Understanding ESG: A Path to Sustainable Business Practices in Malaysia

What Is ESG?

ESG stands for environmental, social, and governance. ESG refers to the factors that investors measure when analysing a company’s sustainability efforts, responsibility metrics and standards for potential investments.

(a) Environmental responsibility gauges how a company safeguards the environment and/or manage the environmental impacts.

(b) Social responsibility examines how a company manages relationships with employees, customers, etc and bring community impacts.

(c) Governance measures a company’s leadership, internal controls, audits, executive remuneration and shareholder rights, it serves as a control mechanism of a company.

ESG is a measure to assess sustainability of a company, encompassing climate change, human rights and adherence to law. ESG investing implies not just chasing profits, but also looking at how those profits are earned from a sustainable development perspective.

Why is ESG important in business?

Since year 2021, sustainability and ESG are taking the front seat of investors’ focus. ESG being the 3 non-financial factors are now increasingly being measured and analysed by investors to identify a company’s risk and sustainability in the market.

Based on an article published by Bursa Malaysia, companies with good environmental, social and corporate governance (ESG) practices have been more resilient since the start of the Covid-19 pandemic as investors’ growing concerns over damage to the environment have led them to put more value on the effective management of ESG risks.

With the concerns in respect to sustainability, investors are now expecting change of a company’s business role in improving society and protecting the environment. ESG also increased greater transparency of a company governance.

ESG principles have gained immense prominence in company businesses, for the following reasons:

(a) Investor confidence: ESG attracts a broader base of investors who value sustainability and ethical conduct, it boosts investor confidence from those who prioritise sustainability.

(b) Risk mitigation: ESG helps identify and mitigate various risks, from environmental disasters to reputational damage.

(c) Competitive advantage: ESG can help to differentiate a company in a crowded marketplace, appealing to socially conscious consumers.

(d) Long-term viability: ESG is a long-term strategy for building resilient and future-ready business.

ESG impact in Malaysia?

Malaysian companies have adopted and integrating ESG into their business strategies and operations to boost their overall competitiveness.

ESG metrics have become an essential tool for decision-makers, investors, and consumers who are looking to support responsible and sustainable practices.

Investors are increasingly considering ESG factors when making investment decisions and recognizing the companies with strong ESG performance.

Growing of ESG in Malaysia

As a developing country, Malaysia government has released its 12th Malaysia Plan in September 2021, pledging to achieve carbon neutrality by 2050. While the pledge is focused on adhering to more environmentally friendly practices, it also provides an opportunity to promote greener and more ethical investments.

The rise in ESG adoption in Malaysia highlights the growing interest in sustainable finance, and the attention it continues to gain with the ongoing environmental and socioeconomic transformations in South-East Asia.

What is ESG reporting?

ESG reporting is the process of disclosing information about a company’s operations and risks and communicating a company’s ESG performance to its stakeholders in respect to these 3 areas: environmental stewardship, social responsibility, and corporate governance.

ESG reporting is a more focused and measurable approach that can be relied on by the investors to identify which companies to invest in with less financial risk because of their environmental impact, social standards, or governance structure.

ESG reports help investors’ portfolios avoid companies engaged in risky or unethical practice and/or companies that may be impacted by stricter ESG metrics in the future or other risks related to ESG data included in their reports.

The first phase, effective next year, will apply to large listed-companies on the Main Market with market capitalisation of RM2 billion and above. This will then be extended to other Main Market listed issuers in 2026, followed by listed companies on the ACE Market as well as large non-listed companies in 2027.

Why is ESG reporting important for company?

As businesses around the world face increasing pressure to incorporate sustainability practices into their operations, governments are taking proactive steps to enforce mandatory ESG reporting.

In Malaysia, ESG reporting has been made mandatory for all public listed companies since year 2016. The Malaysian government and the Securities Commission Malaysia (SC) promote ESG reporting through initiatives like:

(a) The Malaysian Code on Corporate Governance (MCCG)

(b) The Sustainable and Responsible Investment (SRI) Framework

(c) The ESG Index Series

Bursa Malaysia has enhanced the Sustainability Reporting Framework to standardise ESG disclosures, encouraging reporting against international best practices with common indicators and bolstering investor confidence since year 2016.

ESG reporting is not only a matter of compliance or reputation but also a strategic tool that benefits the companies, including:

(a) Enhancing trust and credibility: ESG reporting enables companies to cultivate trust and credibility, whereby the stakeholders can witness companies’ transparent dedication to ethical practices.

(b) Improving performance and competitiveness: ESG reporting helps companies to enhance their market performance and competitiveness by unveiling ESG risks and opportunities. It serves as a dynamic tool to fostering a culture of innovation and sustainable growth.

(c) Contributing to the global goals: ESG reporting plays a pivotal role in aligning companies with international aspirations. It allows companies to showcase their positive impact, emphasising their contribution to global challenges and collaborative solutions.

Law and regulations pertaining to ESG in Malaysia

The Malaysian businesses and investors must adhere to Malaysia law and regulations in relation to ESG practice.

(a) Environment-related law - Environmental Quality Act 1974

(b) Social - Consumer Protection Act 1999; Employment Act 1955; Occupational Safety and Health Act 1994; and Anti-Sexual Harassment Act 2022

(c) Corporate Governance - Companies Act 2016; Companies Commission of Malaysia Act 2001; Malaysian Anti-Corruption Commission Act 2009; Whistleblower Protection Act 2010; Capital Markets and Services Act 2007; and Financial Services Act 2013

Conclusion

Malaysia is seen to be expediting its ESG efforts amidst Asia’s growing focus on sustainability in recent years, evolving positively to reflect its broader commitment to sustainable development and corporate social responsibility.

In Malaysia, ESG practices are not just an option but a necessity for sustainable growth and development. Incorporating ESG practices into the business operations can not only aligns with the global ESG trend but also positions Malaysia as a responsible and forward-thinking player in the international business arena.

Looking into the future, the ESG framework has the potential to strengthen Malaysia's position in the global market and attracting responsible investments.

This Brief Introduction of ESG in Malaysia is written by Wong Poh Yee, Associate, ESG Practice Group. Our Managing Partner and Head of ESG Practice Group, Kho Sze Jia, can be reached at szejia@ikclaw.com