Corporate Social Responsibility in Asia Pacific: Malaysia’s Role in promoting CSR

Dato’ Zarinah Anwar

Deputy Chief Executive

Securities Commission

Lex Mundi Asia Pacific Regional Conference

Shangri-la Kuala Lumpur

12 November 2005


Ladies and gentlemen,

A very good morning to all of you.

Firstly I would like to thank Lex Mundi for inviting me to speak on a subject of growing significance in Malaysia and the Asia Pacific region. It is indeed an honour to be able to share some thoughts on the subject with such a distinguished gathering.

Corporate social responsibility (or CSR for short) has certainly become common in today’s business lexicon. In an environment characterized by dynamism, a company’s ability to recognize, react and adapt to global catalysts of change is critical. The exponential growth in information and communications technology, the continual change to global markets, shifting demographics and the homogenization of personal values have all contributed to significant enhancement in the recognition of the value of CSR. Where once viewed as peripheral to management concerns, CSR today is regarded as an integral part of the business with real issues that need to be recognized and addressed because they would be harder for business to deal with if they go wrong.

A Take on CSR

Thus, one way of appreciating the benefit of practising good CSR is to view it from the risk management perspective. CSR allows companies to maintain their “licence to operate”. This tacit social contract between the company and its stakeholders requires the company to preserve the environment and to make the community a better place to live in by reducing its operational footprints through socially responsible practices. It also requires companies to keep abreast with society’s views of their products and services, thus enabling companies to react more quickly to changes in the priorities of society and its norms. More often than not, when norms change, laws will also change. If companies ignore the dynamics of societal change and seek merely to comply with the minimum requirements of the law, they may put their “licence to operate” at risk.

But while CSR is often described in terms of managing risks and maintaining this “licence to operate”, there are real and tangible benefits for companies with good CSR practices. If integrated into its business strategy, CSR can become a potent tool for the company to realize enhanced reputation and brand value, increased operational efficiency, improved sales and customer loyalty as well as the ability to attract and retain quality workforce. But even more importantly, the behaviour of business has a major impact on efforts to achieve a better life for all, thus affecting the well being of the people in the communities in which they operate with consequential effects on national stability and prosperity.

SC’s Interest in CSR

The SC views the promotion of CSR as a natural progression of our ongoing efforts in developing a strong corporate governance framework. While corporate governance focuses on value creation for shareholders, CSR naturally requires companies to look beyond shareholder value and take into account wider stakeholder interests such as those of employees, customers, suppliers and society at large. Good CSR practices will enable companies to attract better quality investors and to better meet the challenges posed by increased competition for markets and capital. This will result in improved reputation and branding of Malaysian companies, whose enhanced performance will contribute towards our goal of establishing a premier capital market that will play a significant role in generating greater economic growth for Malaysia.

CSR and the Asia Pacific Region

Ladies and gentleman,

Economic growth across the region has been impressive over the past 40 years. Asia’s total share of world GDP in 1960 was about 13% but by 2000 it had almost doubled to 25 %. Developing Asia is expected to continue the trend, growing by 6.5% in 2005 1. However the way economies develop in the Asia Pacific region will have a profound impact on the health and stability of the entire world. While the region is the fastest growing and most economically dynamic in the world, the cost of such achievement has been very high. Past growth has generated unprecedented levels of pollution and resource degradation. , Environmental degradation is already amounting to 4-6% of GDP in many countries. With the region’s ecological footprint being what it is, the issue concerns not only the region but also the future of the planet itself. But the ecological challenge is not the only major threat to the region; poverty poses another monumental challenge. The Asian Development Bank, at its 6 th Asia-Pacific Roundtable for Sustainable Consumption and Production held recently in Melbourne said that even if high growth rates continue, the number of people living on less than USD 1 per day is projected to be around 150 million by 2015. On the other hand, if growth slows, the number could well rise to almost three times2.

Thus, building a social agenda that embraces the vulnerable group of society and to prevent further environmental decline are deep-seated challenges for economies in this region. Clearly businesses, through CSR practices, have an important role to play in managing these challenges.

State of CSR in Malaysia-An Overview

In Malaysia efforts towards building a CSR culture are being pursued on various fronts by various parties. One area where progress can be noted is the development of corporate sustainability reporting. The ACCA has taken the lead in Malaysia3 to educate Malaysian companies in engaging in credible reporting on the environmental and social impact of their business operations. In 2003, the ACCA together with the Department of Environment published the first Environmental Reporting Guidelines for Malaysian companies. In April this year, they published the Guidelines for Sustainability Reporting. The ACCA reported that there has been an increase in the number of main board listed companies engaging in some form of environmental and social reporting. While only 25 companies reported on environmental performance in 1999, 60 companies had done so by 2003. 49 companies invested in social reporting in 2003 from just 28 in 2002. While the overall numbers might still be small vis-à-vis the total number of listed companies on the Exchange, the rate of growth in terms of percentage has been encouraging and is indeed a positive indicator of development. To this end, there are also notable Malaysian companies4 that are working closely with the Department of Standards in contributing towards the ISO process of developing ISO 26000 guidance standards on social responsibility.

Apart from such reporting, Malaysian companies have also been recognised globally by their inclusion in the Dow Jones Sustainability Index5 or being compliant with the highest sustainability standards in the form of the Global Reporting Initiative (GRI) framework6. A homegrown Malaysian company recently received the Asian CSR Award for having the best workplace practices in Asia7. Others have also been active in contributing towards furthering the development of CSR by developing human capital through the establishment of private universities, scholarship programmes, community network and embarking on resource conservation programmes. Professional bodies in Malaysia have also been actively promoting CSR reporting as well as organizing various education and awareness programmes. The Malaysian Accounting Standards Board for instance, is encouraging greater environmental disclosures and value added statements to assist economic decision-making8. Concurrently, ACCA Malaysia recognises the value of good social and environmental reporting by recognizing companies through the annual Malaysia Environmental and Social Reporting Awards (better known as the MESRA awards).

Furthering CSR in Malaysia and Asia Pacific

In Malaysia, regulators like the SC have taken a proactive role in driving the development of CSR. To strike a balance between the prescriptive approach of some jurisdictions9 with the absolute laissez-faire approach of others, the SC believes in instilling good CSR practices through education and awareness programmes. We believe that CSR would be sustainable in the long run and would add value best if it is undertaken at the companies’ initiative through encouragement and guidance on best practices with selective regulation eg in the area of environmental protection, health and safety. As part of our efforts to encourage and facilitate industry adoption of higher CSR standards, the SC and the British High Commissionco-hosted a national conference on CSR in 2004. The conference which was aimed at strengthening awareness of CSR and its growing international importance among local companies and the Malaysian public drew strong participation from CEOs and directors of public listed companies, l as well as professionals and industry associations from Malaysia and across the region.

Consequent to the Conference, the SC has brought together like-minded leading companies to explore the possibility of setting up a CSR Institute in Malaysia. He objective of the Institute is to promote the development of socially responsible business practices in Malaysia so that Malaysian companies are able to serve developed markets competitively while raising business standards and ensuring sustainable development . Towards this end, a Steering Committee comprising the interested companies has been formed and is now working together to finalise the terms of reference for such an institute. The SC is also an active participant in the Working Committee on the National Integrity Plan, which is focused, inter alia , on the development of CSR in Malaysia. Collectively, through these avenues, the SC will continue to facilitate efforts towards raising the bar on the quality of CSR in the country and the Asia Pacific region.

Socially Responsible Investing (SRI)

Ladies and gentlemen

Let me say a few words on Socially Responsible Investing (SRI) and the role it plays in terms of driving improvements in CSR practices. SRI in its simplest form means investing in companies which are perceived to be sustainable in their business practices. A study by the Association for Sustainable and Responsible Investment in Asia sponsored by the International Finance Corporation, the private sector arm of the World Bank, showed that sustainable and responsible investing in Asian fund management has strong potential to propel improvements in environmental and social performance as well as governance and transparency. It also showed that Asian companies that strive for high standards in these areas are able to gain better access to a growing pool of liquidity10.

Indeed the last decade has seen an extraordinary growth in the scale and breadth of SRI. Current global SRI funds’ size is estimated to be just over USD 3.0 trillion11. In the US, US$2 trillion of funds under professional management is linked to some kind of SRI strategies, a fourfold increase in growth over the last decade12. In Europe, the total amount of SRI assets grew by 57% in just one year from 12.2 billion euros in 2003 to 19 billion euros in 200413, while in Australia, assets of SRI funds grew by 41% between June 2003 and June 2004, more than twice as fast as the overall Australian retail and wholesale investment market which grew 18% over the same period14. In Asia, SRI is less well known but is beginning to take off especially in the region’s developed economies such as Japan and Hong Kong. In Japan, SRI has grown from zero to eleven SRI fund options, totalling almost USD1 billion, in less than three years – clearly demonstrating local market potential. The total value of SRI related funds under management in Asia is estimated to exceed US$2.5bn15.

What is obvious here is the tremendous growth potential of SRI and hence the opportunities that SRI can offer as a viable source of capital. From the perspective of the investors on the other hand, SRI can be an investment opportunity and a genuine way of adding value and lowering risk in an investment portfolio (Henderson Global Investors). SRI investors believe that having a conscience does not mean having to accept lower returns on investments. With the acceptance of SRI by the finance community as reflected eg by the launch of the Dow Jones Sustainablity Index, we can expect SRI benchmarks to play a key role in raising corporate awareness by prompting companies to re-examine their practices to enable them to pass the SRI screening process.

Potential to be the Asia Pacific CSR leader -The SRI Niche

Ladies and gentlemen

In Malaysia, while conventional SRI funds are in nascent stages of development with only two funds currently in existence16, Malaysia however has a long and established history with the portfolio screening process in the form of Syariah-compliant funds. The mechanics of the Syariah-compliant portfolio screening process are to a large extent similar to its conventional counterpart but the difference lies in the fact that Syariah-compliant funds follow Islamic religious guidance rather than the general perception of what is socially responsible.

Today we have 826 Syariah-compliant stocks listed on the Exchange with a market capitalisation of about RM440 billion or 64% of the total market capitalisation. The availability of Syariah compliant stocks has boosted the development of the Islamic fund management industry which grew at a compounded annual rate of 47% over the last 10 years compared to 9.6% for the unit trust industry as a whole. Starting with 2 equity funds in 1993, we now have 77 Islamic funds with a net asset value of RM6.8 billion.

Most Islamic funds are essentially negatively screened ethical funds. It would be relatively straightforward for companies offering Islamic funds to install conventional SRI positive screening on top of their existing screening mechanism. The growth of the Islamic capital market in Malaysia therefore heralds a positive development for SRI, and provides the impetus for companies to conduct themselves appropriately in the area of CSR.

Conclusion – Getting CSR Right

Ladies and gentlemen,

How do companies get it right on CSR . Admittedly this is difficult because this is a journey, not a destination. Indeed it is a moving target with changing goalposts. As countries evolve, and society gets richer and better educated, expectations of company’s behaviour become more demanding. So what was good enough yesterday may no longer be good enough today, and certainly not good enough tomorrow. In this context, viewing a company’s obligations on CSR from the perspective of the “Licence to operate” seems very apt. It captures, in a contextually-determined manner, all that the company needs to do to satisfy its multiple stakeholders to stay in business17.

But at the root of CSR is the professional and ethical management of companies. This I believe is the first line of defence against corporate misbehaviour. Ethics play a crucial role as a guide to proper and honest conduct. Ethics is beyond law. The law does not and cannot specify all that is ethical for acting ethically requires freedom of choice which encompasses not only “not doing the wrong thing”, but also “doing the right thing”. Thus it is essential that business build on universal values, subscribe to moral and ethical practices and nurture a system of shared beliefs that will be translated into socially responsible behaviour.

Ladies and Gentlemen, thank you for your attention.

1 Asian Development Bank. “Asian Environment Outlook 2005″

2 Asian Development Bank, 6 th Asia-Pacific Roundtable for Sustainable Consumption and Production, Melbourne, 10 October 2005

3 “The State of Corporate Environmental and Social Reporting in Malaysia” ACCA 2004

4 ISO Mirror committee includes companies like PETRONAS, TNB, TM & Puncak Niaga

5 BAT Malaysia Berhad

6 BAT Malaysia Berhad and Ford Malaysia Sdn Bhd

7 SAJ Holding Sdn Bhd, a subsidiary of Ranhill Berhad. Awarded in Jakarta, September 2005 by Asian Institute of Management-Ramon V.del Rosario Sr. Centre for CSR.

8 Paragraph 10, MASB 1

9 Scandinavian jurisdictions such as Sweden, Denmark and Norway mandated public disclosure by companies of their (mainly environmental) CSR practices.

10 AsrIA Press Release dated 16 October 2003


12 Social Investment Forum, SIF Industry Research Programme Bi-annual report “2003 Report on Socially Responsible Investment Trends in the United States”2003

13 Avanzi SRI Research/ SiRi Company “Green, Social and Ethical Funds in Europe” 2004.

14 Deni Greene Consulting Services: “Socially Responsible Investing in Australia 2004-Benchmarking Survey Conducted for Ethical Investment Association”-2004


16 Mayban Ethical Trust Fund and Phillip First Ethical Fund

17 John Zinkin -Getting CSR Right, Conference on Corporate Social Responsibility, 21-22 June 2004