Environmental, Social, and Governance (ESG) compliance has evolved from a voluntary corporate initiative to a critical legal and regulatory requirement for Malaysian companies. As sustainability becomes central to business operations and investment decisions, understanding your company's ESG obligations is essential for directors, company secretaries, and business owners alike.

What is ESG Compliance?

ESG compliance refers to a company's adherence to standards and regulations governing three key areas: environmental responsibility (such as carbon emissions and resource management), social factors (including labour practices, community engagement, and human rights), and governance (covering board diversity, ethics, and transparency).

In Malaysia, ESG compliance is shaped by a combination of regulatory requirements, stock exchange rules, and voluntary frameworks that together create a comprehensive sustainability ecosystem for businesses.

The Regulatory Framework for ESG in Malaysia

Bursa Malaysia Sustainability Reporting Requirements

The most significant ESG requirements for Malaysian companies come from Bursa Malaysia. Under the Main Market Listing Requirements and ACE Market Listing Requirements, all listed companies must include a Sustainability Statement in their annual reports.

The Bursa Malaysia Sustainability Reporting Framework, enhanced in 2022 and further strengthened in 2024, requires listed companies to disclose:

Common Sustainability Matters: All Main Market listed issuers must report on prescribed sustainability matters including anti-corruption, community engagement, diversity, energy management, health and safety, labour practices, supply chain management, and data privacy and security.

Climate Change Reporting: Large-cap companies (those in the FTSE Bursa Malaysia Top 100 Index) are required to provide climate change disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. This requirement is being phased in for mid and small-cap companies.

Materiality Assessment: Companies must conduct materiality assessments to identify ESG issues most relevant to their business and stakeholders, and explain how these issues are managed.

Securities Commission Malaysia Guidelines

The Securities Commission Malaysia (SC) has been actively promoting sustainable finance through various initiatives. The SC's Guidelines on Sustainable and Responsible Investment Funds establish criteria for funds marketing themselves as sustainable, while the Sustainable and Responsible Investment Sukuk Framework guides Islamic sustainable financing.

Additionally, the Malaysian Code on Corporate Governance (MCCG) 2021 includes practices related to sustainability governance, recommending that boards establish clear ESG strategies and integrate sustainability considerations into their decision-making processes.

Bank Negara Malaysia Requirements

Financial institutions face additional ESG requirements under Bank Negara Malaysia's Climate Change and Principle-based Taxonomy (CCPT). This taxonomy provides a framework for classifying economic activities based on their climate impact and guides financial institutions in their green financing decisions.

Key ESG Disclosure Obligations

Environmental Disclosures

Companies are expected to report on their environmental impact, including greenhouse gas emissions (Scope 1 and Scope 2, with Scope 3 increasingly expected), energy consumption and efficiency measures, water usage and waste management, biodiversity impacts, and environmental compliance records.

Social Disclosures

Social reporting requirements cover workforce demographics and diversity statistics, employee health and safety metrics, training and development programmes, supply chain labour standards, community investment and engagement, and human rights due diligence processes.

Governance Disclosures

Governance reporting must address board composition and diversity, director independence, executive remuneration policies, anti-corruption measures and ethics programmes, risk management frameworks, and stakeholder engagement practices.

Consequences of Non-Compliance

Failure to meet ESG disclosure requirements can result in several consequences for Malaysian companies. Bursa Malaysia may issue queries, warnings, or public reprimands to listed companies that fail to comply with sustainability reporting requirements. In serious cases, trading suspensions or delisting may occur.

Beyond regulatory penalties, companies face reputational damage, reduced access to sustainable financing, exclusion from ESG-focused investment funds, and potential shareholder activism. Increasingly, institutional investors conduct ESG due diligence, and poor ESG performance can directly impact a company's access to capital and cost of borrowing.

Practical Steps for ESG Compliance

1. Establish Governance Structures

Create a board-level sustainability committee or assign ESG oversight to an existing committee. Appoint a senior management team member to champion sustainability initiatives and ensure regular board reporting on ESG matters.

2. Conduct a Materiality Assessment

Identify the ESG issues most relevant to your business by engaging with stakeholders including employees, customers, investors, and communities. This assessment should be reviewed annually and updated as circumstances change.

3. Develop Policies and Procedures

Create formal policies addressing key ESG areas such as environmental management, human rights, anti-corruption, and supply chain sustainability. Ensure these policies are communicated throughout the organisation and to relevant external parties.

4. Implement Data Collection Systems

Establish robust systems for collecting and verifying ESG data. This may require new software, revised reporting procedures, and training for staff involved in data collection. Consider third-party assurance for key sustainability metrics.

5. Align with Recognised Frameworks

While Bursa Malaysia provides specific requirements, aligning with international frameworks such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or TCFD can enhance credibility and comparability of disclosures.

6. Plan for Climate Reporting

Even if not currently required, companies should prepare for mandatory climate disclosures by beginning to measure their carbon footprint, assess climate-related risks and opportunities, and develop transition plans.

Looking Ahead: Future ESG Requirements

Malaysia's ESG regulatory landscape continues to evolve. The Securities Commission's SRI Roadmap outlines plans for enhanced sustainability disclosures, while regional developments such as Singapore's mandatory climate reporting and the EU's Corporate Sustainability Reporting Directive may influence Malaysian requirements.

Companies should monitor regulatory developments and consider adopting higher standards voluntarily to stay ahead of compliance requirements and meet growing stakeholder expectations.

Conclusion

ESG compliance is no longer optional for Malaysian companies, particularly those that are publicly listed. Understanding and meeting these requirements protects companies from regulatory action while positioning them favourably with investors, customers, and other stakeholders who increasingly prioritise sustainability.

Taking a proactive approach to ESG compliance—going beyond minimum requirements to embed sustainability into corporate strategy—can create competitive advantages and long-term value for shareholders and society alike.

This article provides general information about ESG compliance requirements in Malaysia and does not constitute legal advice. Regulations and guidelines are subject to change, and the specific requirements applicable to your company will depend on its size, listing status, industry, and other factors. For advice on your company's particular ESG compliance obligations, please consult a qualified legal professional.