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The Update of the MCCG Signals Fresh Focus on Sustainability for Companies

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Effective 28 April 2021, the Securities Commission updated the Malaysian Code on Corporate Governance (“MCCG”). What does this mean for Malaysian companies? For starters, companies with financial year ending 31 December 2021 will have to report according to the updated practices in the Code.

What’s changed and why?

One of the key policy considerations for the 2021 update was a global focus on issues relating to sustainability, especially climate change. The intended outcome is for companies to address sustainability risks and opportunities in an integrated and strategic manner.

What is the purpose of introducing these practices? Do they impose more responsibilities and costs on companies?

To answer the first question: according to the Climate Change and Principles-based Taxonomy discussion paper released by Bank Negara Malaysia on 30 April 2021, greenhouse gas emissions have increased the temperature of the planet, causing climate change. This is evident in climate volatility including drought and rainfall patterns.

Natural disasters have occurred more frequently with greater severity, due to human activity. According to Bank Negara, Malaysia has experienced over 50 natural disasters over a period of 20 years. This has resulted in RM8 billion monetary losses for the country. Not only that – these incidents have affected the lives of approximately 3 million people.

Around the world, other countries are also experiencing the effects of climate change. Due to this, about 200 countries agreed in 2015 to reduce greenhouse gas emissions and accelerate the transition to a lower-carbon economy. Without these efforts, climate change could result not only in natural disasters causing loss of life. It would also cause mass migration from these affected areas, disruption in supply chains, and other economic losses.

Implications for Malaysian companies

Bursa Malaysia’s listing requirements require disclosures to be made in the Sustainability Statement. Companies that have closely adhered to these listing requirements and referenced the Sustainability Reporting Guide and Toolkits will find that they would already have begun on their journey to make meaningful sustainability disclosures.

So, what exactly are companies required to do under the MCCG? The board has to set the strategic direction for the company which now includes addressing sustainability risks and opportunities. To do this, the board has to understand sustainability issues that are relevant to the company and its business, especially in relation to climate-related risks and opportunities.

This means the board should not rely solely on management for information as to what the risks and opportunities are. Instead, they should have sufficient expertise in order to be able to have robust discussions with management about the risks and opportunities that have been identified, how these have been prioritized, and how they will be managed.

The evolving role of the board

The board has to consider whether its current composition and skills would enable it to engage in in-depth discussions with management on sustainability matters. Does this require appointing a new board member with sustainability expertise, if the board lacks such skills and experience? Not necessarily, as this would increase the board’s size. Instead, boards could undergo training to increase their knowledge and expertise.

The MCCG expects boards to take sustainability considerations into account in the development and implementation of their company’s strategies, business plans, and major plans of action and risk management. This can be done only if the board has the right structure. It needs to have a sustainability or ESG committee that works closely with management to obtain sustainability data.

While management has to identify and assess the company’s material sustainability matters, prioritize these matters, and manage them effectively, the board has to endorse management’s approach and provide further guidance if required.

Some boards may choose to establish an ESG or Sustainability board committee. Others may leave it to management to establish a committee. However, the information about sustainability risks should be also discussed at the Board Risk Committee if the company has established one, as sustainability risks should be considered part and parcel of risk management.

The board is ultimately accountable for ensuring that sustainability matters are embedded throughout the organization. While it is management’s task to embed it into the daily operations of the company, the board should require management to report on how it has achieved this. For example, it should always ask management, whether sustainability risks have been considered, alongside other risks, when making decisions.

The board is ultimately accountable for ensuring that sustainability matters are embedded throughout the organization.

The board has to also require information from management on how it has communicated sustainability strategies, priorities, and targets to employees and external stakeholders. This should not involve merely obtaining reports from management. It should also be supported by evidence that this has been embedded throughout the company.

Sustainability: More than just climate change

It should be noted that sustainability is not just about climate change or other environmental matters. It also covers material social matters such as whether the company uses forced labor or whether there is diversity in its workforce. Instead of relying on management’s reports on these matters, the board should require data to be provided on these matters.

In some cases, the board may even need to go to the extent of gathering information on its own about this topic. For example, if the board hears reports about forced labor or other breaches, it should in addition to requiring clarification from management, gather information from the media (including social media) on this matter, and perhaps even consider site visits to determine if there is any truth to those reports.

The consequences of not doing so could expose the company to reputational risks or affect its social license to operate. Consider the recent incident involving Rio Tinto, one of the world’s largest mining companies. The company knowingly destroyed Juukan Gorge, comprised of 46,000-year-old caves, although there were representations from Australian indigenous groups and evidence showing that the caves were of archeological value.

As a result of public outrage, the company subsequently removed several members of senior management. However, activists called on investors to hold the Chairman and the board accountable for the actions of management. The Chairman has indicated that he will not seek reelection at Rio Tinto’s next AGM.

Tying action to incentives

Another focus of the updated MCCG is on incentives for boards and senior management to apply good sustainability strategies and practices. What are the implications for boards and management that do not consider sustainability matters seriously? The MCCG emphasizes that there should be disclosures on how the board’s performance and remuneration are tied to the company’s ability to manage sustainability risks and opportunities.

This would mean that internal and external board performance evaluations would have to specifically include an assessment of these areas. In addition, senior management’s key performance indicators should also be tied to an assessment of how well they have managed the company’s sustainability risks and opportunities.

In a nutshell, the recent update of the MCCG focuses not merely on reporting, but on implementing and enforcing robust practices to mitigate sustainability risks and opportunities. Boards must get up to speed on their understanding and awareness of these issues, and be ready to get hands-on in terms of managing them.

About Dr. Elsa Satkunasingam

Dr. Elsa Satkunasingam is a Senior Business Development Adviser Corporate Governance at Iclif Executive Education Center at Asia School of Business. She conducts training programs and carries out research in corporate governance. She also teaches in the Pathway to a Governance Practitioner Programme (namely the Governance and Integrity Module).

Prior to that, she was the Deputy General Manager, Corporate Secretariat Division at Perbadanan Insurans Deposit Malaysia (PIDM) specializing in research on corporate governance and compliance. Her role included updating the Governance Committee and the Board on the latest global and regional developments in corporate governance. She also conducted training for PIDM’s staff as part of PIDM’s Compliance Programme. View Dr. Elsa’s full profile.