Malaysia

Contributing law firm: Rahmat Lim & Partners
Contact: Kelvin Loh, Partner
Dzuhairi Jaafar Thani, Partner

ESG in APAC - Malaysia by Rahmat Lim & Partners

Please click on the podcast above for a snapshot of the three key themes of ESG reporting, transition planning and greenwashing in respect of Malaysia. Scroll down for further information on each key theme.

A. ESG Reporting

1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?

Yes.

2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?

ESG disclosure requirements are primarily aimed at listed companies and financial institutions:

(a) The Task Force on Climate-Related Financial Disclosures (TCFD) Application Guide for Malaysia Financial Institutions (TCFD Application Guide) issued by the Joint Committee on Climate Change (JC3) sets out Basic and Stretch recommendations for financial institutions (e.g. banks, insurers/takaful operators, asset managers/owners) in respect of disclosures on Governance, Strategy, Risk Management, Metrics and Targets.

(b) The Main Market Listing Requirements, ACE Market Listing Requirements and Sustainability Reporting Guide (collectively, the Sustainability Reporting Framework) issued by Bursa Malaysia Securities Berhad (Bursa Malaysia^[1]) sets out the sustainability reporting requirements to be disclosed in the Sustainability Statement (as defined below) of listed companies. The sustainability statement is a narrative statement disclosing the management of material economic, environmental and social risks and opportunities (EES) (Sustainability Statement) of listed companies in their annual reports.

3. Are the requirements mandatory or do they apply on a comply-or-explain basis?

The TCFD Application Guide provides that Basic recommendations must be adopted by 29 June 2024, and Stretch recommendations are expected to be adopted by 31 December 2024.

The Sustainability Reporting Framework contains mandatory sustainability disclosures in relation to the EES of listed companies.

4. Which aspects of ESG do the requirements focus upon?

The TCFD Application Guide focuses on climate-related matters.

The Sustainability Reporting Framework focuses on economic, environmental and social aspects.

5. Are the disclosure requirements based on international standards? If so, which one(s)?

The climate-related disclosures under the TCFD Application Guide are aligned with the TCFD Recommendations developed by the Financial Stability Board.

Pursuant to the Sustainability Reporting Guide, listed companies are encouraged to report in alignment with or, with adherence to the GRI Standards, SASB Standards, the FTSE Russell FTSE4Good Criteria, and standards issued by ISSB, European Union’s European Financial Reporting Advisory Group and Recommendations of the Taskforce on Nature-related Financial Disclosures (TCFD Recommendations). However, the Sustainability Reporting Framework is not based on any specific international standards.

Main Market listed issuers will be required (in Sustainability Statements issued for the financial years ending on or after 31 December 2025) to make climate-related disclosures in line with the TCFD Recommendations.

6. Are there any mandatory requirements for the disclosure of Scope 3 GHG emissions?

Limited Scope 3 GHG emissions disclosures are required pursuant to the Basic recommendations under the TCFD Application Guide (i.e. business travel and employee commuting), while Stretch recommendations include disclosures for all Scope 3 GHG emissions.

Limited Scope 3 GHG emissions disclosures (i.e. business travel and employee commuting) are mandatory for all listed companies.

7. Are there assurance requirements?

There are no requirements under the TCFD Application Guide for climate-related disclosures of financial institutions to be subjected to an assurance process.

There are currently no requirements for the Sustainability Statements of listed companies to be subjected to an assurance process, but such practice is encouraged pursuant to the Sustainability Reporting Guide.

8. Are voluntary ESG disclosures customary?

Based on our limited checks, some listed companies do reference international standards and frameworks, such as the GRI Standards, in their Sustainability Statements even though such alignment or adherence is not mandatory.

9. Is there a local taxonomy? Is it mandatory and what is its scope of application?

The Climate Change and Principle-based Taxonomy (CCPT) issued by the Central Bank of Malaysia (BNM) provides a taxonomy for the classification of economic activities against climate objectives and reporting of lending and investment activities in line with the CCPT by financial institutions. Although CCPT reporting is not currently mandatory, financial institutions have submitted the first report on the application of the CCPT to the BNM in August 2022.

The Principles-Based Sustainable and Responsible Investment Taxonomy (SRI Taxonomy) issued by the Securities Commission Malaysia (SC) provides universal guiding principles for the classification of economic activities by all capital market users. The SRI Taxonomy is currently not mandatory.

10. Are there plans to adopt the ISSB sustainability and/or climate-related disclosure standards? If so, to what extent will the standards be mandatory, to whom will they apply and what is the timeline?

In anticipation of the upcoming release of climate-related disclosure standards by ISSB (ISSB Standards), the TCFD Application Guide applicable to financial institutions will be reviewed by JC3 to take into account the requirements under the new ISSB standards.

Bursa Malaysia has enhanced its Sustainability Reporting Framework in respect of climate change-related disclosures to prepare listed companies to adopt international reporting frameworks and standards, such as the ISSB Standards, in due course.

An Advisory Committee on Sustainability Reporting (chaired by the SC and including representatives from Bursa Malaysia) has been established to consider the implementation of the ISSB Standards in Malaysia.

11. Other upcoming developments / direction of travel

JC3 aims to further align practices in the implementation of the CCPT by the end of 2023, which may include mandatory CCPT reporting by financial institutions. If reporting under the CCPT becomes mandatory, financial institutions may require borrowers to implement ESG reporting/disclosures in order to facilitate standardised classification and reporting of climate-related exposures.

The Capital Markets Malaysia, in collaboration with the Department of Natural Resources, Environment and Climate Change (NRECC), is developing an ESG Disclosure Guide tailored to Malaysian SMEs which will provide practical guidance and baseline exposures expected of SMEs in relation to ESG disclosure. The adoption of such guide is expected to pave the way for alignment with international disclosure frameworks, including the ISSB standards.

B. Transition planning and net zero

1. Has your jurisdiction set decarbonisation targets and strategies?

Yes, to reduce GHG emissions intensity to Gross Domestic Product up to 45% by 2030 based on emissions intensity in 2005.

The Malaysian government has further announced its Low Carbon Nation Aspiration 2040 with the aim of reducing carbon emissions. The Malaysian government aims to achieve net-zero GHG emissions in 2050.

2. Are there carbon trading markets? If so, please give details. If not, are there plans for such markets?

Yes, a voluntary carbon market, the Bursa Carbon Exchange (the BCX) was recently established by Bursa Malaysia and is backed by the Malaysian government, under the purview of the Ministry of Finance and the NRECC. The inaugural auction for the BCX was held on 16 March 2023.

3. Are there mandatory requirements for transition plans and/or their disclosure? If so, please give details (including whether there is any standard or guidance on transition plans and/or requirement to consider the social impact of the plan). If not, are there plans for such requirements?

It is not mandatory to have a transition plan or to disclose any transition plans.

However, Bursa Malaysia has recently announced that they are including enhanced sustainability reporting requirements in their Main Market Listing Requirements and ACE Market Listing Requirements. Main Market listed issuers will be required to disclose their common sustainability matters and indicators for their emissions in their Sustainability Statements^[2]. ACE Market listed corporations will be required to disclose a basic plan to transition towards a low carbon economy^[3].

4. Are there mandatory requirements to set, meet and/or disclose climate-related targets? If so, please give details. If not, are there plans for such requirements?

There are no mandatory requirements set by the Malaysian Government.

However, Bursa Malaysia has imposed the requirement on Main Market listed issuers to include climate change-related disclosures that are aligned with the TCFD Recommendations in their Sustainability Statements^[4]. Under the TCFD Recommendations, the metrics and targets used to assess and manage relevant climate-related risks and opportunities are to be disclosed where such information is material. It remains to be seen how the climate change-related disclosures are to be aligned with the TCFD Recommendations.

Further, the JC3 has released the TCFD Application Guide which outlines the key recommendations and provides guidance within the context of the Malaysian economy and financial system to assist financial institutions in preparing for climate-related disclosures^[5]. The TCFD Application Guide sets out several recommended metrics and targets which financial institutions should use to disclose the climate-related commitments made to its investors and others.

Recently, the IFRS Foundation through ISSB announced the issuance of its first two IFRS Sustainability Disclosure Standards, IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures^[6]. These standards which fully incorporate the recommendations of the TCFD, are aimed at providing a global baseline for sustainability related disclosures and are seen as a culmination of the work of the TCFD. The JC3 has announced that the TCFD Application Guide will be reviewed in light of the release of IFRS S1 and IFRS S2.

5. Other upcoming developments / direction of travel

The recently announced Malaysia’s Budget 2023 (issued by the Ministry of Finance Malaysia) aims to encourage green practices in business operations through various approaches, which include, amongst others, the following:

(a) BNM will provide up to RM2 billion financing facility to SMEs to implement low carbon practices;

(b) Khazanah Nasional Berhad will provide RM150 million to develop environmentally friendly projects including supporting the carbon market and reforestation;

(c) The Green Technology Financing Scheme will be enhanced with the guarantee value being increased to RM3 billion until 2025;

(d) Tax Deduction on Issuance Cost of Sustainable and Responsible Investment Linked Sukuk;

(e) Tax Incentive for Company Renting Non-Commercial Electric Vehicle, and Carbon Capture and Storage; and

(f) Extension of Tax Incentives to Support the Development of the Electric Vehicle Industry.

The NRECC Minister has also announced that the NRECC is developing an Energy Efficiency and Conservation Act with the aim of regulating energy efficiency and conservation practices, as well as working on a Climate Change Act which will establish a legal framework on climate change mitigation and compliance mechanisms. From a previous statement made by the NRECC Minister in Parliament, the development of the Climate Change Act is expected to take 2 to 3 years.

C. Greenwashing risks

1. Are there any recent examples of legal proceedings, regulatory actions or investigations against or into greenwashing in your jurisdiction?

No.

2. Are there any laws or regulations specifically dealing with greenwashing?

No, however there is some guidance relevant to mitigating greenwashing risks (e.g. the SRI Taxonomy issued by SC and the CCPT issued by BNM) applicable to capital markets players and financial institutions.

The Lodge and Launch Framework issued by the SC sets out clear requirements pertaining to the issuance of Sustainable and Responsible Investment (SRI) sukuk, ASEAN green/ social/ sustainability bonds, SRI-linked sukuk and ASEAN sustainability-linked bonds. Risks of greenwashing are therefore mitigated as the issuances of such bonds and sukuk are regulated by the SC.

3. What are the likely grounds on which such proceedings, action or investigations can be instigated?

The likely grounds include:

(a) liability for false or misleading disclosures pursuant to securities laws and regulations (e.g. sustainability reporting requirements applicable to listed issuers);

(b) misrepresentation claims; and

4. Other upcoming developments / direction of travel

The Policy Document on Climate Risk Management and Scenario Analysis (Policy Document) issued by BNM (that will come into effect in stages at the end of 2023 and 2024) requires financial institutions to use established standards and taxonomies, as well as leveraging certifications and third-party assurance, to mitigate the risks associated with greenwashing of their portfolios. Financial institutions must also establish a board-approved policy on climate-related disclosures that promote credible as well as high-quality disclosures to mitigate the risks of greenwashing.

In March 2023, the ASEAN Taxonomy Board, representing ASEAN finance sectoral bodies released the ASEAN Taxonomy for Sustainable Finance (Version 2). Whilst the first version laid out the broad framework of the ASEAN Taxonomy, version 2 sets out, amongst other things, detailed methodologies for assessing economic activities and technical screening criteria for the first focus sector, the energy sector. It is expected that technical screening criteria for five remaining focus sectors will be released in phases, to be finalised by 2025.