KUALA LUMPUR: Micro, small and medium enterprises (MSMEs) in the domestic sales and services space are not ready for the transition to environment, social and governance (ESG) compliance with a majority aware of its importance but ill-equipped to make the transition.
Small and Medium Enterprises Association of Malaysia (Samenta) national president, Datuk William Ng revealed that a mid-year survey conducted in September found that over two-thirds of Malaysian SMEs recognise the importance of ESG.
However, less than 12 per cent indicated readiness for ESG implementation.
"This indicates that the key issue is less about education but more about empowerment and facilitation," he added.
Ng highlighted that early adoptersof ESG include exporters and SMEs serving multinational companies, as they feel the impact of ESG requirements in developed economies.
"Some have been given checklists and training by their customers and principals as early as 5 years ago, and as such the transition has been seamless," he told Business Times
Conversely, SMEs focused on domestic sales and services are struggling with the shift.
According to Ng, the government should pull levers to encourage faster ESG adoption.
"The fund currently earmarked for green financing needs to have more robust criteria especially for loans below RM 1 million."For example, when you require an SME to prepare an impact paper or proposal as to how their new equipment will emit less carbon - not every SME will have the capacity to do so - and these proposals end up either being outsourced which raises the cost of financing for the business,", Ng said.
He added that they are already seeing a sudden rise in the number of 'ESG consultants' - some of whom are genuine but many are simply preying on the ignorance and limited resources of SMEs.
He stressed the need for step-by-step ESG reporting, starting with a simple statement for smaller businesses.
"The current drive towards template-driven ESG reporting is helpful, but again, we must treat the ESG and low carbon transition like a school - you go step by step."
"For example, we can introduce a simple ESG statement by smaller businesses, before migrating to ESG disclosures, reports and compliance with global reporting standards like GRI," he added.
Ng identified a shortage of ESG professionals as a major challenge for SMEs, making the transition intimidating and cost-ineffective.
"Another major challenge for ESG adoption by SMEs is the lack of ESG professionals in the country, which makes it difficult for busy business owners to prioritise such adoption. "Because of this major shortage of ESG talent and the exorbitant price of consulting services due to a surge of demand for ESG consultants - SMEs who want to transition find it intimidating and cost ineffective to do so," said Ng.
Meanwhile, the Small and Medium Enterprise Association of Malaysia (SME Malaysia) president Ding Hong Sing highlighted the crucial role of government assistance in supporting SMEs to integrate the ESG framework.
During an interview with Business Times, Ding revealed that over 90 per cent of SMEs lack the know-how to implement ESG.
"The government needs to invest in educational training and incentives for SMEs. It is crucial to make ESG accessible to owners who often juggle multiple roles within their businesses. "Government support, possibly through one-on-one consultations, can expedite the process. SMEs, constrained by limited resources, need financial assistance and Mandarin-speaking consultants to navigate the ESG landscape effectively," he added.
"While more SMEs are aware of ESG, understanding its significance remains a challenge. They recognise ESG but struggle to apply it to their business operations."To bridge this gap, I've encouraged ESG trainers to communicate in both Mandarin and Bahasa to address the challenges faced by SMEs, particularly those without a higher educational background," Ding told Business Times.
He revealed that the government's push for ESG in SMEs is crucial, especially considering the impending global impact, however, SME owners must collectively understand and apply ESG principles.
"Awareness alone is not sufficient; owners must comprehend ESG's significance. The government's role is vital in providing support and education, as ESG compliance becomes a prerequisite for exports, reducing carbon tax liabilities," said Ding.
He said that the government must establish a dedicated department to aid SMEs in adopting ESG practices as action speaks louder than words, a proactive government approach will prevent delays and ensure a smoother transition for SMEs.
Ding said doubts about the government's commitment to ESG can also undermine its effectiveness.
"SMEs need more than rhetoric; they require tangible support and incentives to integrate ESG into their operations."Delaying ESG implementation poses a threat to businesses, affecting their ability to export and contributing to economic challenges," he added.
RISKS OF NOT IMPLEMENTING ESG
Sustainable Finance Institute Asia 2022 reports Malaysian SMEs are at the risk of losing RM292 billion in revenue due to non-ESG compliance.
According to the United Nations Global Compact Network Malaysia and Brunei (UNGCMYB), it is a sign of business risk when companies do not provide enough ESG information and can negatively affect a company's image as well as decrease its brand value.
"Adhering to ESG practices is crucial for Malaysia's investment policies, especially for SMEs, as failure to follow ESG guidelines can adversely impact the country's global competitiveness," it said.
Elaborating on the importance of SMEs in attracting foreign investments, the necessity of adhering to ESG standards becomes crucial for sustaining international trade connections within the worldwide supply chain.
This is especially pertinent when dealing with major ESG-compliant corporations, as they anticipate their suppliers to align with these established standards.
"The global trend requiring businesses to uphold ESG principles is reshaping banking practices, necessitating ESG compliance for SMEs.Banks are now compelled to align with their customers' customers, such as local SMEs exporting to listed companies," it added.
Demonstrating ESG adaptability is becoming imperative for businesses to secure funding, as banks transition toward ESG-centric lending practices.
UNGCMYB also stated that non-compliance may result in increased difficulty in obtaining loans."The cost of inaction and dependency on major investors pose significant challenges for smaller companies in recovering from adverse incidents."These incidents may include natural disasters, economic downturns, legal issues, accidents, or any disruptive circumstances affecting normal business operations."ESG risk is considered a substantial material risk, and failure to promptly address and incorporate ESG principles can lead to various consequences, jeopardising the resilience and financial stability of businesses," it added.
GOVERNMENT EFFORTS
The Malaysian government has come out with tax incentives to support the implementation of ESG and for firms to be actively engaged in the disclosure so it could benefit their business value-chain as well as their shareholders.
In the tabling of 2024 Budget, a tax deduction of up to RM50,000 for each year of assessment from 2024 to 2027 is proposed for ESG related expenditures.
Companies engaged in the development of carbon projects in Malaysia are eligible for an additional tax deduction of up to RM300,000.
This deduction covers costs incurred for the Development and Measurement, Reporting and Verification (MRV) of carbon projects and can be offset against income earned from trading carbon credits on the Bursa Carbon Exchange (BCX).
The application window for this tax incentive, administered by the Malaysia Green Technology and Climate Change Corporation (MGTC), is open from Jan 1, 2024, to Dec 31, 2026.
The government also provides tax incentives to encourage the adoption of green technology among SMEs.
The Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) enables businesses to claim tax deductions for investments made in approved green technology projects, as outlined by the Malaysian Investment Development Authority (MIDA).
In support of low-carbon practices, Bank Negara Malaysia (BNM) also launched the RM2 billion Low-Carbon Transition Facility (LCTF) in February 2022.
This facility offers affordable financing to SMEs for working capital or capital expenditures associated with the implementation of low-carbon initiatives.
THE ESG FRAMEWORK
In 2023, the government introduced the i-ESG framework, a national Industry Environmental, Social, and Governance initiative, to accelerate the country's progress towards sustainable development goals.
The government aims to generate at least US$12 trillion worth of market opportunities by 2030, unlock 50 per cent of the value of business opportunities in developing countries and create 380 million jobs by 2030, almost 90 per cent of which would be in developing countries.
Under the 'Just Transition' strategy introduced by the Ministry of International Trade and Industry (MITI), Minister Tengku Datuk Seri Zafrul Abdul Aziz revealed that Phase 1.0 of the i-ESG framework, centred on the 'Just Transition' principle, is slated for implementation from 2024 to 2026.
MITI states that the primary goal of the 'Just Transition' phase is to support industries in initiating their ESG journey.
The phase will be achieved through the provision of guidelines, capacity building, outreach programs, mentoring, and financial assistance.
"During this phase, the focus is on heightening awareness, delivering training and providing financial support, with a particular emphasis on assisting MSMEs to embark on their ESG journey," said MITI.
Phase 2.0, or the Acceleration Phase is aimed to move in line with national and international requirements, scheduled from 2027 to 2030.