Malaysia releases National Industry Environmental, Social & Governance framework

Environmental, Social, and Governance (ESG) has become a globally recognized framework for assessing the sustainability and ethical impact of businesses and organizations. ESG factors are used to evaluate the environmental, social, and governance practices of entities, ranging from corporations to investment funds and even government policies. ESG metrics have gained prominence as an essential tool for decision-makers, investors, and consumers looking to support responsible and sustainable practices. The growing emphasis on ESG is driven by several factors, including the increasing awareness of climate change, social justice issues, and corporate ethics. Investors are increasingly considering ESG factors when making investment decisions, recognizing that companies with strong ESG performance are often more resilient and better positioned for long-term success.

The i-ESG Framework for Sustainable Manufacturing

In this context, Malaysia's new National Industry Environmental, Social, and Governance (i-ESG) framework, which was officially presented to the public on 2 October 2023, is a noteworthy initiative representing the country's commitment to promoting ESG principles within its manufacturing sector, and to an alignment with global efforts to address environmental, social, and governance challenges. Malaysia introduced the i-ESG framework to promote sustainable development among manufacturing companies. The policy framework is designed to support the country's commitment to reducing greenhouse gas emissions by 45 % in 2030 and achieving carbon neutrality by 2050. Particular emphasis is placed on micro, small, and medium-sized manufacturing enterprises (MSMEs) which constitute a significant portion of Malaysia's business landscape contributing substantially to the country's GDP (24.2 %), exports (84.2 %) and workforce (17 %).

The i-ESG framework aims to ensure that MSMEs are not left behind in the growing focus on ESG principles among multinational corporations, investors, and trading partners. By fostering public-private partnerships and addressing operational gaps, the framework intends to facilitate MSMEs' participation in ESG-compliant supply chains and their access to export markets where ESG considerations dictate business decisions.

Addressing MSME specific challenges

In practical terms, implementing ESG poses particular challenges for MSME which i-ESG aims to overcome:

Insufficient awareness regarding the significance of ESG practices and the necessity for industries to embrace them;
Challenges in comprehending, handling, and quantifying ESG risks due to the extensive and multifaceted nature of the subject;
Adoption of technology, digital platforms, and training pose additional expenses for organizations, particularly MSMEs;
The complex landscape of competing standards and frameworks presents a significant hurdle for organizations, as 85 % of companies utilize not just one but multiple ESG reporting frameworks;
International standards are evolving rapidly, necessitating organizations to consistently update their data management and convert it into meaningful disclosures.

Implementation phases of the i-ESG framework

The i-ESG framework is divided into two phases: "Just Transition" (Phase 1.0) from 2024 to 2026 and "Accelerate ESG Practices" (Phase 2.0) from 2027 to 2030.

It is built on four pillars:

standards
financing
capacity building, and
market mechanisms.

Supported by six key enablers, including:

stakeholder engagement,
human capital and capabilities,
digitalization,
technology,
financing and incentives, and
policies and regulations.

In Phase 1.0, manufacturing companies will be given the opportunity to undergo self-readiness assessments, outreach, training, mentoring, and financing programs to initiate their sustainability/ESG journey. This first phase includes initiatives like i-ESGReady, a readiness assessment program, and i-ESGStart, a practical guide to help businesses start their sustainability journey. Malaysia’s Ministry of Investment, Trade, and Industry (MITI), will also conduct clinic sessions to guide companies in producing their first sustainability reports. The first of these sessions was held end of October this year.

Implications and Outlook

The introduction of Malaysia's i-ESG framework is a significant and forward-looking step towards fostering sustainability and responsible business practices within the country's manufacturing sector. As the world increasingly recognizes the importance of ESG factors in guiding economic decisions, this framework positions Malaysia to align with global trends and to meet the environmental, social and governance challenges of the 21st century.

One of the most promising aspects of the i-ESG framework is its specific focus on micro, small, and medium-sized manufacturing enterprises (MSMEs). These businesses form the backbone of Malaysia's economy, contributing significantly to its GDP, exports, and employment.

However, it is essential to acknowledge the challenges outlined above that come with the implementation of ESG practices, especially for MSMEs. Addressing these hurdles and navigating the evolving landscape of ESG reporting standards will require concerted efforts from both the public and private sectors.

As we look into the future, the i-ESG framework has the potential to strengthen Malaysia's position in the global market, attracting responsible investments and fostering innovation in sustainable manufacturing. It not only aligns with the global ESG trend but also positions Malaysia as a responsible and forward-thinking player in the international business arena. The implications of Malaysia's i-ESG framework extend beyond its borders. This initiative – if implemented as envisaged - will prove particularly useful for companies who are subject to mandatory ESG-related substantive or reporting laws, such as those on supply chain due diligence and sustainability reporting within the European Union. Affected companies will find it easier to identify and select suitable business partners in Malaysia and have better access to data required for reporting obligations imposed in their European home country.