Three lessons learned from the EU-Malaysia Trade
Do we need better Environmental, Social, and Corporate Governance (ESG) practices to avert our planet’s existential crisis? ‘Yes’ is probably the consensual answer. The open question, however, is how we identify and execute such practices. Nitish Jain, London Business School, and Tina Sara Thomas, Boardroom Limited, provide their take in this contribution.
The European Union (EU) is doing its part to lessen climate change impact and the looming existential crisis and take the lead in ESG initiatives by framing wide-ranging legislations and seeking compliance not just by the domestic firms but also from their global suppliers.
Despite the right intent, the disparity between the EU and global producer countries can cause the derailment of long-standing global supply chains. The recent developments in the legislation affecting EU-Malaysia trade offer three important lessons for those in the MENA region.
More consultation less imposition
In June 2023, the EU formalized the Deforestation Regulation that mandates global producers to prove that their products do not originate from recently deforested land or have contributed to forest degradation — a requirement with the correct gist.
However, Abdul Rahman Khan, CEO, Jawala, a Malaysian forest resources company, observes that the ‘deforestation’ definition seems to be ‘more aligned with the EU region that has matured forests than the realities of relatively young forests in the Malaysian region’.
Though the EU only accounts for a small share of timber and palm oil exports, this disparity can harm Malaysian producers if the other nations follow the EU norms. In the short run, Mugana Kerisnan, Director, Kluang Rubber, a Malay rubber company, is concerned that ‘diverting exports from the EU to different regions may cause price instability.
Introducing ESG-related regulations may be well- intentioned, but if they fail to consider local factors in partner countries, they risk creating new inequalities and instability.
Develop the Ecosystem
To comply with Scope 3 emission reporting, the EU buyers have started asking producers to provide emission data in their price quotations. This is a step forward in meeting the net- zero target.
Ler Tche Boon, Operation Manager, Notion Venture, a Kuala Lumpur company observes that a substantial investment in technology is required to capture the emission data. The main challenge would be how to assure the buyers of the accuracy of the reported data.
So, in addition to stepping forward in data requirements, the buyers also must think about how to enable the data certification ecosystem to meet the end goal. Of course, where there is a need, there is also an opportunity, those that develop a method for accurately verifying emissions data will find themselves in good stead.
The State has an important role
Large producers are better placed to keep up with the pace of compliance. They have the resources to build capacity and respond to compliance by investing in workforce training, technology, and consultative engagement with stakeholders.
The state, including industry associations, must actively support the small producers to meet these investments. The workshops by the Malaysian Timber Industry Board for knowledge dissemination and the funded training opportunities by Human Resources Development
Corporation are two fine examples of Malaysian state efforts in supporting the capacity building of small producers and ones that could no doubt be mirrored in other markets
Conclusion
We need a balancing act among all stakeholders–buyers, producers, regulators, and auxiliary service providers–to successfully meet the ESG goals without creating a high derailing risk for the global supply chains.
BOX OUT 1
Nitish Jain, Professor of Management Science and Operations
Nitish Jain holds a PhD in Management Science from INSEAD. His research interests focus on global supply chains, and on the use of big data and empirical methods to improve supply chain management.
His work has appeared in Management Science, and Operations Research and won prestigious student paper competitions. Before joining the PhD programme at INSEAD, Nitish worked at a real estate firm and in the technology industries.
Nitish has an MBA degree from the Indian School of Business and Bachelors and Master’s degrees in Mathematics and Computing from the Indian Institute of Technology, Delhi, India.
BOX OUT 2
Tina Sara Thomas, Head of Environmental, Social and Governance practice, BoardRoom
Tina specializes in strategic planning and sustainable growth, with a keen interest in innovation and transformation. With over 15 years of experience in the energy industry, she has a global track record in crafting and implementing corporate strategies focused on sustainability. Tina’s roles extend to being a researcher, tutor, author, and speaker on topics related to sustainability.
Of late, her work has centred on Environmental, Social, and Governance (ESG) efforts, touching on aspects like regulatory reporting mandates from entities such as the Task Force on Climate-related Financial Disclosures (TCFD), Global Reporting Initiative (GRI), International Sustainability Standards Board (ISSB), local Stock Exchanges, along with climate reporting. Presently,
Tina is dedicating herself to a research endeavor aimed at identifying the obstacles companies encounter due to climate change and the efforts to legitimise an effective transition or transformation.
