This article first appeared in The Edge Malaysia Weekly on April 17, 2023 - April 23, 2023
It was 9am on a Wednesday, a work day, and yet a group of hikers had already gathered at the car park outside the Shah Alam Community Forest (SACF). Along the two-hour trek through the 174ha of forest, more hikers were seen, many of whom were trying to get to the famous “mirror lake”.
“[The community volunteers] have been putting up the yellow signs [for directions] since the beginning … Before this, those who frequented the trail were mostly mountain bikers. But since the trail network was put up, thousands of people visit the forest every weekend,” says Lim Teckwyn, a forestry and natural resources consultant who is part of the SACF volunteer committee.
As Lim and Alicia Teoh, another SACF volunteer, hiked the forested trail and fixed the signboards, they pointed out results from a recent biodiversity survey done in the area.
“The Indian civet, which is a ground dweller, appeared on several camera traps. The most exciting find was the tapir population here,” says Lim.
Just outside the SACF parking lot is a road sign warning drivers of crossing tapirs. Other animals captured on camera include flying squirrels and the leopard cat.
At one point, they stopped to listen to a gibbon sing. “Throughout their lives, gibbons maintain their families by singing to each other in the morning. It’s quite special,” Lim says.
It is fascinating to consider that a forest, nestled within housing estates and other developments, can host such a diverse range of flora and fauna, while also serving as a popular recreation spot for Malaysians.
The sight of crowds at forest trails in the Klang Valley is nothing new to regular hikers. On weekends, popular spots like the Bukit Kiara Forest Reserve and the Kota Damansara Community Forest are packed. These trails are often managed by volunteers from the community.
In recent years, however, several communities have been fighting against efforts to develop these green spaces. Some of these trails are in forest reserves, and community members — like in Taman Rimba Kiara, the SACF and in the Kuala Langat North Forest Reserve (KLNFR) — have protested or taken legal action against the government for attempting to develop these forest reserves.
This tussle between communities, the government and businesses is interesting to consider from an environmental, social and governance (ESG) perspective. Natural forests, including those in urban areas, are important for the ecosystem services they provide — clean air and soil retention — and also significant for communities who rely on them for resources and recreation.
From the governance angle, questions about the government’s responsibility in protecting forest reserves and following due procedures come into play.
In conjunction with Earth Day on April 22, ESG approached various parties to get their thoughts on this question: Are projects that encroach into urban forests against the principles of ESG? How can the need for economic growth and sustainability be considered?
“By the time the land is given to a property developer, it’s often too late. If it’s inside a forest reserve, the land should remain in public hands and should never have been alienated. Secondly, even if it’s now owned by a private individual or company, they cannot ignore the local plan,” says Lim.
He points out a recent case in Penang where residents successfully challenged a hillside development project approved by the city council for Sunway (City) Penang Sdn Bhd. “That case makes it very clear that if the area you own is zoned as an environmentally sensitive area, you still have limits on what you can do.”
In August 2022, the SACF Society and non-governmental organisation (NGO) Peka Malaysia filed a judicial review against the Selangor government for the de-gazettement of 406.22ha of the Bukit Cherakah Forest Reserve, which includes the SACF. The application was dismissed by the court last November, but the SACF and Peka have filed an appeal.
The government is alleged to have backdated the de-gazettement of the SACF reserve to 2000 and only making this public in May 2022. Lim adds that this was also done without holding a public inquiry, which is required under the law.
The public inquiry is important. “In the KLNFR, the public inquiry created such a groundswell of opposition that the state government was forced to back down. But the menteri besar has not re-gazetted (the KLNFR) yet,” he says.
The attempt to de-gazette the KLNFR’s forest reserve status in 2020 caused an uproar, as it comprises peatland swamps, hosts endangered species and is home to some 2,000 Orang Asli, according to reports.
Most of the SACF is owned by the Selangor State Development Corporation (PKNS) and the rest by the state government. Roads, cemeteries and commercial developments are planned for the area, reports indicate. ESG has reached out to PKNS for comments but it has not responded.
(Top) Along the SACF trails are a series of signboards with QR codes that visitors can scan with their cellphones to access a child-friendly story about tapirs (Above) PKNS says it will keep 20% of the SACF as its community forest
Are ‘green’ developments greenwashing?
Residential developments that are close to nature are a popular selling point for developers now. Of course, it would be ironic if the developments involved “illegal” deforestation in the first place, especially if this is contested by local communities.
“In a way, it’s a good sign because it shows that they know that’s what the market wants. We’ve traditionally seen forests as dirty and dangerous, but this trend indicates that people do like to live next to nature,” says Lim.
While avoiding defore–station of forest reserves is the optimal step, Lim does not discount the actions that some developers have been taking to reduce their impact.
“Just north of here, you have Sime Darby Property working with the [NGO] Tropical Rainforest Conservation & Research Centre. They have a nursery focusing on [saving] endangered tree species,” he says.
Setia Eco Park by S P Setia Bhd, which has a residential development right next to the SACF, has also engaged with them to ensure that hiking paths are accessible. He says, however, that the public should in general be sceptical of claims by companies to be “green”.
Regardless, property developers are nowadays under pressure to conduct biodiversity assessments and avoid deforestation.
Businesses can be more proactive in reducing their environmental impacts.
“Singapore has a good example. It is trying to establish a [natural] way to ensure that even though there is concrete underneath, there is a tree canopy for wildlife to move from one end of the island to the other. You have to be sensitive to the ecological corridor,” says Teoh.
An increasingly common solution by developers is to set aside part of the land as forest trails. Last year, PKNS signed a memorandum of understanding with Universiti Teknologi Mara to preserve 34.5ha of the SACF (around 20%) as a community forest.
“We emphasise the ecological impact as well. It’s not just recreation, because people can just go to a park and walk in circles. This is a teaching forest for future generations to be more mindful about sustainability,” says Teoh.
How much forest do we need?
The biodiversity in a natural forest is many times that of a manicured park, thanks to its dense tree cover, different layers of vegetation and diverse species, says Tapan Kumar Nath, professor at the School of Environmental and Geographical Science in the University of Nottingham Malaysia.
“A report from the US estimated that an urban green space has the capacity to absorb 25.1 tonnes of carbon per hectare. But in natural forests, it is 53.5 tonnes of carbon per hectare that are sequestered,” says Tapan.
How much natural forest is needed in an urban area?
“There are some research articles that say we need to conserve at least 30% of green spaces in urban areas. The World Health Organization has said that we need a minimum of 9m2 of green spaces per capita,” says Tapan.
The peak of Bukit Dinding offers no views but is nevertheless popular with hikers, runners and mountain bikers
The ecosystem services provided by natural forests are vital, especially in regulating temperature, maintaining air quality and retaining rainwater, thus preventing soil erosion, landslides and flash floods. With more frequent and intense rainfall expected due to climate change, forests in urban areas will become essential.
“There is research that compares temperatures in urban and non-urban areas, and it is around 3°C to 4°C. Urban areas have become heat islands,” says Tapan.
Additionally, “researchers in Bangladesh looked at the quantity of particulate matter (PM) in different places and found that it is significantly lower in dense, urban green spaces … PM has heavy metals and is a risk to our health”.
From the “S” (social) perspective, having accessible urban forests enables people to engage in physical activities, which reduces health risks.
“There was a study that recorded that parks and green spaces contribute to US$2 billion in reduced health costs,” he says.
Another crucial factor to consider in Malaysia is that indigenous people often live and rely on forests, Tapan adds.
“Policymakers and developers probably don’t fully realise the importance of having urban green spaces because their mind is [focused] on how they can make more profits. But I think we need to come out of this thinking and, if necessary, have more people conduct research on this and provide evidence.”
How will this impact ESG scores?
Ratings agencies and fund managers take into consideration adverse news when assessing the ESG performance of companies. With non-governmental organisations and communities calling out companies for deforestation activities, how will this impact their ESG ratings?
ESG reached out to ratings agencies and fund managers for their perspectives. Generally, controversial ESG events will affect the ratings of these companies. But if the companies are taking appropriate mitigation actions, it can change the outcome.
“Development of real estate that involves clearing of forests is generally regarded as contributing to climate risk by environmental destruction. A developer that has no mitigation effort would likely have its ESG score penalised and its valuation multiple adjusted downward to reflect a higher risk of potential litigation and negative impact on its reputation and branding,” says Koh Huat Soon, regional head of research at Maybank Asset Management Sdn Bhd.
When controversies happen, fund managers will contact the company to understand the circumstances. But whether the ESG ratings will be negatively impacted depends on if the remedial measures put in place are effective, he adds.
ESG also posed this question to the Employees Provident Fund (EPF).
“The EPF’s assessment on biodiversity is guided by its Climate Change Policy and relevant Priority Sectors Policy, which outline several expectations that companies are required to comply with. Failure to comply with these expectations will impact the ESG-compliant status of the company,” says the EPF in an email response.
It will engage with its investee companies to address issues arising from non-compliance.
“As a responsible investor, the EPF considers all material negative news or controversies when assessing the ESG compliance of our investee companies. We recognise that controversies can harm a company’s reputation and financial performance, which could ultimately affect shareholders’ returns,” says the EPF.
“However, the EPF also assesses how the company is addressing and rectifying these issues. If the company is making significant improvements towards a more sustainable business operation, we take that into account as well. Our goal is to encourage and support sustainable practices among our investee companies, while also considering their financial performance and reputation.”
Ratings agencies look at controversies
ESG posed this question to several of the biggest ESG ratings agencies. Chris Terzis, senior director of client relations for Asia-Pacific ex-Japan at Sustainalytics, explains that its ESG Risk Rating will consider deforestation risks via several indicators and material ESG issues.
“These indicators include areas such as stakeholder governance, community relations, environmental and social impact of products and services, and land use and biodiversity,” says Terzis.
For MSCI, a company needs to be directly or indirectly implicated in events causing harm for a controversy to be added to its profile.
“We consider companies to have direct involvement in an ESG controversy if the negative impact is directly attributed to the company’s actions, practices, products or businesses or a joint venture in which the company has significant control. Indirect involvement typically arises through supply, subsidiaries or partners,” says MSCI.
Allegations on deforestation may include habitat damage and depletion of natural resources. Community impact allegations include a company’s substantial impact on a local community through land use disputes and others.
Such risks are not deemed to be financially material for sectors like real estate. In that case, “such impacts are primarily captured through our Controversies product. However, in situations where we see repeated allegations or controversies, MSCI ESG Research may suggest adding a company-specific key issue to capture such risks”, says MSCI.
The company has a team of analysts who assess the severity of the controversy cases. It gathers data from media, academic, non-governmental organisations, regulatory and government sources to supplement those disclosures, it adds.
This highlights the importance of assessing situations from all angles. Deforestation is harmful to the environment yet it may create economic opportunities, says S&P Global Rating’s sustainable finance analyst, Bertrand Jabouley. At the same time, it could increase flood risk and soil degradation.
“We do factor protests and other controversies in our analyses of companies and try to understand their intricacies beyond the headlines. If there are significant community protests related to a deforestation project, then it becomes clear that deforestation has a negative social impact,” says Jabouley.
“In cases like this, we may negatively adjust our views on how a given company manages its relationships with local communities, and possibly its governance as well, especially if it seems profit maximisation overshadows any other consideration.”
Banks pressured to scrutinise deforestation
Deforestation has always been a tricky issue for banks, which often get called out for financing such projects. In Asia, this scrutiny is typically focused on palm oil and logging projects.
In response, some of the major banks in Malaysia have introduced a “no deforestation, no peat and no exploitation” (NDPE) policy, although it is more applicable to forestry-related sectors. ESG approached some banks to understand how they would manage cases of deforestation.
One of the common points that emerged from their answers is that activities associated with deforestation are considered high risk and require additional assessments. Free, prior and informed consent (FPIC) from local communities is important.
RHB Bank Bhd, for instance, is guided by its ESG risk assessment (ERA) tool that “examines various matters, including but not limited to development on steep terrains, forest reserves, indigenous land, solid waste and wastewater handling, energy efficiency and greenhouse gas emissions”, says Norazzah Sulaiman, group chief sustainability and communications officer.
The bank has adopted the NDPE policy and takes into consideration incidents involving deforestation and violation of community rights, she adds.
“Involvement in such activities or poor sustainability practices would have a detrimental effect on the ESG score of property developers, consistent with our credit policy as well as our ERA tool. This is in line with our view that the protection and conservation of forest, green spaces and high biodiversity areas are very important in building a sustainable future.”
Hong Leong Bank Bhd (HLB) has a similar strategy. It emphasises engagements with clients and categorises corporate customers based on their environmental and social risks.
“Notwithstanding the above, we will not be financing any activities that are involved in illegal activities, including illegal deforestation, and any activities that result in significant conversion or degradation of high biodiversity value areas,” says Domenic Fuda, group managing director and CEO of HLB.
The bank incorporates ESG principles when scoring development projects, he adds, and performs sustainability due diligence based on green certifications.
Meanwhile, CIMB Bank Bhd’s NDPE policy applies to the forestry, rubber and palm oil sectors. It will not finance or facilitate capital raising for companies that are directly involved in new conversion of high conservation value areas or that do not have a commitment to respect FPIC of indigenous communities, among other things.
What about those in non-forestry sectors? Gurdip Singh Sidhu, group chief people officer and group chief sustainability officer of CIMB, says they carry out risk assessment on all development projects from a deforestation lens.
“We have prioritised the focus of our compliance checks on deforestation, and conduct periodic reviews of ESG contraventions on projects that we finance through third-party providers, news agencies and civil societies. Where relevant, we work with our clients to develop time-bound action plans with progress checkpoints at least once a year,” says Gurdip.
The bank also runs its sustainability due diligence process on developments involving the conversion of primary or secondary forests, and includes requirements from its NDPE and human rights policy.
Additionally, “we conduct assessments on climate risk and landslide-prone areas. Depending on the risk severity, we may request that the client commit to time-bound action plans or, in critical cases, we may turn down the financing requests”, adds Gurdip.
Fear of landslides
The peak of Bukit Dinding, one of the highest hills in the vicinity of Kuala Lumpur, offers no views. Still, that has not deterred crowds of hikers and runners from visiting the hill on weekends. But they have to be careful when wandering into some of the forest trails where there are mountain bikers.
Parts of the hill are bound to be developed, since it is not a forest reserve and the land is owned by different companies.
But when it was known that one of the developers, Nova Pesona Sdn Bhd, planned to build two blocks of condominiums, residents near the hill filed an application for judicial review against the approval of the development.
The residents say that the hill is a landslide-prone area, and that the plan to build a high-rise condominium there is dangerous.
Last year, another group of community members formally registered a society called Friends of Bukit Dinding (FoBD), which is modelled after Friends of Bukit Kiara (FoBK). FoBK was successful in fighting the development of Taman Rimba Kiara several years ago.
“The aim of FoBD is to preserve this hill … The argument is that this hill is very steep. We don’t want a repeat of the Highland Towers collapse, which is not too far from here,” says Tan Chee Wee, treasurer of FoBD.
The Highland Towers tragedy in 1993 was one of the worst high-rise building collapses in Malaysia. After 10 days of rain, the building collapsed due to a landslide. Some blamed this on land clearing at a nearby site. In fact, the Ulu Klang area has witnessed several major landslides.
“If you clear one part of the hill, soil movement on the other side might cause landslides or flooding. There are a lot of residents [downhill] in Setiawangsa and Wangsa Maju,” Tan says.
ESG reached out to Nova Pesona, which responded that Bukit Dinding is a remnant of a rubber plantation and is not a virgin forest or forest reserve. It says the land has been zoned as residential under the Kuala Lumpur City Plan 2020, which was gazetted in 2018.
As for slope stability, the company says hillside developments, when done right, improve the safety of the hill and adjacent areas. It says horizontal drains will release groundwater build-up.
It adds that 25% (13ha) of its land will be surrendered for a recreational public park and green zone, which is higher than the minimum standard of 5% as stated by the Kuala Lumpur City Hall (DBKL). “This will be enjoyed by and for the benefit of the surrounding community,” it says.
The company says it carried out three engagements with residents in the area and that it has “complied with the stringent requirements of DBKL on this development”.
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