This means that for every unit of electricity used, another unit is placed back into the grid by renewable generators.

       Kamarul says these initiatives by companies which are heavy polluters reflect the shifting of priorities by using business intelligence to not only save on costs, but to also become environmentally aware.

       But how do we evaluate whether these companies are doing enough to fulfil the ESG agenda?

       Data from annual and sustainability reports of companies can be assessed by investors to review the company’s ESG performance and its future plans on the ESG matrix.

       Another best form of evaluation will be the company’s performance on sustainability indices such as the Dow Jones Sustainability Indices (DJSI) or FTSE4Good Index for general stakeholders, says KPMG’s Phang.

       She reveals that the global mining group Rio Tinto has performed well in ESG indices, having been rated on the DJSI.

       “Similarly, leading companies in the extractive sector have also performed well in ESG management and indices because of global attention and investors on their ability to manage non-financial risks,” confides Phang.

       It is worth noting that DJSI is generally considered to be a very high bar to evaluate the ESG performance of companies.

       However, eligible companies must be invited to participate in the DJSI by global data provider S&P Global.

       As of April 5, checks by StarBizWeek from the S&P Global website revealed that a total of 28 Malaysian public-listed companies had been invited, including Top Glove Corp Bhd, Press Metal Aluminium Holdings Bhd, Tenaga Nasional Bhd, Petronas Gas Bhd, Genting Bhd, Sime Darby Plantation Bhd and Malayan Banking Bhd, among others.

       As of last year, citing data from S&P Global, Phang notes that only four Malaysian companies took part in the DJSI, namely, CIMB Group Holdings Bhd, Top Glove, Fraser & Neave Holdings Bhd and Petronas Chemicals Group Bhd.

       Despite the invitations, she discloses that the participation rate of Malaysian companies in the DJSI is “very low.”

       Yet, there is still high pressure on companies to disclose their ESG performance due to regulatory pressures on investors.

       This is why the risk of greenwashing has been prevalent, with a significant increase in green claims by companies, points out Deloitte’s Kamarul.

       However, he notes that the consequences of these false claims are serious.

       “A company’s reputation can be damaged, customer loyalty can be broken and advertisers also face fines or bans,” shares the ESG expert.

       PWC’s Chan says “accidental greenwashing” can also happen due to the complexity of some areas of the ESG agenda.

       “For example, some may confuse the terms carbon neutral, GHG neutral, climate neutral or net zero.

       “The definitions of an ESG issue also varies across stakeholders, which can lead to misunderstanding and claims of greenwashing,” he added.

       Overall, the ESG consultants believe that companies should define each relevant issue, specific targets and timeline about their sustainability practices for the clarity of the stakeholders.