Malaysia – ESG: An Update.
In light of the rapidly growing trend of ESG and its growing influence on global business practices which led to the existence of a vacuum of information on ESG, this article serves as an update to our previous discussions on the topic. Rather than revisiting the fundamentals of ESG, we will focus on an update of recent developments, with particular attention to changes within Malaysia’s commercial and legal framework, alongside significant global trends.
Origins of ESG
ESG stands for Environment, Social, Governance. The main objective of ESG is as the acronym explained, which is to ensure businesses, enterprises and corporation operates in a way which is:
(1) up to stringent environmental standards to guard humanity against the adverse effects of climate change;
(2) ensuring that corporations uphold their corporate social responsibility by contributing to meaningful change in business by utilising local resources and strengthening the community at large; and
(3) to implement and uphold the best practice governance principles to operate in an ethical, transparent and accountable manner which can be trusted by the stakeholders at large.
ESG contrary to popular belief, is not a new “trendy” concept that just emerged in the last few years. As far back as the 1980s, organisations in the United States had considered using regulation to manage or reduce pollution (and other negative externalities) produced in the pursuit of economic growth and improve employee labour and safety standards at the same time. This gradually evolved with the trends and challenges of time, and it later then evolved into Corporate Social Responsibility (CSR) which placed a heavier emphasis on corporate philanthropy and employee volunteerism.
Examples of ESG regulations
With regards to ESG regulations, the European Union (EU) ought to be the main point of reference. This is because the EU has the most regulations legislated and directives issued on the matter as well as having the most case studies. According to the data gathered by Guotai Junan Securities in 2022, half of the world’s ESG products are in Europe.
Some of the more recent key legislations and directives include the Shareholder Rights Directive (2014), which protects shareholders’ rights; the General Data Protection Regulation (2018), a stringent privacy law; the European Green Deal (2020) and the European Climate Law (2021), both fostering the green transition and aiming for climate neutrality by 2050; the Non-Financial Reporting Directive (2023), mandating ESG performance disclosure; and the Corporate Sustainability Due Diligence (2025), promoting proactive measures in human rights and environmental impacts.
These policies have global ramifications, influencing corporate governance worldwide, and serves as a blueprint for other countries on matters ranging from environmental impact to supply chain monitoring. Globalisation has also accelerated the spread of awareness and consciousness of ESG around the world. The increased emphasis on ESG practices also mean that companies globally who have or are planning to have commercial dealings in Europe are also exploring the viability of incorporating ESG guidelines in their standard operating practices.
What are the ESG related disputes that may arise?
While the developers and crafters of ESG acted with good intentions, it is however inevitable that market players may try to misuse ESG. In a PricewaterhouseCoopers International Limited (PWC)’s 2023 article titled “The Rise of ESG Fraud”, several examples of a gradual rise of intentional misreporting or misrepresentation of an organisations’ achievements in relation to ESG were reported.
The rise of these deceptive manoeuvres goes back to the fundamental problem with ESG today, that is a lack of uniform reporting standard and general lack of understanding of ESG. Although several groups such as the European Financial Reporting Advisory Group (EFRAG), the International Sustainability Standards Board (ISSB), and the Sustainability Accounting Standards Board (SASB) have developed their own set of guidelines and standards on ESG reporting, there exists a major regulatory vacuum in terms of regulating and setting a clear standard for ESG reporting.
While some have argued that regulating ESG will risk the agenda being bureaucratised which makes it more expensive and inaccessible to companies which are of smaller scale to carry out ESG practices, that essentially goes against the free-market concept of free and open competition. It is undeniable that such concerns are valid. However, with ESG gaining more traction and attracting explosive growth in the ESG investment industry, there is a need for oversight and regulation to prevent the threat of investor abuse. Free market undeniably is a great vehicle for growth and expansion economically, but without some form of breaking mechanism it is extremely prone to instances of market manipulation, fraud and financial crisis just like what happened to the U.S in 1929 and more recently in 2008.
Moreover, there is also a growing trend of “greenwashing” amongst companies which use it as a marketing scheme to build up their brand image. In 2022, German-based Deutsche Bank-controlled investment firm DWS paid a $25 million settlement to settle charges over misstatements regarding its environmental, social, and governance (ESG) investments and failures in its policy design to prevent money laundering by US authorities. In the same year, American multinational investment bank Goldman Sachs was charged by the U.S. Securities and Exchange Commission (S.E.C) for failing to follow certain policies and procedures for investments marketed as ESG investments. This resulted in a $4 million penalty, a cease-and-desist order and a censure on the company.
Another notable case is Asmania et al v Holcim, where Indonesian islanders filed a lawsuit against Holcim in Switzerland in July 2023. The plaintiffs seek a court order requiring Holcim to rapidly reduce emissions to align with the Paris Agreement goals. They also demanded financial contributions from Holcim to mitigate climate impacts on the island, citing the company’s substantial historical CO2 emissions. This case reflects growing legal challenges asserting corporate accountability for climate change impacts, echoing earlier inquiries by the Philippines Commission on Human Rights.
In an article published by HLB, which is a global network of independent advisory and accounting firms. It cited that after drug trafficking and counterfeit goods, environmental crime is the third-most profitable global criminal activity and the impact is consequential as its damage extend to the environment, human rights, public health, and socio-economic development in the long term. The unregulated nature of ESG has also led to an exponential increase in money-laundering cases in the ESG sphere.
The developments of ESG infrastructure within Malaysia’s commercial and legal framework
Much like most of the developing economies, ESG in Malaysia is still in its infancy. Although markets and the general populace have been encouraged by the introduction of several government initiatives and policy roadmaps which are in line with ESG such as the National Energy Transition Roadmap (NETR), the development of the National Sustainability Reporting Framework (NSRF) and the Simplified ESG Disclosure Guide (SEDG).
The Malaysian government have also recently passed several legislations which fit into the main themes of ESG such as the Anti-Sexual Harassment Act 2022, the Companies Act as well as the recent announcement by the Minister of Natural Resources and Environmental Sustainability Minister Nik Nazmi Nik Ahmad that a Climate Change Bill will be tabled in 2025. While it has taken longer to take off, ESG consciousness amongst the general public is growing, and as the pool of stakeholders and activist continues to grow, the market demand for ESG products and services will gradually pick up momentum as well.
On that front, one can take some inspiration and reference from China. Similar to Malaysia, ESG was not a prominent or popular theme in China until the mid-2010s. But upon assessing the development of ESG in China recently, the development and growth in consciousness of ESG has been explosive to say the least. On May 2024, China’s Ministry of Finance opened a public consultation on the Exposure Draft of the Chinese Sustainability Disclosure Standards for Businesses. According to the accompanying explanatory document, China intends to create a mandatory International Sustainability Standards Board (ISSB)-aligned sustainability reporting system by 2030, with fundamental sustainability-related and climate-related disclosure standards set to be introduced by 2027.
The ISSB is an organisation which develops standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. It has international support in its work to develop sustainability disclosure standards backed by the G7, the G20, the International Organization of Securities Commissions, the Financial Stability Board, African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions. China’s approach towards regulating ESG are based on the regulatory recommendations of IISB on the best practices of ESG compliance.
Interesting Developments around the World and lessons for Malaysia
As Malaysia is still adapting to ESG regulations, it must be open to all ideas and practices around the world. The one advantage of slowly adapting to ESG is that Malaysia is able to “look and learn” of examples and case studies from past experience of other countries which had gone through the process earlier.
For example, some of the most advanced and successful countries in the ESG space are Scandinavian countries such as Sweden, Denmark, Norway, Iceland, and Finland. The one common convergence between the Scandinavian countries and Malaysia is that both are mineral/resource-rich countries. Many critics have often cited that ESG guidelines are by construct, difficult to comply with for oil-producing countries and mineral exporting countries which is why developed countries like the United States of America is ranked relatively low on some of the metrics of ESG compliance. However, the Scandinavian countries consistent high ratings debunk this theory.
The Scandinavian countries success on the ESG front is based upon its strong commitment from the highest political level as well as the government’s effective messaging on promoting sustainable development throughout the decades which have shaped the strong societal support and attitude towards ESG amongst the Scandinavian society. Malaysia could very well take lessons and inspiration on how to effectively craft a national sustainable agenda similar to the approach adopted by Denmark and Sweden which had placed strong emphasis on sustainable development from the schools, townhalls and community centres.
Canada is another interesting reference point for Malaysia. Besides issuing directives and aggressive promoting of the principles and promise of ESG at the grassroots level. The Canadian government had also legislated several ambitious legislations that is within the wider context of ESG. The carbon tax is perhaps the most infamous among the group. While the carbon tax is not without its controversies, since many have argued that the “price on pollution” resulted in inflation and the subsequent increase in the cost of living. It is nevertheless an option worth considering.
This is because legislation such as the carbon tax or deforestation duties or any other form of taxation are more of a market-based approach rather than an authoritative dictation from the government. This approach is more acceptable for businesses to accept as it allows for more leeway and time to adjust and transition their business model and operation gradually rather than an outright directive or legislation which would shock the market with very rigid timeframe to mandate change from businesses and corporations.
Conclusion
In conclusion, ESG appears to be here for the long run. With its multiple benefits, it is bound to be a useful mechanism for the growth of multiple industries. There are however, multiple hurdles that need to be overcome in implementing and regulating ESG, but the end result will be worth it for a greener, safer and more inclusive future.
