The Evolving ESG Landscape in Malaysia: A Framework for Sustainable Growth

by | Jul 10, 2025 | Uncategorized

ESG (illustration)

Malaysia stands at a pivotal juncture in its economic development, increasingly recognizing that long-term prosperity is inextricably linked to environmental stewardship, social responsibility, and robust governance. The global surge in Environmental, Social, and Governance (ESG) investing, combined with regulatory pressures, has prompted Malaysian businesses, regulators, and investors to adopt a structured approach to sustainability. This article explores the key pillars of the emerging framework of ESG companies in Malaysia, their drivers, challenges, and the path forward.

Drivers of the Malaysian ESG Framework:

  1. Global Market Pressures: Access to international capital and participation in global supply chains (especially for key exports like palm oil, electronics, and rubber gloves) increasingly demand demonstrable ESG compliance. International investors and multinational corporations prioritize partners with strong sustainability credentials.

  2. Regulatory Mandates: Bursa Malaysia, the national stock exchange, has been a primary driver. It’s Mandatory Sustainability Reporting Requirements for listed companies, phased in since 2016 and significantly enhanced over time (including the adoption of the globally recognized Task Force on Climate-related Financial Disclosures (TCFD) framework by 2025), set a clear baseline. The Securities Commission Malaysia (SC) also plays a crucial role through its Sustainable and Responsible Investment (SRI) taxonomy, guidelines for SRI funds, and the Value-Based Intermediation (VBI) framework for Islamic financial institutions.

  3. National Commitments: The Malaysian government has made significant pledges, including achieving carbon neutrality by 2050. This necessitates a whole-of-economy transition, placing ESG principles at the core of national planning, as reflected in policies like the National Energy Policy (2022-2040) and the Twelfth Malaysia Plan (2021-2025).

  4. Investor Demand: Both domestic and international asset managers are integrating ESG factors into their investment decisions. The growth of SRI funds and green sukuk in Malaysia highlights this shift. Investors seek transparency and evidence of effective ESG risk management and opportunity capture.

  5. Stakeholder Expectations: Consumers, employees, and communities are increasingly holding companies accountable for their environmental footprint, labor practices, community impact, and ethical conduct. Reputational risks associated with ESG failures are significant.

Key Pillars of the Malaysian ESG Framework:

  1. Regulatory & Exchange Mandates (Bursa Malaysia & SC):

    • Bursa Malaysia Listing Requirements: Mandate sustainability reporting based on a prescribed framework, requiring disclosure of material ESG matters, board oversight, stakeholder engagement, and adoption of recognized international standards, such as the TCFD.

    • SC’s SRI Taxonomy: Provides clarity on what constitutes sustainable economic activities, guiding investment and reporting.

    • SC’s Guidelines on SRI Funds: Sets standards for fund managers offering ESG-themed investment products.

    • Value-Based Intermediation (VBI): Integrates sustainability objectives within Islamic finance principles.

  2. Voluntary Standards & Guidance:

    • International Frameworks: Adoption of GRI Standards, SASB Standards, TCFD Recommendations, and the UN Sustainable Development Goals (SDGs) is widespread among leading companies for structuring their reporting.

    • Local Guidance: Organisations like the Minority Shareholders Watch Group (MSWG) provide resources and advocate for best practices in governance and sustainability reporting.

  3. Industry-Specific Initiatives: Sectors facing heightened ESG scrutiny (e.g., palm oil, as exemplified by the Malaysian Sustainable Palm Oil – MSPO certification, and forestry) have developed specific standards and certification schemes.

  4. Financial Sector Integration: Banks are increasingly incorporating ESG risk assessments into lending decisions, guided by frameworks like VBI and climate risk guidelines from Bank Negara Malaysia (the central bank). Green financing and sustainability-linked loans are experiencing rapid growth.

  5. Government Policy & Infrastructure:

    • Ministry of Natural Resources and Environmental Sustainability (NRES): Leads on environmental policies and climate change commitments.

    • Malaysian Green Technology and Climate Change Corporation (MGTC): Facilitates green technology adoption and climate action initiatives.

    • National ESG Framework (Under Development): Recognizing the need for greater coherence, the government is actively developing a comprehensive national ESG framework to harmonize standards and accelerate adoption across all company sizes.

Challenges in Implementation:

  • Data Availability & Quality: Consistent, reliable, and comparable ESG data remains a significant hurdle, especially for Scope 3 emissions and social metrics.

  • Capacity & Expertise: Many companies, particularly SMEs, lack the internal expertise and resources to effectively measure, manage, and report on ESG performance.

  • Cost Implications: Implementing ESG initiatives, particularly major environmental upgrades or comprehensive supply chain monitoring, can involve substantial upfront costs.

  • Greenwashing Risks: Ensuring authenticity and avoiding superficial ESG claims requires robust verification and assurance mechanisms to ensure transparency and credibility.

  • SME Integration: Extending ESG practices beyond large listed companies to the vast SME sector is crucial for achieving national goals, but it presents unique challenges due to resource constraints.

  • Harmonization: Aligning various reporting frameworks (Bursa, SC, international standards) and streamlining requirements can reduce complexity.

The Path Forward:

Malaysia’s ESG journey is well underway but requires sustained effort:

  1. Finalize & Implement the National ESG Framework: Providing clear, unified direction for all sectors is crucial.

  2. Enhance Capacity Building: Significant investment is needed in training, resources, and advisory support, especially for SMEs. Platforms like the Climate Change and Principle-based Taxonomy (CCPT) Advisory Platform (CTIAP) are steps in this direction.

  3. Strengthen Data Infrastructure: Developing national databases, standardizing metrics, and promoting the adoption of technology (e.g., AI for data collection) will enhance data reliability.

  4. Promote Green Finance: Expanding access to affordable, sustainable financing mechanisms (green bonds, sustainability-linked loans, grants) is essential to fund the transition.

  5. Robust Assurance: Enhancing the quality and mandatory nature of independent ESG assurance will build trust and combat greenwashing.

  6. Supply Chain Engagement: Encouraging large corporations to support their SME suppliers in adopting ESG practices is vital for achieving a holistic impact.

  7. Stakeholder Collaboration: Ongoing dialogue among government, regulators, industry, investors, and civil society is crucial for addressing emerging challenges and opportunities.

Conclusion:

Malaysia has laid significant groundwork for embedding ESG principles into its corporate and economic fabric. Driven by regulation, market forces, and national ambition, the framework is evolving from a compliance exercise towards a strategic imperative for resilience, competitiveness, and attracting sustainable capital. While challenges persist around data, capacity, and harmonization, the momentum is undeniable. The successful implementation of a robust national ESG framework, coupled with targeted support and collaboration, will be instrumental in positioning Malaysia not just as a regional leader in sustainability but as a thriving, responsible economy for decades to come. Embracing ESG is no longer optional; it’s the blueprint for Malaysia’s sustainable future.

Frequently Asked Questions (FAQs) about ESG in Malaysia

  1. Is ESG reporting mandatory for all companies in Malaysia?

    • Currently, mandatory sustainability reporting is primarily required for companies listed on Bursa Malaysia. The specific requirements depend on their market capitalization (Main Market vs. ACE Market) and have been phased in over several years. However, the scope is expanding. The government is developing a National ESG Framework aimed at encouraging and potentially mandating ESG practices for larger unlisted companies and eventually SMEs. Furthermore, companies in regulated sectors (like finance) or those seeking specific certifications (like MSPO) or international supply chain contracts often face de facto mandatory ESG requirements.

  2. What are the key ESG reporting requirements for listed companies on Bursa Malaysia?

    • Listed companies must publish an annual Sustainability Statement within their Annual Report or as a standalone report. Key requirements include:

      • Disclosure of material ESG matters identified through stakeholder engagement and a materiality assessment.

      • Explanation of board oversight of sustainability.

      • Description of the sustainability reporting framework and standards used (e.g., GRI, SASB, TCFD).

      • Policies, targets, and performance data related to material ESG topics (e.g., climate risks, diversity, anti-corruption, health & safety).

      • Adoption of the TCFD recommendations is mandatory for PLCs on the FTSE4Good Bursa Malaysia Index from FY2024 and for all Main Market-listed companies by FY2025. ACE Market-listed companies must adopt by FY2026.

  3. What is the TCFD, and why is it important for Malaysian companies?

    • The Task Force on Climate-related Financial Disclosures (TCFD) is a global framework developed by the Financial Stability Board. It provides recommendations for companies to disclose information about their climate-related risks (physical and transition risks) and opportunities, governance around climate issues, strategy resilience, risk management processes, and relevant metrics/targets.

    • It’s critically important because Bursa Malaysia mandates its adoption. It helps companies understand and manage their climate risks, which are increasingly material to financial performance and investor decisions. It enhances transparency and comparability for investors assessing climate resilience. It prepares companies for potential future carbon pricing and regulation.

  4. What are the potential consequences for non-compliance with Bursa Malaysia’s ESG reporting rules?

    • Bursa Malaysia takes non-compliance seriously. Potential consequences include:

      • Public Reprimands: Issuing public statements criticizing the company.

      • Fines: Monetary penalties imposed on the company and/or its directors.

      • Suspension of Trading: Temporary halting of the trading of the company’s securities.

      • Delisting: Removal of the company from the stock exchange (considered a last resort for severe or persistent non-compliance).

      • Damaged Reputation & Investor Confidence: Non-compliance can significantly harm a company’s reputation, increase its cost of capital, and deter investors.

  5. Where can Malaysian companies find resources and support to implement ESG practices?

    • Several resources are available:

      • Bursa Malaysia: Provides detailed Sustainability Reporting Guides, Toolkits, and FAQs on their dedicated sustainability webpage.

      • Securities Commission Malaysia (SC): Offers guidelines on SRI, the SRI Taxonomy, and VBI.

      • Malaysian Green Technology and Climate Change Corporation (MGTC): Offers advisory services, funding programs, and capacity building on climate action and green tech.

      • Climate Change and Principle-based Taxonomy Advisory Platform (CTIAP): A joint initiative by BNM and SC providing advisory support for financial institutions and corporates on climate risk management and TCFD alignment.

      • Industry Associations: Relevant sector-specific bodies (e.g., Malaysian Palm Oil Council – MPOC) often provide guidance and resources.

      • Consulting Firms & NGOs: Numerous professional services firms and non-governmental organizations offer ESG advisory, training, and assurance services.

      • International Standards Organizations, including GRI, SASB, TCFD, and CDP, offer extensive free resources and guidance on their websites.