Covid-19 shines spotlight on sustainability issues

Economist: Pandemic increases pressure on businesses to be more responsible and transparent in related practices

PETALING JAYA: The Covid-19 pandemic has amplified the demand for businesses to address complex supply chains and become more transparent, given the growing focus on their response to the crisis according to AmBank Research’s chief economist Anthony Dass.

He elaborated that there is a growing environmental, political and social pressures for a more sustainable and responsible path towards development, as organisations are expected not only to apply socially responsible practices but also to become responsible business leaders.

“In short, it is all about bringing renewed attention to the importance of corporate transparency on sustainability issues,” Dass said in a report.

He listed that the emphasis is on board composition and quality, environmental risks and opportunities, corporate strategy and capital allocation, compensation that promotes long-term growth, and human capital management.

The head economist argued that it is time to re-examine business models as it should focus on “sustainability” which then looks at resilience, reforms and reimagination.

He pointed out that there is a need for companies to understand their response now and how they should respond in the future and that there is a need for consistency and completeness besides accountability, which will help provide sustainability against shocks.

“While managing Covid-19’s immediate impacts will be the top priority for businesses, reporting historical environment, social and governance (ESG) data and performance remains essential.”

Dass highlighted that businesses must strive to retain the same level of coverage as previous years and continue to improve their disclosures with the aim of ensuring their performance on key social issues are even more thoroughly examined than usual, given that accountability is vital in this new reality.

Aside from the reduction of greenhouse emission and environmental impacts for the reduced business operations, the pandemic also affects various other metrics such as diversity, employee engagement and supply chain labour compliance.

“Going forward, it will be essential for businesses to provide a narrative that identifies what change in historical performance relates to Covid-19 factors and what change results from previously existing plans – numbers on their own will be impossible for readers to interpret,” said the head economist.

In this regard, Dass highlighted that digitalisation will offer important insights into the real impact of businesses on society and the environment, as technology will help monitor the application of environment, social and governance (ESG) with the aim of investing more into sustainable products.

Similarly, the EY Climate Change and Sustainability Services (CCaSS) survey of 298 institutional investors globally found that institutional investors are ramping their assessment of ESG factors to assess the performance of companies.

The survey found that 98% of the respondents evaluate nonfinancial performance based on corporate disclosures, with 72% saying they conduct a structured, methodical evaluation.

Furthermore, it reported that investors are increasingly holding companies accountable, with ESG factors playing a central role in their decisions as 91% of investors stated that nonfinancial performance has played a pivotal role in their investment decision-making over the past 12 months, either frequently or occasionally.

Among the issues, EY’s survey found that climate change plays a significant part in investors’ decision making process with 73% indicated that they will evaluate the physical risk implications of climate change when they make asset allocation and selection decisions.

In Malaysia, it highlighted that the demand for sustainable finance, focusing on ESG considerations, has been gaining momentum since the launch of the Sustainable Responsible Investment (SRI) framework in 2014.

In addition, nine Malaysian investment managers and asset owners including the Employees Provident Fund (EPF) and Khazanah Nasional among others have committed towards ESG best practices and sustainable investing principles by signing of the United Nations-backed Principles for Responsible Investment.

Ernst & Young Advisory Services Sdn Bhd CCaSS director Arina Kok commented the pandemic has exposed the vulnerability of businesses in managing emerging risks.

“It has also further reinforced the importance of having strong ESG disclosures, underpinned by appropriate structures, reviews and controls to regain and rebuild investors’ confidence,” she said.