The global landscape increasingly emphasizes environmental, social, and governance (ESG) considerations. Malaysia, like any other country that intends to export its products and receive foreign direct investment, must adapt and follow international expectations.
As a framework encompassing environmental sustainability, social responsibility, and corporate governance, ESG has become a significant driver of decision-making for companies and investors worldwide. In Malaysia, this paradigm shift reflects a commitment to sustainable practices, responsible governance, and ethical considerations.
As Malaysia aligns itself with global ESG trends, this transformative journey is poised to reshape business strategies, enhance corporate transparency and contribute to the sustainable development of Malaysia. A question then arises: how should this alignment best take place? Here are six anticipated developments to watch out for in 2024.
- ESG is becoming a considerable growth factor, not just a “regulatory nuisance”
ESG is emerging as a substantial growth driver rather than a mere regulatory nuisance. The shift towards sustainable practices, ethical governance, and social responsibility is increasingly acknowledged as a catalyst for long-term success and value creation. Beyond regulatory compliance, businesses are realizing that robust ESG practices enhance operational efficiency, mitigate risks, attract conscientious investors, and foster positive stakeholder relationships.
There are also immediate gains for Malaysia. Let’s look at carbon capture, utilisation and storage (CCUS), where Petronas has committed to play a leading global role: in August 2023, the business newspaper The Edge Malaysia
highlighted in an article that Petronas could spend US$260 million by 2025 to build the world’s largest CCUS facility in the world. In November 2023, Reuters
reported that Japanese companies have agreed to develop a carbon capture and storage (CCS) project with Malaysian energy firm Petronas which should start storing its first carbon dioxide (CO2) emissions from the end of 2028.
These are merely two examples when there are a plethora of opportunities. Without the worldwide ESG boom, these opportunities would not have existed. Clearly, ESG is much more than a regulatory nuisance. It already creates a lot of opportunities and will create many more in the future.
- Supply chains will be dominated by ESG considerations
It is a safe bet that the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will be the most important piece of legislation passed in 2024. Similar to the German Supply Chain Responsibility Act, the CSDDD requires large European procurers to apply due diligence throughout their supply chains.
However, there is one very important difference the CSDDD has to the German Supply Chain Responsibility Act: the CSDDD places much stricter obligations on European procurers. The maximum fine of 5% of the procurer’s global turnover (group-wide) and the civil liability of procurers for environmental and social issues in their supply chain makes the challenging German Supply Chain Responsibility Act appear like a minor issue. We reported on the CSDDD before
In Malaysia, the “S” is a big issue with multiple reports of issues surrounding foreign workers. Stories
like the one about the 170+ Bangladeshi foreign workers, who marched single-file on the road shoulder to the police station to report that they had been deceived by their agent and been without work for more than three months (after likely having paid a significant commission fee to be able to come to Malaysia) are completely unacceptable. They also significantly harm Malaysian’s image around the world.
Many companies in Malaysia will have to up their game to ensure that their “S” is in order as foreign procurers cannot and will not be accepting situations like this one, lest they fall afoul of the CSDDD.
- Expansion of sustainability reporting
There are already sustainability reporting requirements for publicly listed Malaysian companies. However, many Malaysian SMEs, even those more medium-sized than small-sized, have ignored ESG reporting. This will likely change in 2024 and the years to come:
Private companies, driven by Scope 3 rules necessitating the monitoring of indirect emissions in supply chains, will embrace sustainability reporting – or simply go out of business because no one will be willing to include them in their supply chains.
It was unthinkable only a few years ago that SMEs would be heavily involved in ESG-reporting and other initiatives. Then came October 2023 and Bursa published its Simplified ESG Disclosure Guide (SEDG)
for SMEs in Supply Chains with 15 topics from emissions and energy to anti-corruption and customer privacy.
Although still at a voluntary basis for SMEs, we will very likely see more initiatives of the like in the future – and Malaysian SMEs eager to remain a part of the global supply chains will eagerly adopt these initiatives.
- Biodiversity as a key ESG focus
Biodiversity, crucial for life on earth, encompasses the variety of living organisms within ecosystems, including species, genes, and ecosystems. It plays a vital role in sustaining ecosystems, providing essential services like pollination and climate regulation.
Unknown to many in here, Malaysia is one of only 17 countries around the world
that are considered “megadiverse,” meaning that it has at least 5,000 species of endemic plants and border marine ecosystems.
Biodiversity loss will gain prominence as an ESG topic, with global initiatives, investment funds, and the Task Force on Nature-related Financial Disclosures contributing to its mainstream recognition. Governments are likely to adopt standardized frameworks for corporate reporting, aligning with evolving nature-related dependencies and opportunities.
Malaysia’s megadiversity is both an opportunity and a threat, as it means additional spotlight and attention. Malaysia should put a lot of emphasis on ensuring that its rich wildlife is further protected so that it stands out as a guard of biodiversity.
- ESG integration in finance
Sustainability will be deeply ingrained in companies’ financial foundations, with CFOs increasingly considering the potential impacts of climate change on financial outcomes. The integration of ESG into asset valuation and financial reporting protocols will see the rise of ESG controller positions to oversee this integration, highlighting the interconnectedness of sustainability and financial stability.
This is still an area where Malaysia lags behind significantly in comparison to other countries. If Malaysia wants to continue attracting foreign investment, it will have no choice but to adjust. Furthermore, Malaysian companies involved in doing business internationally must put greater emphasis on ESG.
Going forward, financial institutions may be unwilling to provide financing – be it in the form of a traditional loan, a bank guarantee or more sophisticated ways of financing – when the borrowing company cannot show compliance with more stringent international ESG standards. This may have significant implications for Malaysian companies that operate internationally and do not manage to comply with what is required by international lenders.
- Rise in ESG-related disputes
As ESG will play a more important role in contracts, there will be a commensurate increase in ESG-related disputes. Any EU procurer having to pay a fine or facing civil liability (see above, point 2) will most certainly want to recover any losses from their (in)direct supplier. Disputes are thus almost inevitable.
For Malaysian companies, this will among others raise the question what the best way to resolve disputes is. Arbitration (which offers the possibility to join other parties) is set to play an important role. However, there is equally a lot of potential for mediation, in particular when there are claims arising out of the “S” and aggrieved persons may be much more interested in an apology rather than having a long, drawn-out dispute.
Either way, many Malaysian companies will need to up their game when it comes to international dispute resolution. They are only acquainted with Malaysian court proceedings and arbitration proceedings before the Asian International Arbitration Centre
(AIAC). At an international level, other fora will play a more important role as foreign companies will be keen to resolve their disputes outside of Malaysia.
The question of the right choice of dispute resolution also arises. When a plethora of persons are affected, as is the case when foreign workers are subject to forced labour or when environmental damage causes harm to a larger group, mediation
may be much better-suited to resolve the dispute and thus play a more prominent role. Very few Malaysian companies are acquainted with international mediation proceedings and their lack of exposure could require a steep learning-curve in order to catch up.
ESG is not just the future – ESG is now. Malaysian businesses must embrace ESG not merely for compliance or risk management, but as an opportunity to explore new opportunities or adapt their business models. It is indubitable that ESG can appear to be a regulatory nuisance. However, ESG creates value in several ways.
As of the beginning of 2024, despite vocal opposition from some parts of the world, the future is practically certain: ESG will evolve from a peripheral element to a central component of overall corporate business strategies, if it hasn’t done so already. Malaysian companies must take note of these trends and embrace the many opportunities that lie ahead.
Prof. Harald Sippel heads Skrine’s European Desk. He is an Austrian lawyer (Rechtsanwalt) and is the only Foreign Lawyer admitted to the Malaysian Bar who obtained his admission by being a lawyer in an EU Member State.