The most important laws pertaining to ESG in Malaysia
Both Malaysian businesses but in particular foreign investors need to know at least the basics of the laws they must adhere to in order to become ESG-compliant. It would be impossible to discuss all laws and provisions in one single paper; this section only aims at providing a concise yet comprehensive overview.
 
Environment-related laws
Three Acts comprise the fundaments of environmental law in Malaysia: The Environmental Quality Act 1974 (“EQA 1974”) and its respective amendment acts in 2007 and 2012.
 
The EQA 1974 establishes key infrastructure for the administration of the EQA 1974, such as the office of the Director General of Environmental Quality (vested with several wide-ranging powers aimed at protecting Malaysia’s environment and administering the provisions of the EQA 1974) and the Environmental Quality Council (an advisory body for the Minister of natural resources, the environment and climate change – currently Nik Nazmi bin Nik Ahmad).
 
In order to control the volume of potentially harmful waste and other such substances, the EQA 1974 provides for a system of licencing⁴ to regulate the same in respect of any premises which may be producing such emissions. The discretion to grant licences lies with the Director General,⁵ subject to conditions (if any) he thinks fit.
 
Certain prescribed premises must be licenced, and failure to do so is an offence attracting a maximum penalty of RM50,000 or two years’ prison or both (plus a fine of RM1,000 for each day that the offence continues after a notice of cessation is sent to the Director General).⁶ The prescribed premises are as follows:

• All premises occupied or used for the processing of oil-palm fruit or oil-palm fresh-fruit bunches into crude palm-oil, whether as an intermediate or final product.⁷  
• All premises occupied or used for the production or processing of:⁸

  raw natural rubber in technically specified form, latex form including prevulcanised or the form of modified and special purpose rubber; and conventional sheet, skim, crepe or any other form of raw rubber not already described in quantities of 5 tonnes or more per day or with a production or processing capacity of a similar quantity.

• In respect of Waste Treatment and Disposal Facilities:⁹

  off-site storage facilities; off-site treatment facilities; off-site recovery facilities; scheduled waste incinerators; land treatment facilities; and secure landfills.

The EQA 1974 also requires several activities to be licenced. Failure to obtain a licence for activities which could cause certain types of serious pollution are offences. The most important types of pollution are as follows:

• Pollution of the atmosphere¹⁰, including by open burning;¹¹
• Noise pollution;¹²
• Soil pollution;¹³ and
• Inland water pollution, including pollution by waste¹⁴ or by oil.¹⁵  

In respect of these offences, the penalty is a fine not exceeding RM100,000 or a term of imprisonment of five years or fewer, or both (and a further fine not exceeding RM1,000 per day for each day the offence continues after the Director General issued a notice of cessation).
 
Finally, any person aggrieved by, among others, a refusal to grant a licence, may appeal to the Appeal Board, composed of three persons, i.e., a Chairman and Deputy Chairman designated by the Chief Justice of Malaysia and one further person designated by the Chairman.
 
Social
 
As stated earlier, the “social” aspect of ESG governs the channels and methods through which a company interacts and impacts with the wider communities in which they operate (including their consumers) and those in their employ.
 
In the first respect, Malaysia has several pieces of legislation aimed at regulating channels of communication between companies and consumers as well as the impact of those companies on their consumers. Prime among these is the Consumer Protection Act 1999 (“CPA 1999”), which protects consumers against (among others):

• Misleading and Deceptive Conduct, False Representation and Unfair Practices;
• Safety Of Goods and Services;
• Unfair Contract Terms; and
• Defective products.  

Contravention of the requirements relating to misleading and deceptive conduct as well as safety of goods and services are offences, for which the penalty is:

• For a body corporate, a fine of up to RM250,000.00 for the first offence, and up to RM500,000.00 for the second; and  
• For an individual, a fine of up to RM100,000.00 or a term of imprisonment of up to three years for the first offence or both, and a fine of up to RM250,000.00 or a term of imprisonment of up to six years or both.  

The CPA 1999 provides several defences to these offences, including mistake and innocent publication. Essentially, the CPA 1999 provides a robust framework for consumer protection in Malaysia and acts as an exemplar of social regulation in Malaysia.
 
Further, it is arguable that the Companies Act 2016 obliges company directors to consider ESG in the exercise of their powers. Section 213(1) of the Companies Act 2016 requires company directors to exercise their powers in good faith and for a proper purpose, i.e., in the best interests of their respective companies.¹⁶ As ESG becomes an increasingly important concern, it is likely that Directors who fail to take ESG principles into account may fall afoul of Section 213(1) of the Companies Act 2016 in future.
 
In respect of climate change, for example, the Commonwealth Climate  and Law Initiative (in collaboration with our Senior Partner, To’ Puan Janet Looi, and Tan Sri Zarinah Anwar, Chairman of the Institute of Corporate Directors Malaysia, echoed this sentiment in a recent legal opinion. The opinion stated that “it is apparent from legal and regulatory developments that directors are duty bound to proactively and urgently apprise themselves of all aspects of climate change that can affect their companies, take action to manage the full spectrum of climate related risks by integrating them into their corporate strategies, plans and actions, and ensure proper disclosure of such risks”¹⁷.
 
In the second respect, Malaysia has passed several pieces of legislation to protect employees in the workplace in various circumstances, such as the Employment Act 1955 (“EA 1955”), Occupational Safety and Health Act 1994 (“OSHA 1994”) and the Anti-Sexual Harassment Act 2022 (“ASHA 2022”). These Acts, among others, provide a robust framework for various facets of employee protection in Malaysia such as employment contracts, employee health and safety and protection from sexual harassment, respectively.
 
 
EA 1955
The EA 1955 is the main legislation governing employees in Peninsular Malaysia (as Sabah and Sarawak have their respective Labour Ordnances). In general, the EA 1955 provides:

• That terms less favourable than those provided for therein are void¹⁸;  
• Contracts of service may be oral or in writing, but contracts for a period of more than a month must be in writing¹⁹;  
• Contracts of service for a period of more than one month must provide for termination of the same²⁰; and  
• Minimum requirements for Maternity, Annual and Sick Leave²¹.  

Note however that the EA 1955 generally applies only to the employees included in the First Schedule thereof, or those specified in an Order made by the Human Resources Minister (currently YB Tuan V. Sivakumar). This includes²²:

• Any person in a contract of service where their wages do not exceed RM2,000.00 monthly;  
• Any person in a contract of service where:

• Domestic Servants, though Sections 12, 14, 16, 22, 61 and 64, and Parts IX, XII and XIIA of the EA 1955 do not apply.  

OSHA 1994
OSHA 1994 is aimed at “…securing the safety, health and welfare of persons at work, for
protecting others against risks to safety or health in connection with the activities of persons at work, to establish the National Council for Occupational Safety and Health, and for matters connected therewith”²³. Essentially, the Act provides an infrastructural and legal framework for to engender increased occupational safety and health for Malaysian workers. Primarily, OSHA 1994:

• Establishes the National Council for Occupational Safety and Health, which is “…empowered to do all things expedient or reasonably necessary for or incidental to the carrying out of the objects of [OSHA 1994]”²⁴;  
• Sets out general duties for:

• An approval scheme for industry codes of practice²⁸;  
• Provides powers of enforcement and investigation to occupational safety and health officers²⁹; and  
• Provides that any person, inter alia, commits an offence if they breach any of the provisions of the act³⁰.  

ASHA 2022
ASHA 2022 aims to “provide for a right of redress for any person who has been sexually harassed, the establishment of the Tribunal for Anti-Sexual Harassment, to raise awareness and to prevent the occurrence of sexual harassment, and to provide for related matters”³¹. Currently, sexual harassment proceedings are initiated by lodging a complaint of sexual harassment being lodged with the “Tribunal for Anti-Sexual Harassment” (the “Tribunal”), a body established by ASHA 2022³². The Tribunal has the power to make an award in respect of a complaint. This can be one of the following orders³³:

• an order for the respondent to issue a statement of apologyto the complainant as specified in the order  
• if the complaint related to any act of sexual harassment which was carried out in public, an order for the respondent to publish a statement of apology to the complainant in any manner as specified in the order  
• an order for the respondent to pay any compensation or damages not exceeding two hundred and fifty thousand ringgit for any loss or damage suffered by the complainant in respect of the act of sexual harassment; or  
• an order for the parties to attend any programme as the Tribunal thinks necessary  

Corporate Governance
In Malaysia, the corporate governance framework comprises legislations by Parliament, as well as requirements and guidelines issued by authorities to cover listed and unlisted companies. The emphasis is on encouraging listed companies to adopt best governance practices by using a “comply or explain” approach. The following are the key legislations which govern corporate governance in Malaysia.
 
Companies Act 2016
Malaysia being a common law jurisdiction, the courts also rely on case laws, i.e., the law based on previous judicial decisions. Apart from case laws, the laws on good governance of companies, such as Directors’ duties, the rights of shareholders and accountability to shareholders and stakeholders are codified in the Companies Act 2016.
 
The Companies Act 2016 regulates, among others, the management, duties and accountability of Directors, the rights of shareholders and the reporting and disclosure requirements for private, public and listed companies and corporations. 
 
The Companies Act 2016 also provides certain offences, whereby companies may be fined and the company’s Directors and officers may incur personal liability and be subjected to imprisonment. For instance, section 540(1) provides for personal responsibility of the Directors or officers of the company if the court finds that any business of the company has been carried on with intent to defraud the creditors of the company or creditors of any other person or for any fraudulent purpose. Every person who is found to have committed the offence is liable to imprisonment for a term up to 10 years and a fine up to RM1,000,000 or to both.
 
Companies Commission of Malaysia Act 2001
Another important legislation is the Companies Commission of Malaysia Act 2001, which establishes the Companies Commission of Malaysia. The Commission is responsible for the administration and enforcement of the Companies Act 2016. Further, it serves as an agency to incorporate companies and register businesses as well as to provide company and business information to the public.
 
Malaysian Anti-Corruption Commission Act 2009
The Malaysian Anti-Corruption Commission Act 2009 establishes the Malaysian Anti-Corruption Commission. The Act sets out the liability for companies and individuals who provide or attempt to provide “gratification” or engage in corrupt practices.
 
In 2020, corporate liability was introduced into the Act by way of a new section 17A. It provides that a commercial organisation can be considered guilty if any of its employees and/or associates commit corruption for the benefit of the organisation. The commercial organisation is also considered guilty in the event whether or not, the upper management or its representatives know about the corruption acts committed by its employees or associates.
 
The new provision is aimed to encourage commercial organisations to take appropriate and parallel steps to ensure businesses are conducted with integrity and without corruption.
 
Whistleblower Protection Act 2010
An essential feature of corporate governance are whistleblower protections, which contribute to improving the accountability and transparency of organisations. In general terms, a whistleblower is an individual who exposes information about an organization or government that is illegal, unethical, or otherwise inappropriate. This information may include wrongdoing, corruption, or dangerous practices that put public health or safety at risk.
 
The aim of the Whistleblower Protection Act 2010 is to encourage and give protection to persons making disclosures of improper conduct in the public and private sectors.
 
Capital Markets and Services Act 2007
 
The Capital Markets and Services Act 2007 contains provisions that regulate the activities of the markets and intermediaries in the Malaysian capital markets and regulates activities that are not consistent with investor and shareholder and protection, such as prohibitions on insider trading, as well as rules on takeovers, mergers and acquisitions of listed and unlisted public companies.
 
Financial Services Act 2013 and Islamic Financial Services Act 2013
The Financial Services Act 2013 and the Islamic Financial Services Act 2013 deal with conventional financial institutions and with Islamic financial institutions respectively.
 
The Financial Services Act 2013 sets out governance controls, duties and obligations to be observed by financial institutions and other businesses within the financial sector, such as money broking and payment systems. The Act also provides for the powers of the Central Bank of Malaysia regarding the regulation and supervision of financial institutions sector businesses and the oversight of the money market and foreign exchange market.
 
The Islamic Financial Services Act 2013 contains similar provisions to those found in the Financial Services Act 2013, granting the Central Bank of Malaysia the powers to regulate and supervise, but in respect of Islamic financial institutions, takaful insurance and other businesses within the Islamic banking sector.
 
The applicability of foreign ESG laws in Malaysia
It would be short-sighted to take the position that to activities in Malaysia, only Malaysian laws apply. At large, there are three areas where foreign laws related to ESG play a role in Malaysia: Laws applicable only to Malaysian subsidiaries of foreign companies
Above all, Malaysian subsidiaries to foreign companies, especially those headquartered in the European Union, where there are very burdensome ESG obligations, cannot simply disregard the laws that are applicable to their parent company. They are often required to apply the same standard as their parent company, be it because of mandatory applicable laws or because the parent company has self-imposed obligations, as is often the case with European companies already preparing for what’s to come in the next years as part of the European Green Deal.
 
Restrictions when exporting to other countries
When Malaysian companies export to other countries, they can only do so if they meet the requirements of the export destination. The EU Deforestation Regulation, which falls under the European Green Deal, the largest legal sustainability framework, is one example. It makes it impossible to export various products, including palm oil products and rubber, into the European Union unless it can be shown that these products are deforestation-free. Companies intending to do business with EU Member State must therefore comply with these rules. 
 
The Deforestation Regulation caused a lot of commotion in Malaysia and its neighbouring Indonesia, but it only concerns a few industries in Malaysia. This cannot be said of the soon to be updated Packaging and Packaging Waste Directive, which will introduce vigorous rules that require packaging materials to become recyclable. Going forward, all Malaysian companies will thus need to adapt how they package their products when they export them to the EU – a task which could prove difficult as certain materials, which will need to be used in the future, such as biodegradable plastics, are not easily available in Malaysia.
 
Numerous other legal initiatives are on the way in the European Union as part of the European Green Deal and many other important trade partners to Malaysia around the world are following suit.
 
Supply chain responsibility laws
Germany is not only the largest economy in the European Union; it is also a leader when it comes to ESG-related legislation. Its law on supply chain responsibility (Act on Corporate Due Diligence Obligations in Supply Chains), which entered into force in January 2023, is arguably the strictest supply chain law around the world. Yet, it is only a precursor to an EU-wide legislation: large German – and soon European Union – companies must ensure that rigorous social and environmental supply chain standards are adhered to across the supply chain, from the extraction of raw materials all the way through the product reaching the end costumer.
 
These companies face fines of up to 4% of their worldwide annual turnover and can therefore not take any risk as to who they will do business with. When in doubt, it makes more sense for these companies to go with slightly higher prices but have the assurance that there will not be any environmental or labour-related issues.
 
The US’ focus on supply chains free from forced labour is another example of supply chain regulations which heavily impact the way Malaysian companies exporting to the US can do business. The Withhold and Release Order system applied by the US Customs Border Protection means that companies that are suspected of having relied on forced labour in their supply chains have their shipments seized and are no longer capable of exporting into the US. Several Malaysian companies have already had to make acquaintance with these harsh measures.
 
Malaysia’s reliance on foreign workers on plantations and farms, but also in the form of security guards, is very beneficial to Malaysian companies as it allows keeping prices lower than other countries. However, the conditions under which foreign workers in Malaysia are working, including the use of agents charging a huge commission fee, restriction of movement by keeping passports and the low living conditions in dormitories are regularly indicators of forced labour. Many Malaysian companies relying on foreign workers, even if only in the form of security guards, are therefore at the risk of falling foul of the supply chain-related obligations other countries impose on their companies. 
 
Conclusion
ESG is not just a fad, it is here to stay. The human influence on climate change is undeniable and unless companies undergo a substantial shift in how they conduct business, the consequences will be very severe.
 
Foreign companies doing business in Malaysia must adhere to local laws no matter what. These laws may be less strict than in the foreign company’s home country, but the mere fact of having strict laws “at home” does not necessarily guarantee compliance with all local laws. Foreign companies are therefore advised to consult local experts so that they do not fall foul of any provisions. The many fines mentioned above – including the threat of imprisonment for Directors – should certainly be a warning.
 
As regards domestic companies, the regulatory framework in Malaysia is less demanding than that of most Western countries, but as demonstrated above, laws from other countries nevertheless often apply to Malaysian companies in practice. In order not to lose out on profitable business deals Malaysian companies are still enjoying, becoming ESG-compliant is a must. The clock is ticking and arguably, it is not almost high noon. High noon is already there…

Alert by Prof. Dr. Harald Sippel (Foreign Lawyer), Raja Nadhil Aqran (Senior Associate), and Vishnu Vijandran (Associate) of the Dispute Resolution of Skrine.