Environmental, social and governance (ESG) criteria are a set of standards that socially conscious investors use to screen a company’s operations. Companies can also use the ESG frameworks to develop strategies which allow for financial sustainability and value creation. These ESG criteria and initiatives are aligned to the United Nations’ Sustainable Development Goals. Therefore, shortfalls in the adoption of ESG standards and practices would impair a country’s achievement of the SDG by the target year of 2030.

In Malaysia, ESG issues has in the spotlights after companies such as Top Glove, Sime Darby Plantations, and FGV Holdings were alleged to have cases of forced labour practices in their use of foreign labour. In early 2021, the Employees Provident Fund (EPF) which is the largest pension fund in Malaysia announced their plans to make all investments based on ESG practices by 2030 believing that this strategy would make its holdings more resilient against future market crashes.

There are three critical components to ESG, which are the environmental aspect, social aspect and governance aspect.

Environmental aspect considers how the company acts in its role as a steward of nature. This would include elements such as energy use, waste management, pollution and resource conservation. Other possible issues include raw material sourcing such as whether the company uses fair trade or organic ingredients, or biodiversity practices among the land it owns or controls. This environmental criterion is used to assess the level of environmental risk and how companies are able to manage these risks.

Social aspects cover a large array of issues which has to do with social relationships. This would include how companies manage their relationship with stakeholders of the company, which includes the employees, suppliers, customers and the general community at large.

Governance is concerned with how the company is managed by the executive management and board of directors. This would include issues related to the company’s leadership, internal controls, executive pays, audits and shareholder rights. Financial and accounting transparency and honest financial reporting are often considered to be key elements of good corporate governance.