6 questions on sustainability reporting answered

There is growing regulatory and stakeholder demand for businesses to disclose non-financial metrics of the environmental and social impacts arising from their operations. Organisations are now pressured to better manage environmental and social risks, take up opportunities that bring both a decent rate of return and environmental benefit, as well as deliver greater accountability.

With heightening expectations around Environmental, Social and Governance (ESG) issues, Deloitte Malaysia’s Kamarul Baharin, Audit & Assurance Partner shares his views on how Sustainability Reporting plays a role in an organisation’s sustainable development priorities.

1. Why is sustainability reporting important to companies in Malaysia?

Sustainability reporting is an avenue for stakeholder engagement. It is crucial to provide insights into an organisation’s sustainability initiatives, as pressure from stakeholders are compelling businesses to prove their environmental, social, and governance effectiveness, accountability, and transparency through corporate sustainability disclosure.

Business impacts and opportunities in the aspect of climate change, scarcity of resources, changing social expectations, and new legislative requirements in sustainability-related areas are driving organisations to embed sustainability considerations in response to these risks and challenges.

To cater to diverse stakeholder needs and achieve continuous improvement, it is important that corporates engage with targeted stakeholders and obtain meaningful feedback on their sustainability performance and reporting processes, which helps to meet stakeholders’ demands and improves corporates’ future sustainability agenda. A holistic approach to business management, incorporating sustainable considerations alongside financial ones, will serve as a sound business model that supports business continuity and competitiveness in longer term.

2. What is the latest development of sustainability reporting in Malaysia?

In recent years, the development of sustainability reporting in Malaysia is reflected in the advent of various reporting guidelines and government inquiries. However, evidence of the inadequacy of such reporting, coupled with limited evidence of its use by market participants, i.e. investors and creditors for resource-allocation decisions, raises questions about the overall value-relevance of sustainability reporting. It is important to have a holistic view and a sound reporting structure to provide actual value in sustainability reporting, therefore reporting both the past sustainability experience and future sustainability plan are important.

3. Why is sustainability report rating (ESG rating) important to organisations?

ESG rating allows an organisation’s sustainability performance to be measured against industry peers. This is important for companies’ continuous improvement and investor/stakeholders decision making.
In Malaysia, the FTSE4Good Bursa Malaysia Index adopted FTSE Russell’s ESG Data Model that produces ratings with an objective measure of ESG exposure and performance of multiple disciplines. There are 14 ESG themes subdivided into more than 300 detailed indicators. The ratings uses an exposure weighted average (scale 0 to 5). This means that the most material ESG issues are given the most weight. Companies are thus able to gauge exposure to identified risks and improve their effort in a particular aspect.

4. How does sustainability reporting assurance help with an organisation’s sustainability reporting?

Assurance on sustainability reporting enhances transparency and instills confidence and trust in an organisation. Through sustainability reporting assurance, organisations can ensure credibility of information within the sustainable report before communicating it to stakeholders. Stakeholders are increasingly relying on third party independent assurance to assess the reliability and accuracy of an organisation’s sustainability reporting. Also, the risk of disclosing and inaccurate or inconsistent sustainability information may affect the branding and reputation of the organisations which could lead to the loss of stakeholder trust as well as confidence.

5. Having sustainability reporting assurance – will this position an organisation differently? Compared to those who does not have it?

As compared to the organisations that yet to seek assurance on their sustainability report, organisations that have their sustainability report assured will improve the quality and depth of sustainability information disclosed so as to better serve the needs and expectations of the stakeholders.

By having the sustainability reports being assured by the external or internal independent parties, it will improve the level of confidence of the stakeholders since accuracy and reliability of the disclosed information are extremely essential for the stakeholders to make informed decision making.

6. Before embarking on a sustainability journey, what are some questions an organisation should ask/address?

Organisations embarking on a sustainability journey, making sustainability its core value and part of its corporate strategies, should ask these questions:

• Material and vision: What are the issues that we need to focus on/address and why?
• Strategy development: What are the appropriate goals for my organisation and how do we develop the strategy required – strategic road map?
• Value creation: What new strategies can develop better stakeholder value?
• Measurement, reporting and assurance: How to display confidence using the accuracy of my disclosure? How do I create trust?