KUALA LUMPUR (July 29): Small and medium enterprises (SMEs) and mid-cap companies need to be proactive in engaging with environmental, social and governance (ESG) practices to prepare themselves for the carbon border adjustment mechanism (CBAM), said speakers at Hong Leong Bank’s 11th Sustainability Roundtable last Friday (July 26).

CBAM, which imposes a carbon price on imported goods into the European Union (EU), is set to take effect in 2026. This will impose additional costs on Malaysian exports, unless the country implements its own carbon pricing system.

“SMEs need to position their business as a Scope 3-compliant organisation, especially to large corporations, because this is one area where there’s still a lot of due diligence left to be done when these listed companies want to collect Scope 3 data. If you are ahead of the game in this area, you definitely would be able to gain market share from these companies,” said Ong Kian Meng, pro vice chancellor for external engagement at Taylor’s University.

Ong was one of the speakers at the roundtable, themed “Greening the supply chain: The Malaysian corporate sector and the global sustainability revolution: A win-win convergence” at Sofitel Kuala Lumpur Damansara.

SMEs need to start assessing whether they have the right tools and systems to provide data on the carbon footprint of goods covered by the CBAM to the EU. This data includes information about the greenhouse gas emissions associated with the entire lifecycle of a product, from extraction of raw materials to its final disposal.

While there is not a strict legal obligation to provide specific data to EU importers, the EU has increasingly emphasised the importance of doing so, if businesses want to expand their customer base in the EU.

“Companies need to upscale, educate their team about how to measure, track and monitor their GHG (greenhouse gas) emissions, and you have to provide a contact point for governance,” said Richard Baker, PwC director of sustainability and climate change, at the roundtable.

Malaysia’s steel sector is bound to be impacted by the CBAM as well. The country’s steel sector has moved from a lower-than-average carbon intensity to one that is higher than the world’s average, according to a recent policy report, “Asserting climate change leadership in Asean:
Carbon pricing for the Malaysian steel industry” by the Institute for Democracy and Economic Affairs.

“Especially with the steel sector today, at the rate we are going, instead of greening the steel sector, we are de-greening the steel sector by having a lot of technology that generates high emissions being deployed in our country,” said Datuk Seri Tai Hean Leng, managing director
and CEO of Malaysia Steel Works (KL) Bhd (KL:MASTEEL), at the roundtable.

Masteel switched out their electric furnaces to induction furnaces (IFs) that generate lower emissions and produce less waste. According to the company’s 2023 sustainability report, the investment into IFs will enable them to save on the billet production cost of approximately 10.6% per metric tonne.

Ong urged companies not to think of ESG as solely a cost centre or a compliance mechanism.

Instead, they should approach it as a way to make businesses more competitive.

“For example, having a long-term plan of energy needs is important. Obviously, it is much harder for steel entities to do so, but continuous digitalisation [is a good] way to monitor, measure, and optimise [energy use],” said Ong.

The second approach is to look at ESG as a way to build internal capacity and align to external policies.

“If you can align this with some sort of an external understanding of what national, regional and global trends are, I think it will be a much more exciting value proposition for your staff and company. But it will make life more complicated for you, at least at the start,” said Ong.
By being ESG compliant, companies can enter new markets in the EU, and Malaysian companies can position themselves as compliant partners, he adds. This provides companies an advantage over competitors who are slower to adapt, while also inspiring them to innovate products, services and business models.

The central sustainability intelligence (CSI), introduced by Bursa Malaysia Bhd (KL:BURSA) to enhance the integration of ESG, further enables companies, listed and non-listed, to collect and report sustainability data.

“As we built the ecosystem, we said, ‘Why don’t we ask the rest of the economies to come together to the CSI platform and support these smaller and mid-cap companies in a way that they can join the ecosystem in disclosing [their data] seamlessly?’” said Wong Chiun Chiek, director of Bursa Intelligence, at the roundtable.

https://www.theedgemarkets.com/node/720688