THE phrase Environmental, Social and Governance (ESG) may appear as a recent trend to many but this is not the case.

Its foundation can be traced back to 2004 when the United Nations Global Compact (UNGC) released its report “Who Cares Wins” to encourage financial market stakeholders to adopt ESG principles for the long term by highlighting the benefits of responsible investment and the positive impact on society and the environment.

In recent times, ESG has gained prominence in Malaysia alongside the tabling of Budget 2024 which allocated significant funds to promote ESG practices in businesses by introducing various tax deductions, incentives and exemptions for ESG-related spending of companies.

One of the reasons the Malaysian government is dedicated to promoting ESG practices is to ensure that the country can maintain effective access to global supply chains and markets which are increasingly ESG-sensitive.

EU initiatives and their impact on Malaysia

The European Union (EU) Council has in as recent as May 2024 approved and formally adopted the Corporate Sustainability Due Diligence Directive (CSDDD) which mandates rigorous due diligence to identify and mitigate adverse human rights and environmental impacts across operations and supply chains.

Following such development, Malaysian companies engaging with EU markets, particularly industries prone to issues like forced labour must navigate these regulations carefully to avoid penalties and to ensure continued market access.

Environmental concern

The Environmental pillar which is primarily governed by the Environmental Quality Act 1974 focuses on managing emissions, energy usage, water resources, waste and materials sourcing to conserve natural resources.

In a significant development, the Energy Efficiency Conservation Bill 2023 was passed in April 2024, mandating companies to develop energy management systems, conduct periodic energy audits and submit efficiency reports with the aim of reducing energy wastage across all sectors.

Social concern

The Social pillar focuses on upholding human rights and employment standards, effective employee management, promoting diversity, equity and inclusion, thus ensuring occupational health and safety, consumer protection and community engagement.

Towards this end, companies must address critical issues such as forced labour and child labour which are guided by laws such as the Children and Young Persons (Employment) Act 1966, the Employment Act 1955 and international standards such as ILO (International Labour Organization) Conventions.

Malaysia must address issues such as forced labour and employee welfare to ensure ESG compliance. Non-compliance can lead to significant business losses, particularly in markets such as the US and EU.

For instance, the US Customs and Border Protection can issue a Withhold Release Order (WRO) against companies that violate ESG principles by banning their products from entering the US market.

Such sanctions can severely impact business profits as this causes greater financial damage than the cost of implementing proper compliance measures.

Another noteworthy development in June 2024 was the enforcement of the Occupational Safety and Health Amendment Act 2022 which increased penalties for workplace discrimination and recognised the equal importance of employees’ psychological health.

Governance concern

The Governance pillar on the other hand involves establishing a robust governance structure through the implementation of clear policies, managing and reporting risks transparently, preventing corruption, and protecting customer privacy.

This involves adherence to various regulations, including the Companies Act 2016, the Malaysia Anti-Corruption Act 2009 and the Securities Commission Malaysia Act 1993, among others.

Conclusion

Companies that have yet to adopt ESG practices have missed out on the opportunity to benefit in the market during the ‘who cares wins’ period.

However, it is not too late to seize the profitable benefits that ESG compliance can bring. As Malaysia is under the transition period, early adopters stand to gain significant competitive advantages given this will enable them to engage with EU and US companies and avoid substantial future penalties and mandatory compliance costs after the transition period ends.

These benefits far outweigh the investment in adopting ESG principles. Therefore, it might be appropriate to reiterate ‘who cares wins’ during this transition period with the clarion call for companies to act promptly and take ESG practices seriously.

Act now or miss out. - July 1, 2024

Leonard Yeoh is a senior partner with the law firm, Tay & Partners, together with Sharon Teo. 

https://focusmalaysia.my/esg-in-malaysia-so-much-to-gain-so-act-now-without-second-thoughts-or-miss-out/