A practical ESG perspective 

Investment decisions are no longer based entirely on dividends for a growing number of Malaysians. Today, investors increasingly consider whether the companies they invest in contribute to environmental pollution, exploit their workers or have had a history of governance scandals. 

This shift is described as environmental, social and governance (ESG) investing, but its significance extends well beyond listed companies and investment funds. 

For Malaysia’s small and medium enterprises (SMEs), ESG is rapidly becoming a practical business issue.

Many SMEs may assume that sustainability reporting concerns only Bursa Malaysia-listed companies. 

While legally, the most detailed reporting obligations fall on listed companies, commercially, ESG expectations move through supply chains. 

A listed manufacturer seeking information about its indirect emissions may ask smaller suppliers for energy or transportation analytics. 

A multinational customer may require evidence of responsible materials sourcing or evidence that slavery-like conditions are not practised. 

Furthermore, banks and investors may also consider whether a business is prepared for regulator and reputational climate risks. 

A SME can therefore face ESG-related questions even when it has no direct obligation to publish a sustainability report.

ESG as a business lens

ESG provides a framework to examine issues that conventional financial statements may not fully disclose. The environmental dimension includes energy and water use, waste, greenhouse-gas emissions and exposure to resource scarcity. 

Next, the social dimension covers relationships with employees, customers, suppliers and communities, while governance concerns the role of directors, ethical conduct, conflicts of interest and accountability.

These matters are more than a public-relations checklist. For a SME, an electricity bill is simultaneously a cost and an environmental indicator. 

High employee turnover is both a financial problem and a social concern, while customer dissatisfaction may point to governance issues. 

Viewed in this way, ESG is not separate from business performance; it is a lens for identifying where value may be lost, protected or created.

Malaysia’s sustainability landscape has recently become more structured. The National Sustainability Reporting Framework (NSRF) adopts international Sustainability Disclosure Standards as the baseline for corporate sustainability disclosures and is being implemented progressively. 

SMEs are not expected to respond with the same systems or resources as a public listed company. Nevertheless, greater disclosure by large businesses will inevitably increase requests for reliable information from the smaller companies in their value chains. 

How do SMEs benefit from engaging with ESGs?

The best argument in response to the question is that ESG readiness may affect access to customers, finance and future markets. 

A business that can produce credible information on energy consumption, worker safety or supplier standards is easier for a larger company to retain in a responsible supply chain.

It may also be better placed to answer due-diligence questions from lenders and investors, tender for contracts with sustainability conditions, and meet the expectations of overseas markets. 

As ESG considerations become increasingly integrated into commercial decision-making, SMEs may find that demonstrating responsible business practices is no longer simply an optional exercise, but an important part of remaining competitive.

For example, an overseas purchaser may wish to order surgical gloves from a Malaysian SME. Rather than enquiring only about price, quality and delivery times, the purchaser may also request evidence of compliance with ESG standards. 

This could include evidence that the gloves were manufactured using responsibly sourced materials, factory workers receive fair wages, working conditions meet appropriate standards, and waste is properly managed. 

An SME that can provide authoritative answers to these ESG-related questions is more likely to satisfy the purchaser’s due-diligence requirements and secure the contract.

On the other hand, an SME that is unable to provide this information may lose access to overseas markets, even if its products have a lower carbon footprint than comparable products in the market. 

This illustrates why ESG readiness can influence commercial opportunities independently of the actual environmental performance of a product.

Apart from being a strategy to attract overseas buyers, there are operational benefits to tracking ESG matters. Measuring electricity, fuel, water and waste consumption could expose avoidable costs that can be mitigated, resulting in cost savings for the business. 

Reviewing workplace practices can reduce accidents, absenteeism and employee turnover, while stronger governance can reduce legal, regulatory and compliance risks.

Tracking ESG matters can therefore provide SMEs with a clearer understanding of how their businesses operate, where resources are being wasted and where improvements can be made. 

Over time, these practices may contribute to greater efficiency, stronger resilience, improved stakeholder confidence and a more profitable and risk-aware business.

Are there Disadvantages in Tracking ESGs?

As SMEs usually have fewer staff, smaller budgets and less specialist expertise, producing a lengthy corporate sustainability report could create a cost that is unrecoverable. 

The answer is to start small by collecting information and progressively building an ESG scorecard. A practical starting point is the environmental pillar in the ESG equation. 

For example, a logistics company may prioritise fuel use, vehicle safety and driver welfare, focusing on data the SME already possesses — fuel receipts, payroll data, accident reports, employee turnover, customer complaints and maintenance records. 

Once an ESG picture has been realised, the SME can identify pressure points for improvement, establish achievable targets and monitor progress over time. 

This approach allows sustainability efforts to develop gradually without placing unnecessary financial or administrative burdens on the business.

Beware of Greenwashing

Greenwashing occurs when environmental or social credentials are exaggerated or presented without adequate evidence. This is not limited to listed corporations. 

An SME can create the same risk by describing a product as “green”, “carbon neutral” or “ethically sourced” without providing evidence. 

A large percentage of modern consumers comprises a cohort known as ethical consumers. When they purchase a product that does not live up to its claims, they may share their disappointment on social media, raising a reputational risk to the SME that they purchased products from. 

Such criticism can weaken consumer trust, damage brand credibility, and affect customer loyalty and future sales.

Final thoughts

SMEs are advised to incorporate into their annual planning an assessment of ESG risks, drawing on existing records to establish realistic targets and measurable priorities. 

When approached effectively, ESG is more than a compliance obligation; it becomes a disciplined management tool that balances profit with purpose, strengthens resilience, improves decision-making, and supports long-term value creation while enhancing stakeholder trust and business sustainability.

●Donna Barclay, Lecturer, School of Business, Faculty of Business, Design and Arts, Swinburne University of Technology Sarawak Campus

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DISCLAIMER:

The views expressed here are those of the writer and do not necessarily represent the views of Sarawak Tribune. The writer can be reached at [email protected].