Tuesday 06 Jun 2023
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This article first appeared in City & Country, The Edge Malaysia Weekly on March 13, 2023 - March 19, 2023

Malaysia’s industrial parks of yesteryear were often dirty and poorly managed, sending billowing clouds of pollutants into the air. However, they have evolved, even to the point of taking on environmental, social and governance (ESG) commitments to reduce carbon emissions, contribute to society and operate responsibly. 

“Traditionally, conventional industrial facilities were developed in industrial estates with little to no central management. The leap into Industry 4.0 has contributed to the emergence of centrally managed, well-planned industrial parks. Industrial parks have since taken on various forms; for example, agro-industrial, eco-industrial and smart industrial,” says Knight Frank Malaysia Real Estate Research & Consultancy executive director Amy Wong.

“As ESG awareness continues to increase, we expect to see a trend of flight-to-quality that will influence occupier demand and requirements. Green-rated industrial developments have seen solid growth over the years — providing strong evidence of the transition towards greener, sustainable concepts in industrial developments. The gross floor area of Green Building Index-rated industrial developments (new construction and existing buildings) has grown significantly from approximately 400,000 sq ft in 2013 to 9.4 million sq ft in the third quarter of 2022,” she adds.

According to JLL Property Services (Malaysia) Sdn Bhd country head Y Y Lau, “Malaysia boasts more than 600 industrial parks, with each adopting a unique approach to sustainable development, including specialised parks for halal, high tech and logistics. The industrial sector is the second-largest energy consumer, making it imperative to prioritise energy efficiency and renewable energy measures. Despite this, 45% of Malaysian companies have yet to allocate budgets for sustainability initiatives, as reported by the UN Global Compact Network.”

Lau adds that the ESG agenda is still relatively new for the average Malaysian industrial park. While it lags behind the office sector, she believes that the industrial sector “will be next to widely adopt the [ESG] concept as corporates are proactively applying these [ESG] principles”.

Wong: Green-rated industrial developments have seen solid growth over the years — providing strong evidence of the transition towards greener, sustainable concepts in industrial developments (Photo by Knight Frank Malaysia)

Challenges to ESG adoption

As more and more companies push for ESG compliance, there remain some challenges within the Malaysian industrial sector that need to be addressed.

“The industrial sector is often labour-intensive with a substantial energy and carbon footprint, thereby making it more susceptible to workers’ welfare issues and high energy and resource consumption,” says Wong.

“Re cognising these issues, leading companies and industrialists have begun pledging and implementing initiatives towards carbon-neutral operations, on top of elevating social and governance standards. Additionally, some have gone beyond this by implementing the same requirements throughout their entire supply chain (operations), requiring their business partners to commit to decarbonisation as well.

“These ESG issues are now being addressed through the development of proper master-planned industrial park developments that are complete with central management, green features and certifications, renewable energy (like solar panels) to counter the carbon footprint, as well as adequate governance on workers’ welfare and business conduct. Examples of these benchmark industrial park developments are Elmina Business Park and i-Park @ Senai Airport City,” Wong adds.

Says Lau, “Sustainability and clean energy are at the forefront of the Malaysian industrial sector, which is a major energy consumer. Solar panels offer an opportunity to reduce dependency on the electricity grid, and while many industries rely on steam, there are some that still rely on fossil fuels for their boilers.

“Some industrial parks have access to natural gas pipelines that can lower steam costs and emissions, though this is not yet available across all parks.

“Construction methods and materials are moving towards a more sustainable approach, with new developments including low-emitting paint, building insulation, skylights and rainwater harvesting. To attract socially conscious companies and employees, some industrial parks are including hostels and recreational facilities in their offerings,” she adds.

Lau: To attract socially conscious companies and employees, some industrial parks are including hostels and recreational facilities in their offerings (Photo by JLL)

Impact on bottom line

While taking the ESG route may require an overhaul or the tweaking of a company’s business operations, in the end, the bottom line will be affected.

“Potential tenants are now factoring in certification and ESG performance in their site assessment, meaning that non-performing buildings may be excluded by companies with net-zero carbon commitments. The reduced demand could eventually lead to a ‘brown discount’,” says Lau. A brown discount is when a building loses its value or is “discounted”.

“Multinationals, which are prominent in Malaysian industrial parks, are responding to the rising demand for sustainability and aiming to become carbon neutral by 2030 — which means that their office and industrial facilities must comply with this principle. We can expect a significant transformation towards green practices in response to tenant aspirations.

“Adopting ESG principles as a landlord or investor has a tangible impact on financial performance. Asset valuation during acquisition due diligence may see a discount on assets that are not up to par, while increased liquidity and wider availability of financing can result from meeting ESG requirements for occupied buildings and invested assets.

“Many large financial institutions have embraced green financing, making it easier for projects and companies with positive environmental and societal impact to secure financing. In response to the growing demand for green finance, local banks are also developing green products and services,” says Lau.

According to Wong, one industrial concept is providing the stepping stone for others to follow and provide a sustainable industrial product.

“The concept of eco-industrial parks [EIPs] has gained traction as an instrument to implement an inclusive and sustainable industrial development in line with the UN’s SDGs [United Nations’ Sustainable Development Goals].

“EIPs are essential building blocks on the adoption of the circular economy approach, which can be defined as an approach based on phasing out waste and pollution, keeping products and materials in use, and regenerating natural systems, some of which can be automated as well.

“This big shift from the traditional ‘take, make, waste’ industrial model hinges on closing resource loops and aims to decouple economic growth from finite resource consumption and environment impacts, thereby improving the prospects and competitiveness of the industrial developments. Some benchmark examples of EIPs are the Industrial Zone NÖ-Süd, Austria, and the Ulsan Mipo and Onsan Industrial Park in South Korea,” she says.

Lau concurs, adding that, “Many corporations realise that it is too costly to neglect the impact their production facilities have on the environment and society. After several companies lost drastically in company valuation and reputation when it was revealed to the public that they were damaging the environment, others have learnt a lesson and decided that it is too risky to disregard ESG principles.”

Ashwin: A green industrial park should provide sufficient infrastructure to facilitate this aim and promotional activities should also be conducted to raise awareness (Photo by Zahid Izzani/The Edge)

Local certification and its challenges

Local certification entity GreenRE Sdn Bhd provides guidance to companies looking to build sustainable industrial premises. According to its executive director Ashwin Thurairajah, there are two forms of GreenRE certification. 

“The first is a township certification, which is used to benchmark the master planning of an industrial park across environmental and social considerations. The focus of the certification is on infrastructure and public amenities. 

“The second is an industrial certification that is performance-based benchmarking of an industrial facility. The focus is on developing a resource-efficient, low-carbon and enhanced indoor environment quality industrial building.” 

Ashwin adds that ideally, the assessment for either the industrial park or standalone facility should be carried out as early as possible to ensure the maximum impact in influencing and improving the project’s development (see sidebar).

Ashwin highlights that for environmental performance, development of industrial parks is regulated by various government agencies, which is considered in the GreenRE assessment when reviewing an industrial park or facility.

He notes that today, industrial parks have become self-sustaining townships with green and blue spaces (water bodies) with a healthy lifestyle component mixed in that encourages walking and cycling and minimising urban heat island effect. 

“Also, adopting circular-economy practices, especially recycling and salvaging waste throughout the lifecycle of the industrial park, is vital to reducing our demand for virgin resources. A green industrial park should provide sufficient infrastructure to facilitate this aim and promotional activities should also be conducted to raise awareness,” he adds.

Ahmad: There are a number of companies in industrial parks that need to commit to ESG, so as to be able to do business with the ‘big boys’ (Photo by Ahmad Izdihar Supaat)

Doing its part to promote more sustainable industrial parks and premises — particularly those of SMEs (small and medium enterprises) — is the Malaysia Green Building Council (mGBC), a non-profit organisation that promotes sustainable buildings in Malaysia.

“mGBC has set up a task force to spread awareness with priority to our industrial partners and members, with the option of expanding the outreach to a greater SME audience, especially those who are vendors to listed companies. mGBC will soon launch an ESG SDG programme in this quarter of 2023, which was initiated in 2021 by our current president Sim Chee Liang,” says mGBC past president (2021-2023) Ahmad Izdihar Supaat.

“The objective is to spread awareness and assist our stakeholders in kick-starting or bringing their ESG policies and programme up to speed, which is sacrosanct to aligning with green economy market demand.”

The purpose of focusing on SMEs is to encourage them to level up as more companies, especially those with an international presence, become more ESG-focused.

“For those doing business with companies listed on Bursa Malaysia, it is imperative that these firms are ESG [-compliant] as it is a requirement for listed companies to have vendors/suppliers whose respective ESG agenda is aligned with their own. There are a number of companies in industrial parks that need to commit to ESG, so as to be able to do business with the ‘big boys’. 

“Thus, SMEs need to be aware and in turn adopt ESG practices that align with their customer’s (stakeholder’s) ESG agenda. The urgency of getting sustainability ready and having an ESG foundation is the main challenge for all SMEs to remain relevant in this present and future green economy,” says Ahmad.

In addition to having to level up so that SMEs can be part of a sustainable supply chain, there are some challenges that continue to hinder the growth of ESG commitments.

According to Ashwin, “Among the challenges faced are a lack of awareness, differing standards for evaluation of ESG compliance and limited economic incentives for investment in greener industrial parks. The focus of GreenRE certification is primarily environmental with carbon emissions reduction prioritised.

“Nonetheless, it is heartening to see many companies realigning their business strategies towards ESG considerations. Companies are referring to proven case studies of thriving green industrial parks both locally and regionally to balance the trilemma of profit, people and planet.”

He adds that the benefits will outweigh the challenges in the long term because of the positive impact on the environment, people and business operations.

“Benefits range from improved stakeholder perception and productivity of workforce through to future-proofing businesses for impending carbon taxes and, eventually, the right to trade goods with certain countries (for example, the European Green Deal). More importantly, greener industries are doing their part to mitigate climate change,” says Ashwin.

He adds that government initiatives and support are needed to ensure that ESG commitments and initiatives are implemented and executed properly. 

Future outlook

What does the future hold in relation to ESG for industrial parks and facilities? Our experts provide some key highlights.

Says Knight Frank’s Wong, “Looking forward, we expect growing ESG demands to drive the new generation of industrial developments, comprising master industrial developments that are efficiently planned and managed as a complete, self-sustaining industrial ecosystem that healthily integrates with its immediate and wider environment. 

“Fundamental sustainability transformation is becoming mainstream in the built environment and the ESG agenda is set to create a positive impact in the industrial real estate segment, with a resultant larger multiplier effect on the residential and commercial asset classes.”

For JLL’s Lau, “The key driver shall be corporate world transformation to become carbon neutral by 2030. This principle shall include not just office, but also wider built environment — logistics and industrial.

“The push for greener businesses has led to a growing emphasis on sustainable design in new industries, while older industries must retrofit their equipment for increased energy efficiency. Investors are now seeking companies with a strong record in ESG measures, as these measures help future-proof the business from potential ‘brown taxes’.”

For mGBC’s Ahmad, “Malaysian commerce would be more attuned to good governance principles that put the environment and people first as a guiding principle in its operation. The ESG adoption and practice will greatly aid the country in meeting its pledge and target on SDGs, and at the same time change the sustainability landscape.”

And last but not least, GreenRE’s Ashwin says, “The outlook is positive as we are one of the leading industrial hubs in Southeast Asia. Several international companies that have set up long-term operations in Malaysia are acting as agents of change with their commitment towards developing greener facilities. These provide useful case studies for local players. Further, the banking sector in Malaysia is increasingly providing financing incentives to encourage businesses in the adoption of new technologies.”

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