The COVID-19 pandemic has accelerated the ESG agenda for Malaysian SMEs, according to an ESG insights report on Malaysian SMEs developed by Alliance Bank, which offers Islamic products through its Islamic subsidiary, in conjunction with UN Global Compact Network Malaysia & Brunei (UNGCMYB) and SME Corporation Malaysia.
“With a buying trend moving toward eco-friendly alternatives, many companies are realizing the importance of adopting sustainable practices in their operations. Early adoption puts them ahead of their competition and better equips them for success in the long run,” Rizal Il-Ehzan Fadl Azim, CEO of Alliance Islamic Bank, commented.
The report suggests that, while ESG adoption is relatively new for SMEs in Malaysia with one respondent characterizing it as being in its ‘infancy’ and 75% of ESG adopter SMEs having started their journey in the last five years, 60% of SMEs, including non-ESG adopters, believe that ESG practices will create long-term value and increase business opportunities.
Increasing productivity, cost savings from energy and waste efficiencies as well as enhancing brand value and reputation have been highlighted as the top three reasons behind Malaysian SMEs adopting ESG practices.
While the value recognition of ESG adoption is notable, non-ESG adopters have cited uncertainty regarding the impact of ESG practices, a lack of ESG literacy and financial constraints as their main adoption barriers.
The costs associated with ESG adoption are a significant challenge considering that 59% of ESG adopters fund their own ESG initiatives. Internally generated ESG strategies, according to one SME ESG champion, can result in SMEs simply following the lead of the strategies of big companies due to a lack of expertise on their part.
According to the report, financial support from banks, literacy programs from the private and public sectors as well as top-down tax incentives will incentivize ESG adoption among SMEs which are hesitant to embark on their ESG journey.
While the report suggests that the COVID-19 pandemic has accelerated the ESG agenda for Malaysian SMEs, the implementation of ESG practices ranks low on Malaysian SMEs’ priority list for the next six to 12 months, with only 5% of SMEs listing it as a top priority.
For many SMEs, ESG adoption is a luxury they cannot afford right now. They are focusing on navigating the uncertain post-pandemic business landscape and keeping their businesses afloat.
According to Faroze Nadar, the executive director of UNGCMYB, SMEs can set the tone for the direction the Malaysian economy will develop as they are the backbone of the economy and key drivers of job creation and economic development.