Introduction
A quiet revolution is taking place in Malaysian boardrooms. ESG (an acronym for Environment, Social and Governance), once dismissed as corporate window-dressing – is emerging as a critical business imperative. The Corporate Governance Institute[1] defines ESG as standards that measure the impact of a company on the environment and the community. Unlike traditional due diligence, ESG due diligence focuses on identifying long-term risks and opportunities by assessing a company’s ESG-related exposures and liabilities.
Despite this, ESG is still often perceived as a “soft” add-on; an idealistic initiative that generates little tangible returns. However, in reality, ESG failures carry serious consequences; the company may be exposed to financial, regulatory and reputational damage. As this article will explore, ESG due diligence is neither for show, nor a tick box activity – it is a legal necessity for the survival of our economic system.
ESG Failure: An Often-Underestimated Risk
The rapid growth of Malaysia’s economy has been driven by high-performing sectors such as palm oil, oil and gas, manufacturing and construction, all of which generate robust profit margins. However, it isn’t uncommon to find ESG risks lurking beneath the numbers. These range from labour law violations[2], unsafe working conditions[3], poor environmental compliance[4] and other questionable corporate practices.
A notable example often cited in ESG discourse is Top Glove Corporation Berhad (“Top Glove”), which experienced extraordinary financial performance during the COVID-19 pandemic due to a global surge in demand for surgical gloves[5]. Despite producing disposable gloves that protected frontline medical workers from the virus, they faced allegations of forced labour and poor living conditions for their workers[6]. In 2021, U.S. Customs and Border Protection imposed an import ban on certain products linked to the company, citing concerns related to labour practices. Top Glove subsequently undertook various remedial measures to address the issues raised.
This illustrates a broader trend: in today’s regulatory and stakeholder environment, ESG is no longer a peripheral concern. It has evolved into a core component of risk management and corporate sustainability, one that can materially impact business continuity, investor confidence, and market access.
ESG in Malaysia: Balancing Economic Growth with Rising Regulatory Expectations
In Malaysia, where small and medium-sized enterprises (“SMEs”) form the backbone of the economy, the adoption of ESG practices remains a complex balancing act. While ESG initiatives promise long-term benefits, such as attracting foreign investment, enhancing consumer trust and ensuring continued access to international markets, the initial cost of compliance, coupled with legal uncertainty, poses significant challenges for smaller enterprises.
This is where clear and strategic policymaking becomes essential. ESG should not be treated as a tick-box compliance exercise but as a forward-looking investment in sustainable growth. Policymakers must design frameworks that are deliberate, locally contextualised, and aligned with international developments, rather than reactive responses to isolated incidents. The European Union’s Carbon Border Adjustment Mechanism (CBAM) , for example, highlights the urgency for proactive ESG readiness, lest Malaysian exporters risk losing access to key markets. A comparative glance at Singapore’s Green Plan 2030[7] highlighted how targeted support, such as green financing, training and grants, can ease the compliance burden while fostering sustainable development.
Encouragingly, regulators in Malaysia are beginning to align with global ESG trends. Bursa Malaysia has introduced mandatory ESG reporting requirements [8]and a phased disclosure framework under its revised Sustainability Reporting Requirements 2024[9], which brings local reporting closer to international standards. Meanwhile, the Securities Commission Malaysia (SC) continues to drive ESG integration through initiatives like the Sustainable and Responsible Investment (SRI) Roadmap[10], which prescribes clear disclosure criteria for ESG-focused investment funds.
Collectively, these developments reflect a heightened regulatory focus on ESG compliance. Companies that do not align with evolving ESG standards may be subject to closer scrutiny and, where applicable, regulatory action in accordance with existing frameworks. For Malaysian businesses, ESG due diligence is increasingly seen not merely as a best practice, but as an essential component of compliance and long-term strategic planning in a rapidly evolving global economic landscape.
ESG Due Diligence: What Does it Mean for Lawyers?
Having discussed the importance of ESG due diligence, one may wonder: what does the process actually entail? In essence, ESG due diligence consists of identifying, assessing and mitigating ESG-related risks and opportunities in corporate transactions.
The scope of ESG due diligence is broad and typically encompasses, but not limited to, the following key areas:
- Environmental compliance (e.g. emission regulations, pollution liabilities);
- Labour practices and workers’ welfare;
- Board structure and transparency;
- Supply chain sustainability; and
- Community and stakeholder engagement
Failure to identify and/or mitigate these risks can expose business to regulatory penalties, reputational harm, project delays or even termination of ongoing transactions. According to a legal opinion[11] by senior industry leaders, directors may also risk breaching their legal duties should they fail to consider ESG risks in their decision-making.
Looking Ahead: Further Integration of ESG in Strategy
To remain competitive in the international market, ESG must not be treated as a mere afterthought. Companies looking to grow and raise capital must integrate ESG into their core strategies. Legal practitioners have a crucial role in this process: guiding clients through ESG due diligence, proactively flagging ESG risks, protecting clients with robust agreements and ensuring compliance across various aspects.
Conclusion
With the evolving business landscape, ESG is no longer an optional add-on. It has become a fundamental part of compliance and necessity for long-term corporate survival. For Malaysia, embracing ESG does not mean forgoing profits for sustainability—it means aligning growth with sustainability, and on a macro-level, gearing our economy for future challenges.
The views expressed herein are those of the author and do not necessarily reflect the views of the firm. Should you have any legal queries, corporate or otherwise, please feel free to reach out to the firm for further assistance.
Authored by : Ow Chen Guo, Florence (Intern)
Reviewed by : Siow Chan Wai, Shawn (Partner)
For further legal advice on Corporate Law, please contact us at Y Kong, Wong & Partners.
[1] What is ESG and why is it important?
[2] Malaysia penalises 400 companies so far this year for violating labour laws
[3] Malaysia: Hidden cameras reveal poor working & living conditions at Top Glove factory, fuelling forced labour concerns in glove industry
[4] Nestle fined RM90,000 for environmental pollution
[5] Top Glove’s profit surges amidst Covid-19 pandemic
[6] The world’s top suppliers of disposable gloves are thriving because of the pandemic. Their workers aren’t
[7] SG Green Plan – Green Economy
[8] Bursa Malaysia to Launch Platform for Mandatory ESG Reporting
[9] Bursa Malaysia amends Sustainability Reporting Requirements and enhances General Meeting and Adviser/Sponsor Requirements
[10]Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market
[11] ‘Legal Opinion on Directors’ Duties and Disclosure Obligations under Malaysian Law in the Context of Climate Change Risks and Considerations