KUALA LUMPUR: Malaysia needs to move beyond the notion that finance alone will resolve issues related to environmental, social and governance (ESG) adoption by small and medium enterprises, said Universiti Malaya Faculty of Business and Economics Professor Dr Vgr Chandran Govindaraju.
He said that finance and regulatory conditions seem to be secondary in most cases based on his research, “Reconceptualising Our Understanding on the Motivations of ESG Adoption in SMEs: Lessons for Policy Interventions”.
“There’s a whole hype in terms of pushing financial incentives. But what our observation shows is that it is more than finance. So it is not finance that matters that much, but it is the know-how and other knowledge that will be required by the SMEs to promote ESG,” he said at the Sustainable Development for Thriving Communities 2023 conference yesterday.
“Now, of course, the regulatory framework is important. We are not saying that it is not. But for them to start off, it’s not about the regulatory framework itself, it’s about value creation. So, in that context, if you have a lack of knowledge, it is difficult to push towards the adoption of ESG,” he added.
Chandran’s research found three themes emerging as motives for ESG adoption among SMEs, regardless of the industry. The themes are self-discovery, new path creation and market pressure.
“The first one is self-discovery. The journey often begins in many small and medium industries with the owner discovering what ESG entails and then attempting to figure out how to implement the indicators or elements of ESG within their businesses,” he said.
In this process, the capability of owners to manoeuvre their businesses and align themselves with the ESG framework is significant.
“However, what we found is that the regulatory framework does not provide them with adequate information, it’s too complex for them to understand,” said Chandran.
The next aspect involves efforts to forge a new path within the context of their businesses.
“The new path creation for businesses always centres on economic value creation for the firm itself, differentiating itself in terms of business practices through the use of ESG in these contexts,“ he said.
The third factor is market pressure, primarily from clients. The demand from clients is crucial for them to implement ESG.
“If there’s recognition for the implementation of some of these ESG practices, it means there’s an external push towards the firm regarding whether they want to adopt ESG or not,“ he added.
Chandran said there is a common trend or alignment among different cases or situations when it comes to strategies.
“What moderates some of this is the ability to be innovative and creative. So, it means talent is very important. Self-discovery will take place only when you have this creative talent within the context of the organisation. Most often, in these SMEs, the owners are the creators, the innovators,“ he said.
However, he added that the motives driving these strategies are dynamic and evolutionary, implying that they are subject to change and adaptation over time.