Environmental, Social, and Governance (ESG) Sustainability Reporting regulatory standards have come on our shores and will soon be put into effect.

The Small and medium enterprises (SMEs) must urgently embrace carbon transition targets or risk being removed from the global supply chain, to assist this transition, the Small and Medium Practices (SMP) firms’ expects to be well-equipped in facilitating the SMEs. Are you ready with the Mega-trend?

“Business must be run with the goal of achieving profit, otherwise it will go out of business. But when anyone runs a business with the goal of making a profit by neglecting social responsibility to society, then that business will not last long, because it is not sustainable and relevant to last long”. Henry Ford (Ford Motor)

Almost a hundred years since then, these words of wisdom show their truth. Excessive and uncontrolled profit-making activities regardless of the public interest and the environment, contributed to the financial crisis and the downfall of the world’s giant companies.

As risks abound, the Environmental, Social and Governance (ESG) agenda will become more urgent and complex in the coming years, making it critical for SMPs and SMEs to equip themselves to become more sustainable and to seize opportunities from being part of the vast supply ecosystem of listed companies and large multinationals.

Investing and compliance in ESG is now gaining traction among investors, while impact and sustainable ESG compliance reporting becomes major concern for both regulators and investors around the world.

The process of compliance with regulations and competitive ESG performance involves a large investment of time and resources in addition to the lack of specialist personnel who provide this service especially to small and medium enterprises (SMEs). Another major constraint is that we still do not have a uniform Reporting Standard and Framework around the world, especially for the SME sector.

However, with high compliance by companies listed on Bursa Malaysia in particular, a clear standard must be followed which is the ‘IFRS Sustainability Disclosure Standards, the S1 & S2 has been issued by the ‘International Sustainability Standards Board (ISSB)’ which is a standard aimed at harmonizing accounting reporting globally and improving transparency in the financial market especially public listed companies.

The implications of this compliance benefit the company not only in terms of avoiding business hazards, but also in terms of the opportunity to enter new markets from leading corporate clients especially listed entities. It is a opportunity for SMEs with high aspirations to explore prospects as part of the supplier ecosystem to listed firms by implementing proactive ESG compliance and transparent reporting procedures in their business processes.

ESG reporting standards and regulations evolved rapidly and whether they will directly or indirectly impact SMEs to remain relevant and competitive. SMEs need to ensure they embrace ESG initiatives by also minimising their involvement in greenhouse gas emission activities, taking care of the welfare and rights of workers, as well as practicing transparent business governance practices and and abstaining from unethical behavior.

Some SMEs are beginning to feel pressure from regulators who are more detailed in the monitoring and reporting of environmental compliance audits, customers who emphasize environmental, safety, and employee welfare elements, and the financial sector, which is beginning to impose certain compliance conditions on sectors seeking financial facilities. This includes listed companies that have started using ‘Integrated Reporting’ reporting and full compliance with ISSB reporting standards that emphasize their supply chain ecosystem from among SMEs through ESG data and risk reports. If not prepared, SMEs will be threatened.

Recent 2023 MIA International Conference on the topics of “EQUIPPING SMES FOR SUSTAINABILITY – THE ROLE OF SMPS” Moderated by: Mohamad Faisal Abdul Malik, Vice President and Chairman of SMPC of MIA. Panellist:  CA. (Dr.) Debashis Mitra, Immediate Past President and Council Member ICAI. CA. Dayaniwas Sharma, Council Member ICAI. CA. Sripriya Kumar, Council Member, ICAI. Dr. Nurmazilah Dato’ Mahzan, Member of the IFRS Foundation Integrated Reporting and Connectivity Council (IRCC)

According to 2021 OECD report on Facilitating the green transition for ASEAN SMEs. The Small and Medium Enterprises (SMEs) make up the vast majority of firms and provide the majority of employment (OECD/ERIA,2018[3]). They are also responsible for a significant portion of industrial pollution, and they are less heavily regulated than large enterprises. The environmental performance of SMEs will thus be critical to putting ASEAN economies (and most others around the world) onto a more sustainable development path.

SMEs face unique challenges in adopting greener practices. – access to finance, regulatory barriers, and information deficits. There are also additional barriers to SMEs looking to go green.

Let’s take a look from Malaysia’s point of view. The majority of SMEs (mid and big) are unaware of this, let alone of its implementation. Even public interest organizations go to big corporations for assistance.

SME Association secretary-general said up to 90% of SMEs were still unprepared to make the move given that they are still under pressure to recover losses incurred during the periodic lockdowns to curb the spread of Covid-19 in 2020 and 2021.  24 FMT Business report cited Sustainable Finance Institute Asia Ltd statement that 80% of MNCs had already made plans to remove suppliers that failed to meet their carbon transition target by 2025, and as a result Malaysia stood to lose up to US$65 billion (RM291.6 billion) in revenue.

For SMEs, the readiness to embrace green business practices also depended on their profitability.

Mohamad Faisal Abdul Malik, Vice President of the Malaysian Institute of Accountants (MIA) discusses why SMPs and SMEs should prioritise sustainability in order to enable their business continuity and be future fit in an increasingly challenging environment.

Session was featured by RTM1 in Berita Tengahari:

For more information on MIA’s Initiatives for SMPs, please visit https://mia.org.my/…/public-practice/initiatives-for-smps/

Our Governance and risk leader provides advisory, mentoring, and training for commercial organisations conform with the prudent management. Reach us at admin@faisalmalikco.com