Introduction

Environmental, Social and Governance (‘ESG’) framework are used by corporations to measure non-commercial risks and opportunities. An effective ESG plan brings benefits like competitive advantage, stakeholder engagement, better reputation, talent attraction, increased investor confidence alongside environmental and social impact.^[1]

A recent study by PricewaterhouseCoopers (PwC) and Preqin affirmed that over 76% of global market investors plan to invest only in ESG products.^[2]  Not wanting to miss out, the Malaysian government has recognised that ESG adoption is no longer merely an option but rather one of its main strategies in positioning Malaysia as a global investment hub.

With numerous ESG initiatives recently announced by the government of Malaysia, the Corporate, Commercial and M&A Practice Group of LAW Partnership present several key ESG updates from the past two months (October – November 2023). This update will focus primarily on ESG-related commercial initiatives announced under the Budget 2024 and the i-ESG Framework published by the Ministry of Investment, Trade & Industry (“MITI”).

 

Key updates on ESG-related activities 

A. ESG Commercial Initiatives under Budget 2024

The announcement of Budget 2024 brought with it an ambitious ESG-oriented plan aimed at encouraging and boosting ESG adoption in Malaysia.

This section of the update sets out a summary on key incentives and initiatives announced in the Budget 2024, which progressive companies interested in ESG adoption may take advantage of:

• It was announced that financial institutions (specifics of which are yet to be available) are allocating a total of RM200 billion in financing to encourage industries in Malaysia to transition to a low-carbon economy.
• The continuation of the Corporate Green Power Programme (“CGPP”) – i.e., where participants producing renewable energy are able to sell a specific portion of the energy produced to their off-takers via the national electricity grid.
• The Budget 2024 had also proposed that tax deductions of up to RM50,000 per year of assessment were given to companies on ESG-related expenditures. Such expenditures include enhancing companies’ sustainability reporting framework, preparation of transfer pricing documentation, e-Invoicing implementation, and costs in adhering to any reporting requirements related to ESG as approved by the Minister of Finance (a full list may be found in the Budget 2024 speech[3]).
• An extension of tax exemptions until the year 2027 was announced for fund management companies managing Socially Responsible Investments (“SRI”). SRIs are generally referred to as investments or investment strategies that consider and incorporate ESG consciousness and principles. 

• Companies that incur expenses in Measurement, Reporting and Verification (MRV) relating to the development of carbon off-setting projects can benefit from a tax exemption of up to RM300,000. These expenditures are deductible from the carbon credit income traded on the Bursa Carbon Exchange (“BCX”), which will be discussed in a later section of this update.

 

B. i-ESG Framework

 MITI has launched the National Industry Environmental, Social and Governance Framework (“i-ESG Framework”), which is intended to assist companies (particularly in the manufacturing sector in commencing and enhancing their adherence to ESG principles.

With an over-arching objective to promote and nurture green manufacturing, companies’ participation and adherence to the i-ESG Framework is currently on a voluntary basis with mandatory compliance being planned in the next decade (however, no further updates on compliance have been announced by MITI as yet).

The i-ESG Framework is currently in Phase 1 of its implementation, called “Just Transition” (running from 2024 – 2026) – aptly named this phase aims to assist companies in their implementation of ESG principles within their organisations.

Initiatives set out in Phase 1 of the i-ESG Framework are:

• An outreach programme (“Kenal ESG”) aimed to raise and enhance ESG awareness and introduce the i-ESG Framework to industries across Malaysia.
• The i-ESG Framework also aims to assist companies embark on their sustainability journey via the following resources:
• an ESG readiness assessment to assist companies in understanding and evaluating their current ESG adoption level (available for free on the i-ESG webpage[1]);
• an ESG starter kit (‘i-ESGStart’) to serve as a step-by-step guide with practical examples, as well as calculation methods and templates that companies can tap into to facilitate their sustainability reporting (made available to companies on completion of the ESG readiness assessment); and
•  MITI will also conduct clinical sessions to empower and guide companies on producing their first sustainability report.

 

C. Recent Complementary ESG Updates

Apart from the above key updates, this section sets out recent complementary ESG-related updates that may be of interest to companies:

• In October 2023, a Simplified ESG Disclosure Guide (“SEDG”) for SMEs in Supply Chains was issued by Capital Markets Malaysia, a council set up by the Securities Commission of Malaysia in 2012 and formerly known as the Capital Markets Promotion Council. The SEDG is intended as a guide to SMEs in preparing to disclose ESG data to their stakeholders, aligned with international standards. While the SEDG mentions SMEs in supply chains, in particular, the SEDG states that its target users are SMEs who are compelled to track and report on ESG data, which would be beneficial to most companies.
• Both public and private companies are now able to assess their carbon emissions impact through Bursa Malaysia’s BCX. It is a Centralised Sustainability Intelligence Platform developed in line with global standards to facilitate ESG reporting for companies to access a wider sustainable financing pool.^[5]

 

Conclusion

Overall, these developments underscore Malaysia’s commitment to sustainable business practices and position the country as an attractive investment hub with a strong emphasis on ESG considerations. The array of ESG-oriented initiatives introduced by the Malaysian government, as highlighted in Budget 2024 and subsequent frameworks, presents a unique and advantageous landscape for businesses.

Businesses that proactively embrace and leverage these initiatives not only contribute to environmental and social goals but also position themselves for enhanced competitiveness, improved stakeholder relationships, and potential access to a wider pool of sustainable financing. Large corporations and MSMEs alike stand to gain significantly by proactively embracing these initiatives. As a starting point, companies should conduct internal legal ESG-adherence audits on their organizations and processes (which are the bare minimum in terms of compliance) to assess where they stand and their adherence, and how they can improve.

For ESG-related enquiries, feel free to contact the Corporate, Commercial and M&A Practice Group of LAW Partnership – listed as one of ALB Asia’s Top 15 ESG Law Firms 2023.

 

[1] Malaysian Green Technology And Climate Change Corporation, ‘ESG this, ESG that… does it really matter to m’sian smes? here’s The rundown’ (August 2023). <https://www.mgtc.gov.my/2023/08/esg-this-esg-that-does-it-really-matter-to-msian-smes-heres-the-rundown/> accessed 1^st December 2023.

[2] PricewaterhouseCoopers, ‘ESG or nothing – the sustainable finance transformation in private markets, PwC’ (May 2023). < https://www.pwc.lu/en/press/press-releases-2023/gp-global-esg-strategies.html>
accessed 1^st December 2023.

Preqin, ‘Preqin global report 2023: Alternative assets’, < https://www.preqin.com/alternatives-in-2023> accessed 1^st December 2023.  

[3] Ministry of Finance, ‘Budget Speech 2024’, page 215 (October 2023). <https://belanjawan.mof.gov.my/pdf/belanjawan2024/ucapan/ub24-BI.pdf> accessed 1^st December 2023.

[4] Ministry of Investment, Trade & Industry, ‘I-esgready – ESG readiness self assessment Survey’. <https://www.research.net/r/iESGReadyMITI021023> accessed 1^st December 2023.

[5] Bank Negara Malaysia, ‘Towards a Greener Financial System’ (2022). <https://www.bnm.gov.my/documents/20124/10150308/ar2022_en_ch2b.pdf> accessed 1^st December 2023.