Rahmesh Gomez knows first-hand the challenges that small- and medium-sized enterprises (SMEs) in Malaysia experience when it comes to sustainability disclosures.
As the managing director of Malaysian Yoghurt Company, an SME that produces yoghurt products under the name of Sunglo, Rahmesh says many SMEs in Malaysia struggle to navigate the complexities of disclosing their sustainability via current ESG guidelines.
“Most readily available ESG disclosure frameworks that exist have a very broad scope with a high level of detail,” Rahmesh said. “This is one main challenge we face, and as a small company that is just starting on our sustainability journey, it is a steep hill to climb.”
Based in Nilai, Negeri Sembilan, Malaysian Yoghurt Company has been supplying its Sunglo brand to major supermarket chains, hotels, restaurants, bakeries and manufacturers throughout Malaysia since 2006. However, with limited resources, it remains difficult for the SME to adopt sustainable practices.
The company isn’t alone – more SMEs are also feeling increased pressure to report on their environmental, social and governance (ESG) performance, Rahmesh noted, but are not sure where to begin.
A new ESG guide hopes to address this issue. The guide, called the Simplified ESG Disclosure Guide (SEDG) for SMEs in Supply Chains, was produced by Capital Markets Malaysia (CMM) and aims to align Malaysian SMEs with global frameworks and international reporting standards, helping them thrive in the global supply chain.
As the global sustainability movement forges ahead amid heightened regulatory scrutiny and investor demand for more deliberate company action towards net zero goals, the Securities Commission is committed to ensuring that our companies, both large and small, are prepared to meet global ESG requirements.
Dato’ Seri Dr. Awang Adek Hussin, chairman, Capital Markets Malaysia
CMM is an affiliate of the Securities Commission Malaysia, which is responsible for regulating and systematically developing the Malaysian capital market. CMM leads the positioning and profiling of the Malaysian capital market through various initiatives and partnerships, focusing on areas such as sustainable finance and investing, the Islamic capital market, the digital market, and capital market funding opportunities through the private market.
As one of CMM’s consultation partners in drafting the SEDG for SMEs, Rahmesh sees the SEDG as “an important tool to get an [SME’s] sustainability journey off the ground,” and that it provides a “good starting point” for small enterprises that may not have specialised knowledge on ESG frameworks and disclosures.
A key economic backbone
The SEDG is important for Malaysian SMEs, which comprise 97 per cent of all businesses in the country, and contribute 38 per cent to Malaysia’s GDP, according to the Department of Statistics Malaysia.
With SMEs now required by various stakeholders to disclose their ESG standing, Malaysian companies must be responsible for their sustainability or expect to make losses. Malaysian SMEs stand to incur some RM292 billion (US$65 billion) in losses if they fail to keep in step with their multinational company (MNC) counterparts when it comes to global sustainability compliance, according to a report by Sustainable Finance Institute Asia.
The SEDG comprises 35 priority disclosures that are aligned with local and global sustainability guidelines including the Bursa Malaysia Sustainability Reporting Guide, Global Reporting Initiative (GRI), International Sustainability Standards Board (ISSB), Greenhouse Gas Protocol (GHG Protocol), among others, which will enable SMEs to respond to disclosure requests from multiple stakeholders, including customers, investors, banks and regulators.
“After engaging with chief sustainability officers of large corporations, we noticed a consistent pain point for companies that have set net zero targets: the challenge of obtaining credible and meaningful ESG data from their [SME] suppliers,” Navina Balasingam, general manager of Capital Markets Malaysia, told Eco-Business.
“[Malaysian] SMEs are particularly exposed to risks from supply chain vulnerabilities. This was the key driver for us in developing the SEDG for SMEs,” she added.
Three of Malaysia’s top trade partners – namely the European Union, Japan and Singapore – already have policies and legislation in place for mandatory ESG reporting to translate their respective net zero commitments into action. Some 14 per cent of Malaysia’s total exports come from SMEs.
With this, companies are increasingly pressed to include their suppliers’ emissions in disclosing their Scope 3 emissions, which refer to all other indirect emissions that occur in the upstream and downstream activities of an organisation.
A PwC study found that as much as 80 per cent of an enterprise’s supply chain emissions come from as few as one-fifth of its vendors and partners, on average.
“As we collectively transform and elevate Malaysia’s economic system through the adoption of international standards and best practices, it is important to ensure that no SME is left behind,” said CMM chairman Dato’ Seri Dr. Awang Adek Hussin, executive chairman of the SC.
The rollout of the SEDG also hopes to facilitate a just and inclusive transition in Malaysia’s industries – especially among vulnerable stakeholders including SMEs – as the country moves towards a low-carbon economy.
“As the global sustainability movement forges ahead amid heightened regulatory scrutiny and investor demand for more deliberate company action towards net zero goals, the SC is committed to ensuring that our companies, both large and small, are prepared to meet global ESG requirements,” Awang Adek continued.
Beyond supporting SMEs within supply chains, CMM anticipates that the SEDG will be particularly useful to corporations requesting data from their suppliers, Navina said, as it provides a comprehensive, yet straightforward set of disclosures that MNCs can request from their suppliers.
The SEDG will indeed strive to “demystify” ESG, said Dato’ Adnan Pawanteh, executive director of corporate affairs at Nestle Malaysia, noting that it will impact the way organisations engage with their partner SME vendors and spur larger enterprises to source more sustainably.
“The guide is not just about defining standards,” highlighted Adnan. “It’s about going down to the ground level – [akin to] a teacher going down to the level of their students – to help them understand and demystify carbon emissions and ESG.”
Nestle Malaysia – a food and beverage company working to utilise responsibly sourced raw materials in their products while boosting income opportunities for local farmers – is one of the early adopters of CMM’s SEDG.
“For data collection in our value chain, we have to rely on data provided by our various partners in the supply chain. This can be a complex process in addition to being time and resource-intensive, particularly for small and medium enterprises with limited resources to record the type of data required,” he continued.
While Adnan acknowledged that SMEs may feel overwhelmed during their initial introduction to ESG reporting, he views the SEDG as a vital resource for vendor development to help small and medium stakeholders comply with both local laws and international regulations.
“You cannot [easily swallow] an elephant [like ESG]. But by breaking it down into smaller pieces, it finally becomes clear what you can do,” Adnan said. “We are also working closely with our suppliers. It is imperative that we collaborate with our suppliers and partners across the supply chain to support them in reducing emissions.”
Since most supply chain companies are SMEs, the SEDG is also expected to affect supply chains of Malaysian publicly-listed companies (PLCs). For one, Rahmesh of Malaysia Yoghurt Company said, it will prompt Malaysian SMEs to disclose their ESG in order to remain competitive and maintain their position within global supply chains.
Rahmesh noted that SMEs can view the SEDG as a stepping stone towards more detailed and broader disclosures in the future, especially in light of increasing stakeholder concerns with company sustainability.
“At present, we have yet to be required to report on our ESG performance. However, we have been asked by some of our customers and bankers about the steps that we have taken so far,” he said. “We expect that more stakeholders may require a higher level of reporting in the future and we want to be ready for that.”
CMM’s Navina agreed, warning that suppliers unwilling to pivot towards ESG adoption may be dropped from supply chains. “As more companies set net zero and science-based targets, they will be looking to their supply chain to support their ambitious climate goals,” she said.
She ultimately hopes that the SEDG will provide much-needed impetus for SMEs to report on their sustainability, as the onus is now on Malaysian SMEs to comply or fall behind.
“As companies begin to re-evaluate their suppliers based on alignment with their net zero targets, early ESG adopters that can demonstrate their contribution towards emissions reduction and other sustainability goals stand to gain,” Navina concluded.