Malaysia

Contributing law firm: Rahmat Lim & Partners
Contact: Kelvin Loh, 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 risks 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 Malaysian Financial Institutions (TCFD Application Guide) issued by the Joint Committee on Climate Change (JC3)^[1] 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, Sustainability Reporting Framework) issued by Bursa Malaysia Securities Berhad (Bursa Malaysia) 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.

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.

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

The Climate Risk Management and Scenario Analysis (CRMSA) also requires financial institutions to produce TCFD-aligned climate disclosure in line with the TCFD Application Guide, and such disclosures shall be published together with annual financial reports for financial years beginning on or after 1 January 2024.

Disclosures on the implementation of principles in relation to the governance, strategy, risk appetite and risk management of financial institutions are currently mandatory, while disclosures on the implementation of principles in relation to scenario analysis and metrics and targets, together with Basic and Stretch recommendations will take effect for financial years beginning on or after 1 January 2024. In particular, disclosures in line with Basic recommendations are to be implemented by June 2024, and Stretch recommendations are to be implemented based on each financial institution’s overall climate risk exposure and/or complexity of operations.

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, standards issued by the ISSB, European Union’s European Financial Reporting Advisory Group and TCFD Recommendations. However, the Sustainability Reporting Framework is not based on any specific international standards.

6. How do the disclosure requirements approach materiality (e.g. single or double materiality)?

The climate-related disclosures required under the TCFD Application Guide and Sustainability Reporting Framework adopts a “single materiality” approach which is consistent with the TCFD Recommendations.

7. Are there requirements for the disclosure of GHG emissions? If so, please specify the scope (e.g. Scope 1, Scope 2 and/or Scope 3), to whom they apply and whether there are requirements on the measurement methodology?

The TCFD Application Guide sets out mandatory disclosures, in the form of Basic and Stretch Recommendations, which are to be complied with by financial institutions within different time periods. Scope 1, Scope 2 and limited Scope 3 emissions (i.e., business travel and employee commuting) disclosures are required pursuant to the Basic Recommendations under the TCFD Application Guide, while Stretch Recommendations include disclosures for all Scope 3 emissions.

Main market listed companies are also required to make mandatory disclosures on Scope 1, Scope 2 and limited Scope 3 emissions for the financial year ending on or after 31 December 2024. Such requirements are in line with the Basic Recommendations set out in the TCFD Application Guide. TCFD-aligned disclosures, including disclosures for all Scope 3 emissions pursuant to the Stretch Recommendations, would be required on or after the financial year ending on or after 31 December 2025.

There are currently no mandatory disclosure requirements for ACE Market listed companies in respect of absolute Scope 3 emissions. ACE Market listed companies are only required to make disclosures on Scope 1, Scope 2 and limited Scope 3 emissions for the financial year ending on or after 31 December 2026.

There are no requirements under the TCFD Application Guide or the Sustainability Reporting Framework on the measurement methodology. However, disclosures of, among other things, methodologies used to calculate emissions are required.

8. Are there requirements to obtain independent assurance of any ESG disclosures? If so, what is the scope of such 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.

See section A.11 below on the NSRF Consultation Paper which contemplates mandatory external assurance.

9. For companies not subject to mandatory or comply-or-explain ESG reporting, 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.

10. Has your jurisdiction issued or adopted a taxonomy on sustainable activities? Is it mandatory and what is its scope of application?

The Climate Change and Principle-based Taxonomy (CCPT) issued on 30 April 2021 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 disclosures by financial institutions on the classification of their respective economic activities in line with the CCPT is not currently mandatory, financial institutions submitted the first report on their application of the CCPT in their classification of economic activities against climate objectives and reporting of lending and investment activities to BNM in August 2022.

The Principles-Based Sustainable and Responsible Investment Taxonomy (SRI Taxonomy) issued on 12 December 2022 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.

The ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy) Version 3 issued on 27 March 2024 by the ASEAN Taxonomy Board provides alignment on underlying principles and helps harmonise the classification of sustainable activities and assets across ASEAN. It does not have mandatory application.

11. Are there plans to adopt or incorporate the ISSB’s IFRS S1 and/or S2 standards? If so, please indicate the extent of alignment, to what extent the standards will be mandatory, to whom they will apply and the timeline.

The Advisory Committee on Sustainability Reporting (ACSR) had on 15 February 2024 issued a public consultation paper on the proposed issuance of a National Sustainability Reporting Framework for Malaysia (NSRF Consultation Paper). The NSRF Consultation Paper aims to seek feedback on the use and application of IFRS S1 and IFRS S2, including the required transition reliefs, to consider the regulatory structure for issuance and oversight of the ISSB Standards.

Given the difference in readiness and maturity of listed and non-listed companies, the NSRF Consultation Paper proposes for IFRS S1 and IFRS S2 with reliefs to be adopted in stages and at different timelines, with IFRS S1 and IFRS S2 to be fully adopted by (i) Main Market listed issuers for annual reports issued for the financial year ending on or after 31 December 2027; and (ii) ACE Market listed issuers and large non-listed companies with revenue of RM 2 billion and above for annual reports issued for the financial year ending on or after 31 December 2029.

At this juncture, the ACSR, via the NSRF Consultation Paper, is seeking feedback on, among other things, (i) whether the proportionality and scalability mechanism for disclosures in accordance with the IFRS S2 and IFRS S1 is sufficient; (ii) whether there are any additional reliefs that should be considered to facilitate the adoption of IFRS S1 and IFRS S2; and (iii) whether companies are ready to use or already using the GHG Protocol (as defined in the ISSB Standards) to calculate its GHG emissions, and if not, what other standard(s) or methodology is being used.

The NSRF Consultation Paper is also currently seeking feedback on whether the following additional reliefs should be applied (and if so, how long each relief should be provided) in addition to those already identified by the ISSB:

(a) focus on sustainability-related financial disclosures specifically on principal business segments;

(b) option not to disclose impacts of sustainability-related and climate-related risks and opportunities on a company’s strategy and decision making;

(c) permissible for a company to use boundaries other than those outlined in Paragraph 29(iv) of the IFRS S2 in respect of GHG emissions; and

(d) option not to disclose Scope 3 emissions, except for Scope 3 emissions on business travel and employee commuting.

Therefore, at this juncture, it is not confirmed whether Scope 1, 2 and 3 emissions reporting would be mandatory under the IFRS S1 and IFRS S2.

The NSRF Consultation Paper has not indicated if reports prepared in compliance with IFRS S1 and IFRS S2 will be considered as having complied with local ESG reporting rules. The ACSR anticipates that legislative and regulatory amendments may be required to enable adoption of the NSRF by both listed and non-listed companies.

12. Other upcoming developments / direction of travel

The Capital Markets Malaysia, in collaboration with the Department of Natural Resources, Environment and Climate Change, has in October 2023 issued the Simplified ESG Disclosure Guide for SMEs in Supply Chains which provides 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. There is currently no mandatory adoption timeline for disclosures under the guide.

The NSRF Consultation Paper also contemplates shifting the existing voluntary approach to mandatory external assurance. The initial focus for potential mandatory external assurance could be obtaining limited assurance for GHG emissions metrics two years after the adoption of IFRS S2.

B. Transition planning

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. Malaysia government aims to achieve net-zero GHG emissions in 2050.

2. Has the government or any regulator in your jurisdiction launched compliance and/or voluntary carbon trading schemes or carbon taxes? If so, please give details. If not, are there plans to do so?

The State of Sarawak recently passed the Environment (Reduction of Greenhouse Gases Emission) Ordinance, 2023 (Ordinance), which came into effect on 1 March 2024. Under the Ordinance, certain persons or business entities undertaking activities in the oil and gas sector, energy sector, and other economic sectors in Sarawak as may be determined by the Sarawak State Executive Council (Majlis Mesyuarat Kerajaan Negeri Sarawak) are required to submit a carbon emission report to the Controller of Environmental Quality. The Sarawak State Executive Council will in due course establish GHG emissions thresholds in relation to which a carbon levy will be payable as a penalty by any such persons or business entities exceeding such thresholds.

It was also recently announced that two additional taxes will be imposed: a Forest Ecosystem Fee (FEF) of 5% on the value of traded carbon, and an annual land use tax for carbon trading based on the size of the licensed area of such land.

Although Peninsular Malaysia has yet to implement similar carbon taxes, the Ministry of Investment, Trade and Industry recently announced that they are exploring options for carbon pricing, trading and taxation, in anticipation of the European Union (EU)’s implementation of the Carbon Border Adjustment Mechanism in 2026 which aims to level the playing field by ensuring that the carbon cost of imported goods matches that of domestically produced goods within the EU.

A voluntary carbon market, the Bursa Carbon Exchange (BCX) was established by Bursa Malaysia^[2] and is backed by the Malaysian government, under the purview of the Ministry of Finance and the Ministry of Natural Resources, Environment and Climate Change in December 2022. This platform is the world's first Shariah-compliant voluntary carbon market, facilitating the trading of carbon credits from accredited nature-based and technology-based projects. The inaugural auction for the BCX was held on 16 March 2023.

The BCX has since expanded its offerings by introducing Renewable Energy Certificates (RECs). The platform plans to introduce continuous trading, including the facilitation of off-market transactions for RECs, by the end of September 2024. The BCX hosted its inaugural auction of RECs on 25 June 2024.

3. Are there mandatory requirements for companies to have in place and/or disclose climate-related transition plans? 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?

Under Malaysian law, there are no mandatory statutory requirements for companies in Malaysia to have in place and/or disclose climate-related transition plans. However, in recent years, Bursa Malaysia has enhanced sustainability reporting requirements in their Main Market Listing Requirements and ACE Market Listing Requirements.^[3]

Bursa Malaysia mandates that Main Market-listed issuers integrate TCFD Recommendations into their sustainability reporting, which covers disclosures on governance, strategy, risk management and metrics and targets. Similarly, ACE Market-listed issuers are required to disclose a basic transition plan towards a low-carbon economy.^[4]

These requirements are primarily driven by the alignment with the TCFD and include comprehensive guidelines for companies to report on their strategies for transitioning to a low-carbon economy and managing climate-related risks.

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, as mentioned above, 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, and for ACE Market-listed issuers to disclose a basic transition plan towards a low-carbon economy.^[5]

Further, as mentioned, the TCFD Application Guide for Malaysian Financial Institutions outlines the key recommendations and provides guidance to assist financial institutions in preparing for climate-related disclosures. The JC3 had previously announced that the TCFD Application Guide will be reviewed in light of the upcoming release of IFRS S1 and IFRS S2 by the ISSB.^[6] However, as of 30 June 2024, although the IFRS S1 and S2 have been released, the JC3 has yet to release its updated TCFD Application Guide.

5. Other upcoming developments / direction of travel

The recently announced Malaysia’s Budget 2024^[7]aims to encourage green practices in business operations and to allow an easier transition to adopting green practices through various approaches, which include, among other things, the following initiatives:

(a) Provision of funding worth RM2 billion to facilitate the national energy transition and to realise the National Energy Transition Roadmap (NETR) aspiration;

(b) Proposing an additional tax deduction of up to RM300,000 for companies that incur expenses related to Measurement, Reporting, and Verification in the development of carbon projects (these expenses can be deducted from the income generated from carbon credit sales traded on the BCX);

(c) Provision of financing funds with a total value of RM200 billion by financial institutions to encourage the industry’s transition towards a low-carbon economy; and

(d) The continuation of efforts to improve the implementation of the Corporate Green Power Programme^[8] as one of the Third Party Access (TPA) model implementation methods, to achieve the target of 70% renewable energy capacity by 2050.

The Government has also announced that they intend to implement TPA in Malaysia’s electricity supply industry starting in September 2024, which is expected to allow independent power producers, including renewable energy producers to use the national electricity grid to sell electricity directly to consumers, thus allowing corporate consumers to bypass the need to purchase renewable energy from Tenaga Nasional Berhad (TNB) and providing consumers an additional avenue to increase renewable energy usage.

It has further been announced that the Natural Resources, Environment and Climate Change Ministry is working on a Climate Change Act which will establish a legal framework on climate change mitigation and compliance mechanisms. The Natural Resources, Environment and Climate Change Minister has mentioned the Government will not rush the tabling of the relevant bill, but is looking to table it in 2025. No details on the bill have been made public, but a carbon tax and mandatory ETS are being considered.

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 and the Guidance Note on Managing ESG Risks for Fund Management Companies 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 and sukuk, SRI-linked sukuk and ASEAN Sustainability-linked bonds and sukuk. Risks of greenwashing are therefore mitigated as the issuances of such bonds and sukuk are regulated by the SC. The Guidelines on SRI Funds also provides guidance on the disclosure and reporting requirements for SRI funds.

3. What are the likely grounds on which such proceedings, actions 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 comes into effect in stages at the end of 2023 and 2024) encourages financial institutions to use established standards and taxonomies to verify the disclosures made by their customers, as well as leverage 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.

The NSRF Consultation Paper has proposed, among other things, that external assurance be made mandatory for sustainability statements made by companies to avoid greenwashing.

In April 2024, the ASEAN Taxonomy Board, representing ASEAN finance sectoral bodies released the ASEAN Taxonomy for Sustainable Finance (Version 3). Whilst the first version laid out the broad framework of the ASEAN Taxonomy, the second version sets out, among other things, detailed methodologies for assessing economic activities and technical screening criteria for the first focus sector, the energy sector. Version 3 introduces technical screening criteria for two more focus sectors i.e., transportation and storage, and construction and real estate.