Climate change: Calling on internal auditors to be the agent of change
At its annual conference held on October 19-20, the Institute of Internal Auditors Malaysia called on internal auditors to take a proactive role in improving practices related to the sustainability of listed companies (PLCs) (encompassing environmental, social and governance, or ESG) and disclosures, including climate change-related disclosures aligned with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). On September 26, Bursa Malaysia announced enhanced sustainability reporting requirements for ATMs listed on the Main Market and ACE Market. This announcement had a major implication for internal auditors and the internal audit function (IAF).
As a result, Main Market Limited Companies are also required to disclose enhanced quantitative information on their sustainability goals, such as a minimum of three financial years’ data for each reported indicator, including a statement of assurance on whether the company’s sustainability statement has been reviewed internally by internal auditors or independently assured. In addition, ACE Market PLCs are required to strengthen their sustainability reports to align with those of the main market, with an additional requirement to disclose a baseline plan for transitioning to a low-carbon economy. This puts pressure on PLCs listed on the ACE market to take into account the risks and opportunities associated with climate change, taking into account their maturity in the climate change space.
This is a timely move by Bursa to signal the start of the nation’s net zero commitments. Most importantly, to ensure successful implementation of the requirements, Bursa has adopted a multi-year and phased implementation approach. Public companies listed on the main market will be required to disclose common sustainability issues for the fiscal year ending on or after December 31, 2023, and culminating with TCFD-aligned disclosures for the fiscal year ending on or after December 31, 2025 . call for Corporate Malaysia has generated many ESG-focused events. The clear message from these events is that the board has a critical role in shaping the company’s ESG strategy to achieve sustainability goals and that PLCs have limited opportunities to greenwash. This is where the increased role of internal auditors lies.
Bursa’s announcement aligns with the global race against climate change – the most defining issue right now. Most importantly, the public must take a proactive role in climate change adaptations. However, public information on the effects of climate change is sorely lacking. DFC’s sustainability reports and climate-related disclosures can provide important information in this regard.
The impact of climate change must be clearly understood and appreciated. Climate change refers to long-term changes in temperatures and weather patterns that occur naturally, for example through variations in the solar cycle. However, human activities have been the main driver of climate change since the 1800s, mainly due to the burning of fossil fuels such as coal, oil and gas, which generate greenhouse gas emissions (including carbon dioxide). carbon dioxide and methane) that trap the sun’s heat and raise temperatures.
Dr. Nampuna D Gultom of Sunway University Business School, in his ongoing research, has conducted a study of historical literature on economic and financial crises from AD34 to the present day. He found evidence to suggest that climate change was already one of the critical factors affecting the lives of human beings. For example, data recorded during the Great Depression of the British agricultural sector shows that the collapse in grain prices was partly due to the poor seasons of 1875-1879. Prolonged wet summers affected the quality of cereal harvests. Later, a series of summer droughts in 1892-1893 and 1895-1896 caused problems for herders. These events caused the agricultural contribution to Britain’s gross national product to fall from 20% in the 1850s to just 6% by the end of the 1890s.
The depression occurred 25 years after the “Little Ice Age” (LIA) (1650-1850), a period of regional cooling mainly in the North Atlantic region. The transition period was only an increase in an annual global mean temperature change of +0.2°C from the LIA period (at -0.2°C on average per year). From 2021, we have reached an annual variation greater than +0.8°C worldwide. Clearly, the exit from the mini ice age in the 19th century did in fact affect Britain’s agricultural sector, and it was one of the triggers in a series that eventually led to the Great Depression in the 19th century.
Climate change (though tiny in scale compared to current climate change), combined with limited agricultural technology to mitigate sudden changes in climate, has caused the death of many crops and driven up the prices of locally harvested foods compared to those produced abroad. Therefore, climate change cannot be ignored. It’s time for real ESG action beyond compliance.
The IAF is recognized as an important strategic partner in the sustainability agenda. Bursa certainly recognizes the importance of this role. The need to subject the sustainability report to internal review elevates the IAF.
Now is the time to take action to integrate the IAF into the sustainability conversations in DFC.