Introduction.
His Excellency, The British High Commissioner, Mr. Bruce Cleghorn.
Yang Berbahagia, Dato' Md Nor Yusof, Chairman of the Securities Commission.
Distinguished speakers and guests, ladies and gentlemen.
Assalamualaikum Warahmatullahiwabarakatuh dan selamat pagi.
First of all, I would like to thank the British High Commission and the Securities Commission for inviting me to deliver this morning's special address for the Corporate Social Responsibility conference entitled “CSR: Creating Greater Competitive Advantage”.
From the programme, I note that the distinguished panel of speakers had, over the past one and a half days, covered key areas relating to CSR namely its importance to the businesses and the community, how CSR can contribute towards realizing Vision 2020, the various aspects and perspectives of CSR and its relationship with corporate governance and socially responsible investing. So naturally, the question that all of you might and indeed should be asking at this juncture is, how do we move forward from here?
Taking Stock – The current level of CSR and SRI in Malaysia.
Ladies and Gentlemen,
As with any strategic analysis, it is always useful to begin with an assessment of the current state of CSR practices in Malaysia. By benchmarking this against global best practices, we can thus identify strategic challenges and ways for the nation to move ahead.
The terminology CSR might be new to most people in the country but the concept, is not. At its core, CSR principles epitomize the fundamental religious and social values that have held the very fabric of humanity together since the dawn of civilization. It is a natural extension to individual social responsibilities and manifested religious obligations that we have, as a society, been practicing for thousands of years. As corporations in the last hundred years are beginning to have profound effects of the way we live, it is timely that we demand the same standards of social accountability from them.
For instance in Malaysia's National Report on UN's Agenda 21, the Government recognized the importance of sustainable development
1. Measures and commitment undertaken by the Government will no doubt to a certain extent, would have to be realized by major enterprises like those present today. It is the Government's priority to ensure that businesses and public activities pay heed to CSR issues such as eradicating poverty, conserving energy, combating deforestation, managing fragile ecosystems, protecting health and managing land resources.
There are also various instances where the private sector and government agencies along with NGOs have worked together for the betterment of the environment. Initiatives like the Tree Planting Group
2 and the Prime Minister's Hibiscus Award are testament to these collaborations. The corporate sector in Malaysia supports environmental educational and awareness efforts by participating and making contributions towards programmes like the Environmental Education and Awareness Trust Fund. Responsible enterprises have successfully supported environmental-related efforts like the Beautification of Schools programme and the Environmental Journalism Award. I am also very glad to note the level of support given by the private sector to NGOs like the WWF, ENSEARCH, Environmental Protection Society of Malaysia and the Malaysian Nature Society.
Besides the progress that we have made on the environmental front, Malaysia has also made significant advancements in the area of corporate governance (CG) reforms. Progressive steps have been taken to establish a strong foundation for CSR strategy and implementation with the Malaysian Code on Corporate Governance (the Code). Though not exactly two sides of the same coin, CG and CSR do have a lot in common. While better CG practices address the concerns of shareholders, good CSR on the other hand more often address the concerns of the stakeholders. However, investors are now increasingly interested in this area as they believe that a well- managed company will address CSR issues and take its stakeholders seriously. Some aspects of CSR, such as energy conservation or recycling, can cut cost and increase profits while others may be seen in terms of risk management, another area of focus brought by the our recent CG reforms.
Besides progress on the CSR front, again Malaysia has also been active in nurturing Socially Responsible Investment or SRI. Though SRI products might be new, the concept is not especially for Muslims.
Last year, Malaysia had witnessed the birth of two ethical or SRI funds
3. The focus of these funds is to invest in companies which are not just profitable are must not involved in tobacco, liquor and gambling as well as having socially accepted practices such as good corporate governance and environmentally-friendly. These funds have been collaborating closely with various NGOs to advise them on ethical issues as well as having a special advisory board to guide the fund managers on topics such as corporate governance, social responsibility and environmental protection. Investors should also be encouraged with the fact that SRI funds often provide comparatively good financial returns as well additional social and environmental benefits that go beyond direct financial reward to the investor.
SRI is a positive economic choice about the way we live and the world we live in. The SRI funds that we have are basically in the category of portfolio screening. This basically means the inclusion or exclusion of stocks in the investment portfolio on ethical, social and environmental grounds. This can be done via screening criteria or corporate ratings based on the “best of class” basis
4.
A special category of portfolio screening has a long established history in Malaysia namely the Syariah Approved funds. Since the establishment of the first Islamic equity fund in 1968
5, Islamic funds have seen phenomenal growth. At 31 March 2004, there are 61 Islamic funds with net asset value of RM 5.32 billion. Islamic fund grew 85.36% from 2002 to March 2004
6.
The stunning growth of the Islamic capital market is driven by a variety of catalysts. The Government's aspiration for Malaysia to be an international Islamic capital center is manifested in the Capital Market Masterplan. The Securities Commission is tasked with spearheading this initiative. Efforts such as the Syariah Index, establishment of the Syariah Advisory Council and the maintenance of the ever-growing list of syariah compliant securities on Bursa Malaysia are some of the examples of this effort. As at 30 April 2004, there were 743 companies listed on Bursa Malaysia which were deemed to be syariah-compliant, covering close to 80% of all shares traded on the exchange
7.
Indeed the development of the Islamic capital market provides a favourable grounding for the development of SRI funds. Most Islamic funds are essentially negatively screened ethical funds. It would be a relatively straightforward next step for companies offering Islamic funds to install some SRI positive screening on top of the current selection mechanisms
8.
In Malaysia, another category of SRI, namely community investing is also present. This category of CSR involves supporting a particular cause or activity through financing it via investment or loans. Community investing includes microcredit and revolving loan schemes. Community investors may seek a financial return at lower than market rates to achieve a particular social return for society from their investment. However, unlike philanthropy, social finance institutions require, at a minimum that the original value of the investment can be returned. Amanah Ikhtiar Malaysia (AIM) is an example of a micro-finance institution where it has adopted the Grameen Bank model and is intent on targeting the hardcore poor. To date, AIM has helped 88,095 applicants free themselves from the hardcore poor status with RM 963 million worth of loans disbursed
9.
Moving Forward- Options for Growth
Ladies and Gentlemen,
The next natural option is to consider how we as a nation can ensure and enhance the progress of CSR and SRI. However, there are of course minimum standards laid down in law in terms of environmental protection, occupational safety and health as well as employment. CSR should begin its corporate journey here voluntarily. Captains of the industry like those present today should voluntarily go beyond the minimum regulatory measures and take proactive action to enhance their CSR practices.
With the increasing awareness and global demand for better CSR practices, companies should recognize and adopt CSR into their management practices. In moving forward, it is important to note that while CSR can only be taken on by the companies themselves, stakeholders, especially employees, consumers and investors, can play a decisive role in prompting companies to adopt CSR practices. The stakeholders can also enhance their CSR role by requiring companies to be effectively transparent about their social and environmental performances.
CSR as a strategic initiative for companies
The effort to nurture good CSR practices begins with the company. At the start, companies should adopt a mission statement, code of conduct or credo where they state socially responsible purpose, core values and responsibilities to the stakeholders. These strategic objectives must be effectively translated into tactical plans such as adding social and environmental dimensions in plans and budget. Companies can also consider carrying out environmental audits and setting up continuous education programmes. Global companies have also adopted the creation of “community advisory committees” to advise them on the impact of their business on the well being of the community at large. This includes assessing and reporting environmental effects and also social aspects such as participation in the surrounding community's activities.
Taking pro-active steps – CSR reporting and auditing
Ladies and Gentlemen,
CSR should not just be confined to the strategic realm. It must be manifested in companies' business practices and should be made known to interested stakeholders. Many multinational companies are now issuing CSR reports. A few Malaysian companies
10 have actually disclosed in their annual reports their CSR practices. However, in most instances, these reports are only limited to issues such as environment and occupational health safety. These are good areas to begin the CSR reporting process, but moving forward, issues such as non-discriminatory recruitment practices and socially beneficial activities should also be disclosed. These disclosures serve as a very useful tool for SRI investors to base their investment decisions on. It can also serve as a differentiation factor for companies especially if reporting awards such as the ACCA Malaysia Environmental Reporting Awards recognizes the companies' reports. To further distinguish themselves companies may also opt to publish a stand-alone CSR report.
Besides that, in line with developments in other jurisdictions, corporates may also elect to adopt global standards for social accounting, reporting and auditing. There are major international initiatives focusing on the globalization of social standards, public disclosure of information and the development of social reports. Some of the notable ones are the Social Accountability 8000 (SA8000) and the Global Reporting Initiative (GRI).
Ladies and Gentlemen,
It is important that verification by independent third parties is done to avoid criticism that the reports are nothing more than a public relations gimmick without any substance. The involvement of stakeholders such as the trade unions and NGOs, could improve the quality of verification.
CSR reporting and the adoption of related standards are very important. Given the current dynamism and the exponential growth of CSR, in the future, it will no longer serve just as an “order winner” but will also be the prerequisite “order qualifier”. This means that, good CSR practices will be the precondition for customers to even consider doing business with the enterprise.
The Government strongly supports the adoption of voluntary reporting and CSR standards as it believes that regulations should not precede private sector's progress and initiatives within a voluntary CSR framework.
A Growing CSR Force – Your employees
Ladies and Gentlemen,
There is an increasing believe that number of employees who are concerned with social values of their employers are on the rise. As companies seek to recruit the best and the brightest, these enlightened workforce will increasingly use their clout in the labour market to affect increased CSR performance of companies. Certainly, companies with bad CSR records will have difficulty recruiting and retaining their staff compared to companies with good CSR practices.
Over the period of one and a half day, the point has been emphasized that employees are major stakeholders of companies. Implementing CSR is an enterprise-wide effort, thus it requires not only the drive from management but also innovative thinking, new skills and closer involvement of employees. Mechanisms such as social dialogues with the employees therefore, play a crucial role in embracing CSR. These dialogues can structure permanent feedback and adjustments for the CSR initiative.
Influencing global consumers – Show them what you have.
Thought leaders believe that there will be a specific category of CSR consumers in the future with high income and increasing influence in the marketplace
11. This is especially true in developed markets such as Europe where surveys has shown that consumers do not only want good and safe products but also seek the assurance that it was produced in a socially responsible manner
12. More often than not, products from developing nations like Malaysia often carry the connotation of being produced irresponsibly. With the advent of globalization, our producers must seek to change this often-misleading preconception. Without, which, it might not be able to compete in the global market especially when CSR criteria become “order qualifiers”. So what can we do?
I believe the answer is to adopt CSR and let the consumers know that you do. Unlike CSR reports, which are usually relied upon by SRI investors and fund managers, your end-customers are often unaware of any CSR initiatives that you have undertaken. Companies can utilize the very powerful market-based incentive of social and eco-labeling. These can help deliver positive social change among enterprises, retailers and customers. Basically, social and eco-labels imply guarantee that the item or materials used in the delivery of services, was produced free from exploitation and abuse.
To ensure that these labels are credible, enterprises should ensure that they are transparent and able to verify their claims.
Being socially responsible pays – the role of SRI
Ladies and Gentlemen,
There is a widespread agreement that shareholder action and institutional investors will have a significant impact on the future of CSR. The prevailing believe is that, capital markets will be central to establishing the incentives that drive corporations towards being socially responsible in the future
13. This is due to the fact that, socially and environmentally responsible policies provide investors with a good indication of sound internal and external management. Good CSR practices can also contribute towards managing risks by anticipating and preventing crises that can affect reputation and cause dramatic reduction in share value. It is anticipated that there will be a growth in investors looking at CSR as a contributor to the companies' intangible assets and future earnings potential. Criteria often scrutinized by the investors are the company's ability to recruit and retain the best workforce, engender trusts in customers, build a good reputation or manage its risks. In anticipation of such demand, especially if your company harbours global ambitions, your company should try to increasingly link sustainable development with shareholder value, both by building it into business and building new business around it to create shareholder value.
The Government has and will continue its current drive to establish Malaysia as the center for international Islamic capital market. This will undoubtedly continue to foster the tremendous growth of the special category of SRI funds namely the Islamic funds. Investors familiar with the negative screening mechanisms of these faith-based funds will be more receptive to conventional SRI funds. This makes Malaysian investors relatively socially aware compared with their other counterparts in the region. A 2003 report by the Association for the Sustainable and Responsible Investment in Asia (AsriA) highlighted that this awareness makes Malaysia a strong potential market for SRI funds
14 to the local market.
Ladies and Gentlemen,
To wholly embrace the concept of SRI as the impetus to drive the development of CSR, we must also focus on developing conventional SRI funds. Asset management companies and investment houses should explore the possibility of adding to the two SRI financial products currently in the market. Academic studies and empirical evidence have shown that there is no systemic reason for SRI funds to underperform. Indeed much of the studies pointed that SRI funds can perform as well as and often outperform their benchmark
15 . For instance the Domini 400 social index has consistently outperform the benchmark S&P 500 on a total return basis since its launch in 1990
16. Thus, given the success of SRI funds elsewhere especially the fact that being socially responsible does not compromise the financial returns, Malaysian asset management companies should seriously consider introducing conventional SRI funds.
Conclusion
Ladies and Gentlemen,
On balance, the development of CSR and SRI in Malaysia is relatively advanced compared to other nations in the region, albeit being pursued under different forms. However, there are still many improvement opportunities for us to continuously enhance its progress. The way forward requires a collaborative effort of Government, companies, investors, NGOs and other stakeholders. I sincerely hope that you can utilize the introductory knowledge gained during this conference to put your current business operations and strategic direction within the ambit of better CSR practices.
Ladies and Gentlemen, on that note, I thank you for your attention.
