Tay Partners


InsiderTAPS March 2022


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What is ESG?

If there is one buzzword that encapsulates the zeitgeist of today, it is ESG.

With growing ethical awareness on the economic, environmental and social footprint that we leave behind, the emphasis on ESG (short form for “Environmental, Social and Governance”) by corporations, stakeholders including investors and customers, and even governments alike has been gaining traction globally and locally. 

The concept first made headway in a report prepared by the United Nation’s Environment Programme Finance Initiative (UNEP FI).[1] The report, which recognises the severe environmental and social impact due to the reluctance of markets to embrace sustainability, promulgated the urgent need to account for and integrate ESG governance into market, investment and board room considerations for long-term value creation.

However, while the concept of ESG is a lofty one, to date, there is no internationally accepted definition of ESG. With the lack of standardization of baseline or criteria on ESG, ESG remains a nebulous concept, the ambiguity of which may pose a challenge for compliance.

How is Malaysia faring so far?

Bursa’s Sustainability Reporting Guide 

On the local front, having recognized the shift in global policy making and growing investor appetite for sustainable development and investments, the Malaysian Securities Commission (“SC”) has launched a sustainable and responsible investment roadmap for the Malaysian capital market in the bid to posit Malaysia as a regional sustainable and responsible investment as well as green financing centre.

Under the Listing Requirements of Bursa Malaysia Securities Berhad (“Bursa”), Main Market and ACE Market listed issuers are required to include in their annual reports, a Sustainability Statement,[2] comprising a narrative statement of the listed corporation’s management of material economic, environmental and social risks and opportunities by taking into consideration the themes set out in the Bursa’s Sustainability Reporting Guide (“Guide”).[3] Listed issuers under the Main Market are subject to additional obligations, including disclosure on its governance structure in place to manage ESG risks and opportunities, scope of the Sustainability Statement and basis for the scope, and material sustainability matters and their management.[4]

The Guide sets to explain economic, environmental, and social themes to assist corporations to, among others, improve awareness of risks and opportunities, identify, evaluate, and manage material sustainability risks and opportunities, and improve the quality and depth of sustainability information.  

It further provides toolkits on reporting and disclosure obligations which ought to be considered by the issuer. For example, on anti-corruption, organisations are required to report the total number and percentage of operations assessed for corruption risks and significant identified risks, anti-corruption policies and procedures, communications to employees, business partners and governance body members as well as the total number and nature of confirmed incidents and action taken.[5]

Bursa FTSE4Good Bursa Malaysia Index

In addition, in July 2021, Bursa, in partnership with FTSE Russell launched the FTSE4Good Index (“Index”) to identify and recognise Malaysian companies who demonstrates a leading approach to addressing ESG risks.[6]  

On top of being used by mainstream institutional investors looking to meet an ESG mandate, many corporations use their inclusion in the Index as a show of commitment to strong ESG performance.

Based upon a globally consistent methodology and globally comparable ratings,[7] each company is given an ESG rating ranging from 0 to 5 (5 being highest). Depending on the classification of country, the minimal rating for Index inclusion differs. As Malaysia is an emerging market, Malaysian companies need to achieve a rating of 2.9 or higher to be included in the Index.  

SC’s Malaysian Code on Corporate Governance (“MCCG”)[8]

 The imperative role of boards and senior management in delivering sustainability value and ESG ethos is also recognised in the recently updated MCCG.[9]

As a guidance, the MCCG provides, among others, that:

  • Effective board leadership requires the integration of sustainability considerations in corporate strategy, governance and decision-making, as well as sustainability and underlying ESG issues. The board should have sufficient understanding and knowledge of sustainability issues and the capacity and competency to tackle such issues;[10]
  • The board should take proactive measures to address material ESG risks and opportunities;[11]
  • Senior management should integrate sustainability considerations in the day-to-day operations of the company to ensure effective implementation;[12]
  • The views of internal and external stakeholders should be continuously sought and considered and the company’s sustainability strategies, priorities, targets and performance should also be communicated to its stakeholders;[13] and
  • Performance evaluations of the board and senior management should include a review of their performance in addressing the company’s material sustainability risks and opportunities.[14]

More importantly, the MCCG recognises that many institutional investors consider integration of ESG factors in their investment decision-making process as part of their fiduciary responsibility and several have committed to using their votes to hold boards and senior management accountable for the management and oversight of sustainability.[15]

In this regard, it is not farfetched to argue that the failure to give due regard to ESG factors may attract personal liability on the part of directors/officers arising from a potential breach of a director’s fiduciary duties under the Companies Act 2016.

Further Advancement of the ESG agenda

The efforts by the SC and Bursa to advance the ESG agenda are not standalone. For one, Bursa has started collaborating with the Ministry of Environment and Water and Ministry of Finance to create a voluntary carbon market for trading of carbon credits. Further, the Ministry of Environment and Water has also announced recently that it would implement a domestic emission trading scheme to execute domestic carbon credit transactions.[16]

ESG-related Legal Risks 

Non-Adherence to ESG 

Lest ESG is perceived as just a passing fad, the risks of non-compliance, to name a few, are real, and costly. For example, Top Glove, the world’s biggest rubber glove manufacturer saw its share prices taking a fall and faced import bans from the US after discovered to have engaged in forced labor.[17]

In fact, the impact of ESG issues may also be more far-reaching than one may expect. A notable example would be representation of the world’s biggest fossil fuel companies by PR companies.  On top of accusations that fossil fuel companies have been using PR firms to “greenwash” their contribution to the climate crisis,[18] PR firms have lost clients by trying to play both sides and being unwilling to take a concrete stance on the climate debate.[19]


Some stakeholders want to see real action and just not lip service to ESG. Stakeholders are increasingly aware of greenwashing and are intolerant of such deception.

A prime example would be the high profile “diesel dupe” scandal by Volkswagen (“VW”), which resulted in the company recalling millions of cars worldwide. VW claimed that its cars are equipped with groundbreaking clean diesel engine which could meet the US’s tailpipe emission standards. VW was subsequently found to have rigged its engines to reduce emissions when it detects testing regimens. Fast forward five years from when the scandal broke, VW is still reeling from the gargantuan financial damage cause by the scandal, not to mention legal costs, reputational damage, and plummeting stock value.[20]

Other than financial and reputational damage, it should also be noted that any misleading conduct or false or misleading representation to the public is an offence under the Malaysia Consumer Protection Act 1999. If found liable, the offender may be exposed to fines and/or imprisonment.[21]

Besides, environmental claims that are vague or unspecific or that generally imply that a product is environmentally friendly or beneficial to the environment which may convey a range of meanings to consumers, should only be made if they are valid, without qualification, under all reasonably foreseeable circumstances. Such claims have a high potential to be misunderstood by consumers.


Amid the discourse on ESG efforts, corporations should not lose sight of other areas of law. Even though the importance of ESG cannot be undermined, it is crucial for organizations to be mindful of their ability to cooperate with other organizations to attain ESG goals. While the time is ripe for industry players to take the opportunity to collaborate on their ESG agenda,[22] equally important is the need to ensure that competitors who work together avoid competition pitfalls (e.g. sensitive information sharing, limiting technological development or investment).

Concluding Remarks

With ESG gaining traction in the corporate arena, we can see that businesses are amping up their gears in shifting towards sustainability and ESG goals. Nonetheless, while such efforts are laudable, this new arena is replete with risks of its own. Thus, businesses should proceed with caution to minimize the legal risks that may arise from their ESG practices, disclosures, and other ancillary efforts.

The article is authored by our Partner, Ms Nicole Leong and Associate, Ms Heng Jia. The views and opinions expressed in this article are those of the authors alone and do not constitute any legal advice. For further information or advice on ESG, kindly contact our Partner, Ms Nicole Leong.

[1] 2004 report commissioned by the UNEP Asset Management Working Group titled ‘The Materiality of Social, Environmental and Corporate Governance Issues to Equity Pricing

[2] Main Market Listing Requirements, paragraphs 9.45(2) and paragraph (29), Part A of Appendix 9C, supplemented by Practice Note 9. See also the ACE Market Listing Requirements, paragraph (30) of Appendix 9C, supplemented by Guidance Note 11

[3] Bursa’s Sustainability Reporting Guide, 2nd Edition issued by the Bursa

[4] Guide, Section 5.2

[5] Guide, page 84, read together with the Bursa’s Toolkit, Themes and Indicators, Disclosure standards issued by the Global Sustainability Standards Board and Sustainable Development Goal 16

[6] FTSE4Good Bursa Malaysia Index FAQ dated December 2021 published by Bursa

[7] Ibid.

[8] SC’s MCCG as on 28 April 2021

[9] Media release by the SC titled ‘SC Updates the Malaysian Code on Corporate Governance to Promote Board Leadership and Oversight of Sustainability’ dated 28 April 2021 available for access at:  https://www.sc.com.my/resources/media/media-release/sc-updates-the-malaysian-code-on-corporate-governance-to-promote-board-leadership-and-oversight-of-sustainability

[10] MCCG, paragraph G4.3

[11] MCCG, paragraph G4.1

[12] Ibid.

[13] MCCG, paragraph 4.2

[14] MCCG, paragraph G4.4

[15] MCCG, paragraph G4.1

[16] The Edge article titled ‘Domestic Carbon Trading to be Implemented in Phases from End of Next Year- Minister’ dated 1 December 2021, available for access at: https://www.theedgemarkets.com/article/domestic-carbon-trading-be-implemented-phases-end-next-year-%E2%80%94-minister

[17] Business Times’s report titled ‘Top Glove reiterates commitment to labour practices after US customs seizure order’ dated 30 March 2021, available for access at: https://www.businesstimes.com.sg/companies-markets/top-glove-reiterates-commitment-to-labour-practices-after-us-customs-seizure-order

[18] CNBC’s report titled ‘PR firms are Facing a Backlash for ‘Greenwashing’ Big Oil – and the pressure on them is growing’ dated 16 February 2022, available for access at: https://www.cnbc.com/2022/02/16/big-oil-and-the-climate-crisis-the-fight-to-hold-pr-firms-accountable.html

[19] The Guardian’s report titled ‘Edelman Loses Executives and Clients Over Climate Change Stance’ dated 7 July 2015, available for access at: https://www.theguardian.com/sustainable-business/2015/jul/07/pr-edelman-climate-change-lost-executives-clients

[20] Fortune article titled ‘5 years in, Damages from the VW Emissions Cheating Scandal are still Rolling In” dated 6 October 2020, available for access at: https://fortune.com/2020/10/06/volkswagen-vw-emissions-scandal-damages/

[21] Consumer Protection Act 1999, Sections 10 and 25

[22] See, for example, the collaboration between MSM Malaysia and Wilmar Sugar to build a sustainable sugar supply chain, New Straits Time report titled ‘MSM Malaysia, Wilmar Sugar Collaborate to Build a Sustainable Sugar Supply Chain’ dated 15 February 2022, available for access at: https://www.nst.com.my/business/2022/02/771584/msm-malaysia-wilmar-sugar-collaborate-build-sustainable-sugar-supply-chain

Nicole Leong
T: +603 2050 1918

Heng Jia
T: +603 2050 1846

Photo by Appolinary Kalashnikova on Unsplash