Malaysian companies forging sustainability-driven practices
In the financial world, derivatives transactions exist to help companies pursue long-term plans by mitigating short-term financial risks. Yet one might well ask, who helps to mitigate the risks to the planet that are part of everyday business today?
For companies with sizeable environment footprint, could financial incentives be offered in exchange for less emissions, consumption and waste?
While to some these might seem wishful sentiments, it was with these exact notions in mind that two leading companies completed a unique derivatives transaction, a first-of-its-kind for Malaysia’s fast-moving consumer goods (FMCG) sector.
In the case of Etika Group of Companies (Etika) and Standard Chartered Malaysia, a key goal of their MYR251 million (almost USD58 million) derivatives transaction in early 2022 was to help reduce the environmental impact of doing business – by embedding specific financial incentives into the heart of the deal.
The result is an environmental, social and governance (ESG)-linked derivatives transaction, believed to be a landmark for a homegrown FMCG corporate in Malaysia. Included in the structure of the transaction is a unique pricing mechanism, based on the successful meeting of environment-driven key performance indicators (KPIs)i.
A multi-pronged effort
These KPIs will be tied to the greenhouse gas emissions intensity of the Etika Beverage Plant and Etika Dairy Plant, supporting the company’s sustainability commitments to promote environmentally-conscious practices within the FMCG sectorii.
Santharuban Thurai Sundaram, Chief Executive Officer of Etika Group of Companies (Malaysia, Singapore and Brunei) says the highly-publicised initiative will help his company create a direct and meaningful dialogue with its customers, centred around the important issues of environmental protection.
“In recent years, we have seen an increasing number of consumers respond positively to brands committed to environmentally-conscious and sustainable practices,” says Santharuban. “With growing concerns about the environment, there is an urgent need to build innovative solutions to combat pressing challenges such as plastic pollution, increasing emission of greenhouse gases, and waste management.”
Proud of the company’s determination to lead the way for Malaysia’s FMCG sector in committing to measurable KPIs, Santharuban says applying the performance-based dividend was about Etika showing its environmentally-savvy customers that its commitment to doing better for Malaysia’s sustainable future represented more than open-ended promises.
“To ensure the materialisation of our goals, we believe the use of environment-centric targets which are specific, measurable, verifiable, and transparent, will allow us to understand our positioning – on where we are currently and where we are heading, while remaining consistently clear on our key focus areas, milestones, goals, and achievements.”
Measurable targets
Sylvia Wong, Head of Financial Markets Corporate Sales, ASEAN, Standard Chartered, explained further how its pricing mechanism works: “A discount or premium will be applied on the swap pricing, depending on Etika’s achievement of pre-agreed sustainability related Key Performance Indicators (KPIs) that are tied to greenhouse gas emissions intensity reduction of its beverage and dairy plants. These two plants form a material portion of Etika Group’s operations.”
“For us and our clients to work hand-in-hand in achieving sustainability goals, integrity and transparency around KPI setting, the measurements and verification are of utmost importance,” explains Wong. “Etika has worked closely with us in ensuring that the KPIs we have agreed upon are ambitious and visible. These are the key ingredients which have provided both Etika and us the comfort in going to market with this deal.”
By designing this annual financial imperative to perform, the deal has enabled Etika to sustain a company-wide conversation all year round focused on demonstrably improving its sustainable performance. “Our aim, as we move forward through the year, is to continue on our roadmap of ensuring responsible business with a focus on sustainable practices,” explains Santharuban.
“This means that we will be paying more focus on innovation across our packaging, products and practices to ensure that we are aligned to our larger ESG goals. We plan to introduce more eco-friendly packaging, adhering to manufacturing practices that reduce waste – and develop products that are better for our consumers. We believe these are important cornerstones to our business expansion.”
Etika has set itself ambitious environmental targets. “We have a target to reduce Scope 1 and Scope 2 carbon emissions by 20% by 2030,” notes Santharuban. “We have already embarked on our mission toward achieving net zero carbon emissions by 2050, and we are now on track with a 2% reduction to-date in the carbon emissions intensity of our portfolio.iii”
Achieving the yearly targets will require a multi-pronged effort, including diversifying into renewable energy or clean energy, such as natural gas. Company initiatives include subscription to Malaysia’s Green Electricity Tariffiv, a government initiative that offers customers the option of purchasing power sourced solely from renewable energy; implementation of solar harvesting; and generation of electricity through efficient combined heat power technology, powered by natural gas, which is 75 per cent more energy efficient than conventional boilers and power generation technologiesv. In addition to this, there is a plan to certify Etika’s energy management system.
Key for the company has been adopting the mindset and practices of a less wasteful circular economy, right across its business operations. “We are implementing several new systems to improve our current waste management, recycling efforts and composting,” notes Santharuban. “Currently, several initiatives have been put in place including the downgauging of packaging and the future use of recycled PET resins.” PET is a strong and lightweight plastic that is widely used in foods and beverage packagingvi.
It was important to us to find like-minded partners — and when it came to it, Standard Chartered makes a perfect counterpart for us, as our goals are aligned and Standard Chartered Malaysia has been at the forefront of a number of first to market ESG transactions.
Closely-aligned partners
As with any business, inviting greater attention to efforts around waste management and supply-chain improvement also ushers in greater scrutiny from people sceptical about so-called greenwashing practices. Santharuban is well-aware that to get it right, companies and their business partners must adopt a culture of constant vigilance.
“Taking into consideration the pressing need to address environmental impact, challenges and social responsibility, at Etika, we have shaped our group sustainability initiatives to emerge as a greener business – with a focus on implementing better practices for our consumers, communities, and the environment,” Santharuban says.
Finding other companies with similarly broad commitments has been key to expanding Etika’s journey, Santharuban explains. “It was important to us to find like-minded partners – and when it came to it, Standard Chartered makes a perfect counterpart for us, as our goals are aligned and Standard Chartered Malaysia has been at the forefront of a number of first-to-market ESG transactions.”
“Malaysia has set a Carbon Neutral 2050 goal, and we see a huge opportunity in supporting our clients in Malaysia, such as Etika, transition towards a low-carbon future and meet their decarbonisation goals,” notes Mak Joon Nien, Managing Director and CEO of Standard Chartered Malaysia.
“In line with our ambition to become the world’s most sustainable and responsible bank, this ESG-linked derivatives transaction is another feather in our cap that proves our commitment to innovation and ability to ‘walk the talk’ regarding issues that are close to our heart, such as climate change and sustainability,” adds Mak.
i MGATS
ii Energy.gov