In the first part of my commentary last month, I highlighted two factors that bind ESG (environmental, social, and governance) and human rights concepts. This month, I will elaborate on why Malaysian businesses will lose out if they do not embrace the ESG-business and human rights (BHR) standards that are being driven by countries that we export to.
Slowly but surely, increased regulatory standards for due diligence, transparency in supply chains and ESG-BHR reporting will hit the operations of Malaysian companies doing business overseas. There has been a raft of foreign laws, treaties, and mechanisms driving the ESG-BHR agenda already.
It is public knowledge that several Malaysian companies have suffered from import bans, and whether rightly or wrongly, Malaysia’s reputation has been bruised and battered. Our record on the issue of forced labour is quite appalling in the eyes of the global community. The bans have also disrupted the operations of our companies and supply chains. The cost of the damage for non-compliance has likely far outweighed the costs of compliance, had we imposed a higher standard for our industries.
Even as a legally binding BHR treaty is being negotiated at the United Nations, western countries are moving ahead with their own sustainability requirements on imported goods. For example, the Corporate Sustainability Reporting Directive (CSRD) of the European Union (EU) introduced mandatory reporting on how businesses (including those from outside the EU) deal with climate change and human rights issues.
Furthermore, in December 2022, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) moved to the next phase of becoming law. It would require company directors to account for human rights and environmental impacts of their businesses, failing which penalties can be imposed. The CSDDD will impact remuneration policies and business operations, such as requiring due diligence to be carried out by companies doing business with the EU.
The CSRD and CSDDD may potentially apply directly to Malaysian companies generating certain amounts of revenue in the EU. Additionally, non-Malaysian companies that are subject to the directives will be asked to conduct due diligence on all parties in their value chain anywhere in the world. Thus, Malaysian suppliers will be indirectly affected. High-risk industries such as resource extraction, fisheries, agriculture, and forestry will be under close scrutiny.
As of Jan 1, 2023, failure to account for human rights issues in their supply chains will hit the bottom line of German businesses. German law now requires companies to check their supply chains for environmental and social risks. Failure to do so could incur fines of up to 2% of their global turnover.
As we shall soon see, transparency and traceability in supply chains, and due diligence will become the new norm. Not only will Malaysian companies have to identify, prevent or mitigate actual or potential adverse human rights and environmental impacts, but they will also have to act compatibly with climate obligations on global warming.
These external drivers have implications for Malaysian companies.
Increasingly, stakeholders, including civil society and citizens, are aware of — and will not hesitate to use — the power of speaking out against rights abuses. The third pillar of the United Nations Guiding Principles on Business and Human Rights (access to justice) encourages these actions and for companies to provide remedies to victims and survivors.
The next few years will not only be exciting times for human rights and environmental activists, but also a crucial period for humanity. The sooner our government and the corporate world internalise ESG-BHR principles, whether as law or normative standards, the better.
This article was published by The Edge Malaysia Weekly, archived here. Edmund Bon co-founded AmerBON, Advocates. He has been in the practice of human rights for 25 years. He is currently leading a team of experts to assess Malaysia’s compliance with the United Nations Guiding Principles on Business and Human Rights. The baseline assessment report is for the government’s national action plan on business and human rights due to be adopted in 2023.