In recent years, we have seen a rapidly growing momentum on corporate climate action. Investors, customers, regulators and other key stakeholders increasingly expect companies to undertake ambitious efforts to minimise their environmental impact and reach the goals of the Paris Agreement.

In fact, there is also a growing expectation for small and medium enterprises (SMEs) to implement environmental, social and governance (ESG) initiatives and be transparent about their performance. This will be increasingly important for SMEs to maintain their competitive advantage and stay ahead of compliance requirements.

Unfortunately, despite the Malaysian government’s efforts in educating businesses on the importance of ESG, the country’s SMEs still lack the required awareness of its significance.

Failure to adapt to the times could see these businesses lose their competitive advantage and market share, and they would not be able to be part of the supply chains of larger corporations, especially when it comes to exports. This is because multinational corporations are increasingly requiring their suppliers to adhere to ESG standards and have the required certifications.

Thus, SMEs that take the initiative to “green” their operations would have the upper hand, not only in being able to attract more customers but also in making their businesses more sustainable.

Implementing sustainability practices is now business-critical for every company, whether large or small. This brings challenges but also opportunities.

When it comes to ESG, most companies assume that it is just good for the environment and to reduce climate change. However, what these companies fail to see is that it also has a direct impact on their business operations.

Apart from providing SMEs with a competitive advantage, investing in ESG practices would also help them future-proof their business.

There is increasing pressure on organisations of all stripes to adopt such practices, most notably from economies such as those of the European Union and the US. Countries and companies that are not ESG-compliant are likely to find themselves facing embargoes or higher barriers to entry.

In contrast, those that make the integration of ESG practices a priority would have more opportunities to expand into new markets in such high-income countries, where consumers often willingly pay a premium for products that meet green standards. This is on top of benefits such as being able to make a positive social and environmental impact, elevating a company’s reputation, increasing customer satisfaction and improving stakeholder relationships.

Furthermore, as financial institutions move full steam ahead with ESG to mitigate climate and environmental risks, SMEs that are not on board with the sustainability agenda will face difficulties in accessing capital.

For SMEs, sustainability practices should be woven into their mission statement and purpose as a company. Many firms would look at their internal operational sustainability first — for example, using less energy or paper, or producing less waste. As sustainability develops within a company, it will grow to encompass risk management and the needs of stakeholders, from customers and suppliers to investors.

With SMEs still experiencing the after-effects of disruptions caused by the Covid-19 pandemic, the government understands that companies are mainly focusing on business survival, of which cash flow is a key issue, while neglecting non-business-related matters without near-term benefits.

Thus, the government, through Belanjawan 2023, has introduced several financing initiatives to encourage green practices in businesses.

Bank Negara Malaysia is providing up to RM2 billion in financing facilities to support sustainable technology start-ups and help SMEs implement low carbon practices.

With the whole world transitioning from a carbon-heavy economy to a green economy, businesses need to get with the times by developing products and services that can address the needs of a more sustainable world. Thus, this RM2 billion in financing facilities will go a long way in supporting start-ups in their journey to achieving such goals.

Meanwhile, Khazanah Nasional Bhd is providing RM150 million to spur the development of environmentally friendly projects, including supporting the carbon market and reforestation.

To support this drive even further, the Green Technology Financing Scheme (GTFS) has been enhanced, with the guarantee value increased to RM3 billion until 2025. The GTFS is a special financing scheme introduced by the government to support the development of green technology in Malaysia. The funds are available to finance green technology in various sectors, including energy, water, building and township, transport, waste and manufacturing.

While ESG practices are often associated with larger firms and global corporations, its significance for SMEs cannot be underestimated. With Belanjawan 2023 having a strong emphasis on ESG activities, the stage is set for SMEs to embrace sustainable practices and unlock their true potential.

Companies with a robust ESG record tend to have a stronger corporate brand value, which would attract both good quality employees and investors. Such companies also tend to perform better financially through a greater focus on innovation, operational efficiency and risk management.

Conversely, firms that fail to act on their ESG aspirations could risk losing investor interest, as well as alienating customers and top-notch talent, especially among the younger generation.

Ultimately, ESG will only become more important to the success of any business, including SMEs. Companies that fail to meaningfully incorporate sustainability practices in their operations and supply chains risk becoming irrelevant. Meanwhile, SMEs that prioritise ESG now can look forward to a more successful and sustainable future.