Is ESG reporting in Malaysia more than compliance?

By James Wong on September 21, 2025, Sunday at 11:23 AM

Alliance Bank Group chief strategy and transformation officer Dr Aaron Sum (fifth left) presents the Sarawak SME ESG Report to Sarawak Premier Datuk Patinggi Tan Sri Abang Johari Tun Openg (centre).

KUCHING (September 21): Environmental, social and governance (ESG) reporting has become a mandate for publicly listed companies in Malaysia, but the question remains: how much of it is truly meaningful?

ESG reporting is the process of disclosing a company’s performance to stakeholders. It reflects a firm’s obligation to improve social welfare and create equitable, sustainable long-term wealth.

It can take several forms. Sustainability reporting is a comprehensive document covering economic, environmental and social performance, with details on goals, strategies and policies.

Integrated reporting combines financial and non-financial performance, outlining value creation models, risks, opportunities and future outlooks.

ESG disclosures on the other hand focus more narrowly on metrics and initiatives that is often aligned with recognised frameworks or standards.

The term ESG was introduced in 2004 through the UN Global Compact Initiative’s report “Who Cares Wins.” It was initially linked to socially responsible investing, which grouped three pillars of ethical finance: environmental, social and governance.

The launch of the UN Principles of Responsible Investment (UNPRI) in 2006 accelerated its adoption.

By 2015, the United Nations pushed sustainability further with the 17 Sustainable Development Goals (SDGs), while the Financial Stability Board established the Task Force on Climate-related Financial Disclosures (TCFD).

That same year, the Paris Agreement cemented global commitments to climate action.

In Malaysia, the path of our ESG journey has been shaped by corporate governance reforms, reporting frameworks and market-driven initiatives.

The Securities Commission introduced the Malaysian Code on Corporate Governance (MCCG) in 2000 to push for corporate governance reform and integration of sustainability considerations in companies’ operation.

This was followed by the Malaysian Code for Institutional Investors in 2014. Bursa Malaysia also launched the FTSE4Good Bursa Malaysia Index that same year to promote responsible investment.

Before ESG, corporate social responsibility (CSR) reporting was the main disclosure framework. Bursa Malaysia initially introduced voluntary CSR guidance in 2006 before making it mandatory for public-listed companies (PLCs) in 2007.

CSR disclosures were embedded in annual reports, covering the market, community, environment and workplace. The government also included CSR in the Tenth Malaysia Plan, while the Companies Act 2016 enforced CSR disclosures.

ESG reporting’s momentum shifted when sustainability reporting became mandatory for all public listed companies in 2016, where listing rules required companies to publish sustainability statements on economic, environmental and social risks and opportunities, gradually replacing CSR-centric disclosures.

The efforts culminated in September 2024 when the Securities Commission launched the National Sustainability Reporting Framework (NSRF).

The NSRF formally adopted the International Sustainability Standards Board’s (ISSB) IFRS S1 for general sustainability disclosure and IFRS S2 for climate-related reporting, which aims to align Malaysia with global standards, ensuring consistent, comparable and reliable information for investors.

Up to today, local ESG adoption is still driven mainly by regulatory compliance and investor pressure, supported by global frameworks such as the Global Reporting Initiative (GRI) and TCFD but its role has grown beyond compliance.

Various studies have shown that ESG-compliant firms tend to have stronger governance, care more about the environment, face less earnings volatility and enjoy access to cheaper funds.

Integration of ESG into valuation models has also been shown to enhance consumer satisfaction, market acceptance, access to lower-cost debt and overall competitiveness.

Decoding the evolution of Malaysia’s ESG reporting

The question that remains is whether improved ESG disclosure in Malaysia will translate into shareholder wealth and profitability, or if it is merely a tool to enhance reputation.

ESG Malaysia — a non-profit organisation established to promote and provide leadership for the development and growth of the ESG services industry in Malaysia — believes the nation’s reporting maturity is improving but still has room to grow.

Bryan Paul

He described the overall maturity of ESG reporting among Malaysian PLCs as “mid-to-upper middle.

“Large-cap issuers have moved into decision-useful metrics and climate governance, while the median is improving as Bursa Malaysia’s amended Listing Requirements embed the National Sustainability Reporting Framework (NSRF) and a phased IFRS S1/S2 roll-out,” ESG Malaysia co-founder Bryan Paul told BizHive in an exclusive interview.

Paul explained that the NSRF adopts a climate-first approach to support Malaysia’s net-zero goals in financial year 2025 for the largest Main Market issuers, particularly those earning RM2 billion and above.

It will later expand to full IFRS S1 and S2 adoption, Scope 3 disclosures and assurance, he said.

Scope 3 refers to indirect greenhouse gas emissions from a company’s value chain, such as those from suppliers, transportation, product use and disposal, making it the largest and hardest-to-measure part of a firm’s carbon footprint.

Scope 1 covers direct emissions from sources a company owns or controls, while Scope 2 refers to indirect emissions from purchased electricity, heat or steam.

“A 2024 Securities Commission–World Bank baseline also found disclosures historically compliance-led with weaker climate and nature indicators, and this is precisely what the ISSB transition is designed to fix.

“On balance, the curve is rising and the next step-change will come from assurance and better value-chain data,” he said.

In practice however, academicians have noted that most ESG reports still lean heavily on environmental issues, particularly in high-impact industries such as oil, gas and steel where scrutiny is most intense.

They argue that while sustainability reporting is on the rise, many companies limit disclosures to what is legally required that leaves stakeholders with a narrow view of their overall performance in social and governance areas.

Commenting on this, Paul said this narrow approach persists for several reasons.

Firstly, he noted that capability and systems are still maturing whereas social and supply-chain data are the hardest to standardise and assure.

“Secondly, companies are also cautious about over-committing amid legal and reputational risk. If you overstated, your stakeholders can hold you accountable.

“Third, the incentives. Albeit the government do have incentives for ESG, these incentives are often rolled back or deemed not competitive enough to transition beyond what are legally required.

“Fourth, capacity and capability. Companies and even regulators may have difficulties to find people who are able to advise or even address social and governance areas for the organisations,” he explained.

When asked whether Malaysian companies view ESG reporting as a strategic tool or simply a compliance exercise, Paul said both exist but the shift is underway.

“The NSRF’s alignment to IFRS S1 and S2 and Bursa’s rule changes mean boards must connect climate and broader sustainability risks to cash flows, capital access and pricing.

“Additionally, Bank Negara Malaysia’s updated Climate Risk Management and Scenario Analysis policy is also pushing financial institutions, and by extension their clients, toward scenario analysis and credible transition plans rather than checkbox reporting.

“In short, ESG is increasingly treated as risk management and market access, not just a disclosure exercise,” he said.

Paul said the biggest hurdles to producing more meaningful, impact-driven ESG reports lie in data and board readiness.

He said the heavy lifts are value-chain data, especially Scope 3, assurance-ready controls and board fluency in climate and social topics, particularly in the Sarawak context.

He added that translating taxonomies into investment-grade KPIs and running credible scenario analysis also stretch internal teams as this requires specific skills that even Malaysia has only a limited pool of individuals to handle.

“Malaysia’s ISSB path allows proportional reliefs but still expects scenario analysis and anticipated financial effects, which forces better linkage to strategy.

“Financial-sector guidance from the Central Bank is simultaneously nudging banks and insurers to raise the bar on their own disclosures and on client expectations.

“Together, these pressures are constructive but capacity-intensive for many PLCs and a long-stretch barriers for small and medium enterprises,” he said.

To push companies to go beyond surface-level reporting, he asserted that regulators should keep phasing in S1/S2, set clear Scope 3 timelines, and mandate independent assurance over time while aligning labels and metrics to the national and global standards to reduce ambiguity.

Paul said investors and lenders can link pricing and access to credible transition plans and taxonomy-aligned activities, rather than accepting broad claims.

Meanwhile, civil society and media can benchmark disclosures and call out gaps where marketing runs ahead of evidence, while professional bodies should scale training for directors, preparers and assurers to accelerate quality.

“These levers together can move the market from narratives to decision-useful, comparable data,” he said.

The launch of the National Sustainability Reporting Framework in September 2024.

NSRF’s implementation timeline.

ESG traps: Greenwashing, green hushing and green wishing

Unlike financial reporting, ESG disclosures do not yet follow the same level of rigour with established standards and robust controls that result in consistency, accuracy and comparability of data and disclosures.

This gap can lead to a mismatch between what firms claim and what they actually do.

While not always intentional, such discrepancies can still harm investors, customers, employees and other stakeholders who rely on ESG reports in their decision-making process.

Some argue that many companies disclose only what is required by regulators or what enhances their reputation. Some also use ESG disclosures to ease regulatory restrictions on their investment portfolios, rather than to show real progress.

On greenwashing, Paul stated that greenwashing does exist in Malaysia but is hard to measure as it cuts across advertising, products and finance.

He pointed to the highest risks in claim-heavy, high-emitting or land-use exposed sectors such as energy, materials, construction and agriculture, as well as in consumer marketing where broad “green” labels can mislead.

He noted that Malaysia relies on general protections such as the Malaysian Code of Advertising Practices and sectoral supervision rather than a dedicated greenwashing law, which often falls short in addressing the legality of prevention.

To counter this, Paul said independent assurance should become the norm, with companies moving toward reasonable assurance on Scope 1 and 2 in line with the NSRF timeline.

He added that boards should be required to provide attestations backed by internal control testing over non-financial data.

Furthermore, Paul asserted that firms should not make vague environmental claims without proof.

“Firms need to tie their claims to recognised standards and show clear methods for how they set targets, use offsets or apply nature-based solutions,” he said.

Climate disclosure must also follow standardised rules. Scope 1 and 2 reporting, he said, should include visible assumptions from scenario analysis and proper audit trails, while scope 3 should be phased in with some relief in the early years but must still have fixed deadlines.

“Firms should link fund-label and product claims to clear regulations by adding them to existing laws to prevent mis-selling,” he urged.

Malaysia relies on general protections such as the Malaysian Code of Advertising Practices and sectoral supervision rather than a dedicated greenwashing law, which often falls short in addressing the legality of prevention. — Bernama photo

Sarawak’s SMEs show momentum, but more needs to be done

In Sarawak, SMEs are beginning to show momentum in adopting ESG practices, according to a study by Alliance Bank Malaysia Berhad (Alliance Bank).

The report, launched in May 2025 in collaboration with the Sarawak government, InvestSarawak and Monash University Malaysia, found that 66 per cent of 106 participating SMEs in Sarawak have incorporated ESG practices into their business operations.

Of these adopters, 44 per cent have fully integrated ESG into their strategies while 22 per cent applied it on a smaller scale.

Governance recorded the highest adoption at 45 per cent, followed by social at 44 per cent and environmental at 41 per cent.

However, only 20 per cent of SMEs “practised, documented and reported” across all three ESG pillars at a high level, according to the report.

The study also showed that 62 per cent of SMEs were aware of ESG, a figure lower than the adoption rate. This suggested that many businesses may have adopted ESG practices unconsciously.

Meanwhile, 34 per cent of SMEs were classified as non-adopters. Of these, 28 per cent were still exploring ESG frameworks and goals but had yet to implement concrete measures while the remaining 6 per cent had not considered ESG at all.

The report said this group presents opportunities for policymakers, industry leaders and financial institutions to support and accelerate ESG integration in Sarawak’s SME sector.

Jordan Ong

SME Association Sarawak president Jordan Ong said adoption among SMEs remains “relatively low” despite high awareness.

He pointed out that many still perceive ESG as a “buzzword” or something relevant only to listed companies.

“There is limited appreciation of how ESG practices can actually translate into long-term benefits such as cost savings, improved market access and stronger risk management.

“Moreover, the perceived high cost of implementation is a major barrier. Businesses often associate ESG adoption with expensive certifications, reporting frameworks or the need for new technologies.

“For SMEs in Sarawak, particularly in traditional sectors like timber, agriculture and construction, ESG is often seen as a financial burden rather than an investment in long-term competitiveness,” he told The Sunday Post in an interview recently.

He also highlighted the limited regulatory push. Unlike Europe or Singapore where disclosure is mandatory, he noted that Malaysia is only tightening requirements for publicly listed companies.

For SMEs in Sarawak, the lack of immediate enforcement has led many to adopt a “wait-and-see” approach, he said.

The resource and talent gap is another challenge. Many local firms lack expertise in sustainability reporting, carbon accounting and ESG strategy.

“Access to consultants and professionals is also more limited in Sarawak compared to Peninsular Malaysia,” he noted.

He added that most Sarawak SMEs are domestically focused and do not face strong compliance pressure from international buyers or investors. Export-oriented firms trading with the EU or US are starting to feel it but remain the minority.

“Cultural and mindset barriers further contribute to the challenge,” Ong said.

“ESG is often equated with CSR activities such as donations, rather than being integrated into operations and sustainability strategies.

“Many business owners continue to view profitability as the sole priority, with ESG treated as nice to have rather than a necessity,” he added.

Moreover, Sarawak’s infrastructure and policy support are also still developing. Although Sarawak is making bold moves in renewable energy, hydrogen economy and carbon trading, he said the supporting ecosystem for SMEs is still at an early stage.

“Financing, incentives and structured support for ESG-related upgrades remain limited.”

This is in line with the report, which found that 46 per cent of Sarawak SMEs were self-funding its ESG initiatives.

That being said, there is a strong demand for financial support among these self-funders, with with 53 per cent of them requiring government grants, 46 per cent seeking tax incentives, and 44 per cent needing assistance from financial institutions.

Encouragingly, 41 per cent secured financing from banks and 40 per cent from development financial institutions.

Opportunities for ESG reporting in Sarawak

To accelerate ESG adoption in Sarawak, Ong said it has to be made accessible, affordable and valuable. This shift, he added, will change perceptions of ESG from being a burden to becoming an investment in competitiveness and long-term sustainability.

“First and foremost is the need for awareness and education. SMEs often find ESG concepts complex or disconnected from their day-to-day operations.

“More targeted workshops, seminars and practical case studies should be organised to demonstrate how ESG can directly benefit businesses through energy savings, waste reduction, stronger branding and export readiness.

“ESG concepts must be translated into simple, practical guidelines rather than technical jargon so that they are easily understood and implemented by smaller enterprises,” he said.

He stressed that financial incentives are crucial. Government and banks can play a role by offering green financing schemes or preferential loans for ESG upgrades such as solar power or waste management systems.

Tax incentives similar to pioneer status or investment allowances would also encourage participation.

A clear regulatory roadmap would help SMEs. Ong said ESG reporting should be phased in, starting with bigger firms, so smaller businesses have time to prepare.

Equally important is the development of partnerships and ecosystems such as collaboration between industry associations, chambers, universities and government agencies to help build knowledge-sharing platforms.

Larger corporations, including anchor companies and government-linked companies (GLCs) should also be encouraged to support their SME suppliers in adopting ESG practices creating a positive ripple effect across supply chains.

He also urged SMEs to leverage Sarawak’s strengths in hydropower, hydrogen and carbon trading. By aligning with these green priorities, local firms can attract global investors and improve their long-term positioning.

At the same time, Paul stressed that high-quality ESG data and credible transition plans are fast becoming the passport to capital, export markets and jobs.

He said businesses should expect tighter disclosure expectations moving forward in line with the national NSRF and ISSB regime.

“This is not only pertinent to PLCs, but as we move towards the integration of the whole value-chain proposition, SMEs will also be affected by these mandates.

“It is a matter we want ourselves to slowly and proactively prepare our businesses for these mandates or we run and reactively do firefighting as the time comes.

“Looking at Sarawak especially, we now has a clear sustainability roadmap which is covered under the PCDS 2030 and complemented by the Sarawak 2030 Sustainability Blueprint whereby these are backed by real projects in renewables, hydrogen and industrial decarbonisation.

“The opportunity is to turn Sarawak’s resource base into verifiable, investable climate solutions and ensuring we stands thru with the overarching sustainable development definition of ensuring the resources we have not only meet the current generation needs, but it will also meet the needs of future generations,” he said.