Saturday 22 Jun 2024
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This article first appeared in The Edge Malaysia Weekly on December 25, 2023 - January 7, 2024

The pressure to decarbonise and adopt sustainability is not the same for every industry. Some are pushed to do more because they inherently have high emissions while others are driven to comply due to customer demands or regulations.

But if the pressure is too much and there aren’t sufficient resources to help those that are left behind, there will be pushback.

This can already be observed in some countries, where the pressure to decarbonise, coupled with political attacks, has fuelled anti-ESG (environmental, social and governance) movements. In Malaysia, rumblings can be heard from some quarters, especially due to the European Union’s (EU) Deforestation Regulation that will impact the palm oil sector.

In this cover story, ESG speaks to representatives from three different industries to understand their perspectives on the transition.

 

Can the oil and gas sector ‘go green’?

The oil and gas (O&G) sector understandably receives much pressure as the fight against climate change continues. The recent United Nations 28th Conference of Parties ended with an agreement to transition away from fossil fuels, which is the first time such an explicit statement has been made.

Obviously, this has consequences for Malaysia, which is dependent on O&G revenues. While the biggest company in this sector, Petroliam Nasional Bhd, has been investing in renewable energy and other low-carbon technologies, the concern lies with its supply chain or the oil and gas services and equipment (OGSE) industry.

These are the over 4,000 OGSE main contractors, subcontractors, specialists, consultants, vendors and agents, of which small and medium enterprises (SMEs) account for around 95%, according to the National OGSE Sustainability Plan.

The plan was released by the Malaysia Petroleum Resources Corporation (MPRC), which is an agency under the Economic Planning Unit, to advance the OGSE industry. Sustainability is one of the four strategic thrusts.

MPRC has come up with the National OGSE Sustainability Roadmap and will soon roll out a framework.

“The vision is to have a robust, resilient and globally competitive sector that will [ensure] we survive all these headwinds,” says Mohd Yazid Ja’afar, president and CEO of MPRC.

Low awareness among OGSE players

MPRC conducted a sustainability assessment on the top 100 OGSE companies in Malaysia by revenue in 2019 and found that the companies’ average score was lower than the regional group and global OGSE leaders.

The majority were ranked “low” on sustainability practices, which was due to smaller companies’ lack of financial and manpower resources as well as a lack of awareness of sustainability-related risks and opportunities.

Less than 50% of the companies had defined sustainability reporting and only 16% adopted clear, quantified sustainability targets.

“To survive is actually to be sustainable. Hopefully, they can see that with the energy transition, [they can understand it’s something] they can’t just ignore. The ‘why’ part has been more or less addressed. But they really need help in terms of how we’re going to do it, whether we have talent and resources, how much time it’s going to take and what it means,” says Mohd Yazid.

One possible reason why the Malaysian OGSE sector is behind its regional peers is because the smaller companies are more focused on the domestic market, he says, whereas their Singaporean and Thai counterparts had to manage the pressure to decarbonise from global customers.

But survivability is of utmost importance, especially for OGSE SMEs in a slow economy, which is now compounded by the pressure to transition away from O&G. A just transition that takes into account those who have fewer resources is needed, stresses Mohd Yazid.

“You cannot change your business overnight. We do recognise talent is still coming in and you don’t have enough resources. As long as we can demonstrate how we are planning to get there, [it can be accepted].”

Potential pathways for OGSE sector

As part of the sustainability framework, more guidance will be given to OGSE companies on transition pathways and sustainability disclosures, among other things. It also identifies 13 material topics for the OGSE sector.

It is the bigger OGSE companies, such as Yinson Holdings Bhd, that are more entrepreneurial and investing in green technology. It set up Yinson GreenTech, which has invested in an advanced hydrofoil system for electric vessels, e-bikes and swappable batteries, and autonomous technology for electric vehicles and vessels, among other things.

Some companies have also expanded into adjacent sectors by utilising their expertise in installing huge structures on and offshore.

“We have the skill to also fabricate huge structures. We can use the same set of skills to start installing offshore wind farms,” Mohd Yazid says, giving Eversendai Offshore, a subsidiary of Eversendai Corp Bhd, as an example. The company delivered its first European offshore wind renewable energy project in 2020.

But the lowest-hanging fruits are making the OGSE processes more energy efficient. Nevertheless, more assistance will be needed, whether it’s in terms of talent or funding. Mohd Yazid brings up the National Energy Transition Facility, which can be used for transition financing, and Bank Negara Malaysia’s Low Carbon Transition Fund.

Transition finance in demand

OGSE companies might feel left out of the transition as financial institutions become more wary of financing fossil fuel companies. As such, transition finance will be key to helping these companies on their journey.

Mohd Yazid says that transition takes time and OGSE companies should be able to demonstrate a clear strategy to transform.

MPRC plans to launch the framework early next year through engagement with industry players, regulators, government agencies and other stakeholders.

“Our focus is not just OGSE players or SMEs. We are also expecting financial institutions to dig in, understand what the road map is about and play a role. They are part of our committee,” he says, adding that MPRC will integrate the Simplified ESG Disclosure Guide released by Capital Markets Malaysia.

“We don’t want to reinvent the wheel. We’re also looking at i-ESG, the framework for manufacturing [companies].”

Mohd Yazid is looking forward to the government’s Long Term Low Emissions Development Strategy and working with industry players to upskill and reskill talent in the industry. “The other [item on my] wish list is to see more financing and awareness from the banking side,” he says.

 

Keeping SMEs as part of the supply chain

A lot has been said this year about how small and medium enterprises (SMEs) risk being cut out of supply chains if they do not adopt ESG and how they have potential to gain more market share if they do.

Some SMEs are already feeling the pressure, especially if they are suppliers to large companies that need to meet their own sustainability targets, whether on emission reductions or human rights.

“We have a member who was speaking to their client, a local manufacturer, and found that they were part of a supply chain with principals in France. Their principal asked them a year ago, ‘do you have plans to put in solar and electric vehicle charging as part of your infrastructure? If you do, great. If you don’t, then unfortunately, we’re going to have to find someone else,’” says Vernon Foo, chairman of the sustainability and circular economy committee for Small and Medium Enterprises Association Malaysia (Samenta).

“This is happening. We have SMEs in the food and beverage sector that are caterers and their clients are large public-listed companies with sustainability policies. They are only able to service these clients because they have biodegradable packaging as part of their offering.”

Different SMEs, different needs

But not all SMEs recognise the benefits of adopting ESG now, especially if they are struggling financially and their customers do not demand it.

That’s why it’s important to see SMEs across this spectrum and provide the right resources to them based on their needs, says Foo.

“Which category are we talking to? What is the support for those who are export ready, especially those in the manufacturing sector? These are the first ones who jumped on the bandwagon, followed by the medium and smaller players that are service providers,” he says.

Most importantly at this juncture, clarity in the country’s direction for ESG and the standards to follow is critical. He observes that ministries, agencies and banks seem to be working on variations of frameworks and standards.

“As a result, it creates mass confusion and no confidence in the need to adopt ESG at this time, given the lack of clarity unless they are directly affected by it. The popular answer right now seems to be that it’s not a standard nor is it compulsory, but it’s voluntary and a guideline instead, in which case there is no clear plan or benefits for SMEs to be the first adopters,” says Foo.

“Why don’t we agree to a set of standards that can cater to 90% of the market and places that we export to, followed by proper segmentation of SMEs?”

There should be better dialogues with different segments of SMEs and training programmes that educate SMEs on the basics of ESG. SMEs can take baby steps in the journey, depending on which segment they fall into.

They don’t need to do complete sustainability reporting from the get-go either.

“Perhaps consider starting with just two disclosures from each of the pillars. If you have a stronger presence in the environment, maybe disclose three or four there,” he says.

Funding for SMEs is, of course, critical. One of the biggest concerns for a SME is the financial implications of starting the transition. “Does it actually allow better access to key global markets?” Foo questions. He adds that the financial assistance should also cover areas like sustainability training and talent development, and solutions other than just solar panels and electric vehicles.

 

Many upcoming risks for manufacturers

Manufacturing companies in Malaysia would have read plenty of news about the many regulations that will impact them and witnessed how some companies have gotten into trouble due to allegations of forced labour.

The European Union (EU) human rights due diligence requirement, the European Green Deal, the German Supply Chain Due Diligence Act and the EU’s Carbon Border Adjustment Mechanism (CBAM), which came into force in May, are some of the examples given by Tan Sri Datuk Soh Thian Lai, president of Federation of Malaysian Manufacturers (FMM), when asked by ESG about the pressure faced by Malaysian manufacturers.

CBAM will affect exporters of iron and steel, cement, fertilisers, aluminium, electricity and hydrogen in the first phase. This will also impact those that are in the supply chain, which includes SMEs.

Other push factors are the expectation for half of Malaysian banks’ new financing to be aligned with green climate policies by 2026, changing customer demand for companies with good ESG practices and the government’s commitment to net zero emissions.

There is growing awareness among companies that strengthening ESG practices can increase business opportunities and create long-term value. But only half have adopted comprehensive sustainability strategies, he says.

“Capacity building, especially among the SMEs, is necessary to assist them with the ESG transition as it is now a requirement for exporters to Europe and the US, and soon will become a requirement for those seeking financing from local financial institutions or participating in government procurement programmes,” says Soh.

One-stop agency to prevent confusion

For Budget 2024, FMM proposed establishing a one-step agency and ESG fund to assist SMEs in kick-starting their ESG journey. “SMEs in general lack internal expertise and funding to undertake ESG exercises, which can be very extensive and overwhelming,” Soh says.

Although the proposal hasn’t been considered, “we do note that Budget 2024 provides a tax deduction for ESG-related expenses of up to RM50,000 per year of assessment. The Low Carbon Transition Facility of RM200 billion committed by financial institutions as well as the extension of the Green Investment Tax Allowance and Green Income Tax Exemption will help ease the transition cost,” says Soh.

To further accelerate the transition, the government can continue to provide an ecosystem to support industry efforts towards sustainability. He adds that the industry hopes to have close engagement and collaboration with the government and other partners.

“SMEs would certainly benefit should a one-stop agency be established to provide advice and references before embarking on any internal or external sustainability-related projects,” says Soh.

“As the subject of green growth and sustainable development is cross-cutting across ministries and agencies, it may cause confusion for the private sector on which agency to refer to, especially on initiatives or projects that require multiple agencies’ approval or in cases where overlapping jurisdiction exists.”

On the other hand, when the government is formulating the Climate Change Act and carbon tax, Soh hopes that the manufacturing industry will be consulted and engaged at all stages.

“The country must also strengthen the ecosystem that supports initiatives to reduce carbon emissions and take into consideration the cost impact on businesses, especially SMEs, before a carbon tax mechanism is adopted,” says Soh.

“Should the government decide in the future to implement the carbon tax, it should be at a low rate initially, with a gradual increase over time, and the collection from the carbon tax pumped back towards capacity building for the green economy. Most critical is that all these plans and proposals must be done in close consultation with industries.”

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