Edited by Rivermore Academy
In early October, Malaysia will unveil the ESG blueprint for SMEs to address the European 'Carbon Border Adjustment Mechanism (CBAM)' set to begin this October and officially take effect in 2026. Business owners, are you prepared?
With an increasing global focus on social and environmental issues, the acronym "ESG" has become a hot topic in companies worldwide. ESG stands for Environmental, Social, and Governance, and it has now become a key indicator for businesses when considering market entry, even influencing a country's economic prosperity.
As a result, governments around the world have varying levels of attention to ESG, which is playing an increasingly important role in the financial and investment sectors. Nowadays, more and more investors and financial institutions are incorporating ESG factors into their investment analysis and risk assessment to gain a comprehensive understanding of a company's value and potential risks.
The Three Principles of ESG:
1. Environmental
The first principle focuses on a company's environmental responsibility. This includes examining the company's environmental policies, energy consumption, carbon emissions, waste management, water resource utilization, and other environmental issues. The purpose of evaluating a company's environmental performance through ESG is to ensure that the company minimizes its negative impact on the environment and promotes sustainable development.
For companies, conserving energy and reducing operating costs are closely related. While implementing environmentally friendly initiatives may incur significant upfront expenses, in the long run, it allows the company to enhance the efficient use of limited resources, lower operational costs, comply with regulations to avoid pollution litigation, and improve the company's reputation.
2. Social
The second principle focuses on a company's social responsibility. As a company operates within society, it should adopt a "people-oriented" approach, considering and caring for the needs of different groups. This includes employees, customers, suppliers, communities, and other stakeholders.
In the workplace, companies should prioritize the safety and well-being of their employees, ensuring their welfare and rights. In a broader sense, companies should ensure the safety of their products and positively impact communities to gain support. Considering these factors enables companies to develop an attractive corporate culture and reduce employee turnover.
3. Governance
The third principle focuses on a company's governance structure and operating methods. Simply put, it examines whether the company operates in compliance with laws and regulations, whether its management is transparent and ethical, and whether its business decisions adhere to business ethics.
For companies, a robust governance system ensures smooth operations and a good reputation. Excellent governance enhances a company's stability and credibility, gaining more trust from investors.
How ESG Provides Value for Companies
A study by McKinsey highlights five ways in which ESG (Environmental, Social, and Governance) creates value for companies:
1. Tapping New Markets and Expanding Existing Ones
Expanding into new markets always requires resources such as funding, partnerships, information, and human resources. While companies can acquire these resources in their own ways, embracing ESG and gaining the trust of local authorities or government agencies increases the likelihood of obtaining approvals and licenses for new opportunities or market entry. It may also lead to support from local institutions.
For instance, in a large-scale public-private infrastructure project in Long Beach, California, the preference was given to companies with a strong performance in sustainability, which falls under the ESG umbrella.
ESG can also influence consumer preferences. According to McKinsey's research, over 70% of consumers in industries like automotive, building, electronics, and packaging are willing to pay an extra 5% for green products.
2. Reducing Costs
ESG can lower long-term costs by improving resource utilization, such as raw material costs, water resources, and carbon emissions. McKinsey's research indicates that these costs can impact a company's operating profit by as much as 60%.
A US company initiated the "pollution prevention pays" (3P) program and successfully saved up to $2.2 billion. Another major water utility achieved annual cost savings of nearly $180 million by improving preventive maintenance, optimizing spare parts inventory management, and addressing energy consumption and sludge recovery.
3. Mitigating Legal Risks
Paying attention to ESG allows companies to have greater strategic freedom and eases regulatory pressures. When a company complies with laws and regulations, it gains trust from relevant institutions and opens up more opportunities for cooperation with the government or related agencies. This ensures smoother business development while avoiding legal complications.
4. Enhancing Employee Efficiency
ESG also helps companies attract and retain top talent. Over time, it has been observed that employees who not only find their work satisfying but also feel connected perform better.
McKinsey's research also reveals a correlation between positive social impact and higher job satisfaction. Field experiments indicate that when companies "give back" to society, employees respond enthusiastically.
5. Optimizing Investment Returns and Assets
Investments related to ESG are growing in importance and generating increased returns. While upgrading ESG-related facilities may require significant investment, relying on energy-intensive factories and equipment can lead to substantial financial setbacks in the future.
In China, many companies are collaborating with relevant institutions to invest in ESG across various industries, from air quality monitoring to indoor air purification and even cement mixing. This is estimated to create over $3 trillion in value by 2030.
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