There is increasing pressure on small- and medium-sized enterprises (SMEs) in Malaysia to provide better sustainability disclosures.
As Malaysia forges ahead with its 2050 net zero climate ambition, new policies are prompting businesses to embed sustainability throughout their operations and supply chains – and in the SMEs they rely on.
One is the National Sustainability Reporting Framework (NSRF)which is set to shake up corporate reporting by requiring Malaysia’s largest publicly listed companies to disclose their entire value chain’s greenhouse gas (GHG) emissions by 2027.
The framework’s mandatory Scope 3 reporting requirement, for one, encompasses all indirect emissions from a company’s upstream and downstream activities, excluding direct emissions (Scope 1) and those from energy use (Scope 2).
While the mandate represents a significant step toward decarbonisation, it underscores the mounting pressure on large businesses – especially in Malaysia – to address their environmental impact holistically, and on SMEs to align with global reporting standards.
A KPMG and Pacific Basin Economic Council study, for example, revealed that only 21 per cent of Malaysian publicly listed companies disclosed their Scope 3 emissions in their 2023 reporting cycle, lagging behind broader Asia Pacific’s 39 per cent.
Ignoring Scope 3 emissions would theoretically mean leaving out 70 to 90 per cent of a company’s total carbon footprint. While measuring Scope 3 emissions is essential, many organisations – especially smaller businesses within large company supply chains – are not sure where to begin.
Staying relevant
One such company is Malaysia-based commercial printing company Thumbprints Utd Sdn Bhd, which works with a number of Malaysian and multinational companies including food and beverage company Nestlé, as well as book publishers Harper Collins and Scholastic.
Lim Chee Yoong, executive director of Thumbprints Utd Sdn Bhd, notes that while sustainability reporting has grown in importance, especially in maintaining relevance amid competitive global markets, the company struggles to obtain Scope 3 emissions data from their suppliers because reporting is still voluntary.
“It’s difficult for us to get reports from our own [paper] suppliers for Scope 3 since most of them are SMEs and it’s not mandatory [for them at the moment]. When it comes to knowledge and adoption of ESG, they don’t prioritise it,” he explained.
Lim added that engaging their SME partners in emissions reporting has increasingly become crucial as a producer that predominantly serves clients abroad and as a company subjected to continuous audits by sustainability assessors such as EcoVadis and Sedex.
Shifting sustainability requirements among large companies are putting the onus on SMEs to stay ahead or lose relevance, Najwa A’liah Fairuz, head, Brand Engagement of the United Nations Global Compact Network Malaysia and Brunei (UNGCMYB) told Eco-Business.
“Large corporations and regulatory bodies have begun embedding ESG [environmental, social, and governance] criteria into procurement policies. For SMEs, aligning with these standards is no longer a matter of choice but an essential strategic move for continued growth, competitive advantage and market relevance,” Fairuz explained.
The UN Global Compact is a strategic initiative that supports global companies committed to responsible business practices.
Another KPMG study found that across Asia Pacific, 63 per cent of companies conduct regular supplier assessments, and 66 per cent have integrated environmental and social requirements into supplier onboarding processes to ensure their partners work within sustainability standards.
Sustainability journey guidance
Despite growing awareness of the value of ESG integration, many Malaysian SMEs remain slow to adopt these practices.
A 2023 report from Alliance Bank, a Malaysian financial institution, found that despite three out of five SMEs noting that ESG practices create long-term value and increase business opportunities, only 28 per cent have incorporated them into their strategies.
Barriers include resource constraints, a lack of technical expertise, and concerns about income stability and profitability, according to the study’s respondents.
“Limited resources and industry exposure often hinder [SMEs’] ability to align ESG principles with their operations. Identifying appropriate professional guidance remains a significant hurdle, leaving many businesses unsure about how to begin their ESG journey,” said Fairuz.
One guide, known as the Simplified ESG Disclosure Guide (SEDG) for SMEs in Supply Chainsaims to help SMEs with the sustainability reporting process.
Launched in 2023 by Capital Markets Malaysia (CMM), the SEDG seeks to align SMEs with global frameworks and international reporting standards, making it easier to participate in global supply chains.
“Our priority is to support SMEs as they begin their ESG reporting journey,” explained Navina Balasingam, general manager of CMM, adding that the SEDG aims to achieve this by laying out the ESG disclosures that appear in global ESG frameworks and regulations in a clear and simplified manner.
“Being able to adopt and report on the 38 disclosures [included in the SEDG] will give Malaysian SMEs the assurance that they are complying with the majority of the [reporting] requirements expected of them by their global customers,” Balasingam added.
Malaysian SMEs, which comprise 97 per cent of all businesses in the country, contribute 38 per cent to Malaysia’s GDP, according to the Department of Statistics Malaysia.
Malaysia is also the first country to issue a disclosure guidance for SMEs aligned with the various global and local ESG disclosure frameworks, to encourage more SMEs to adopt ESG reporting best practices.
CMM is an affiliate of the Securities Commission Malaysia, which is responsible for regulating and systematically developing the Malaysian capital market. CMM leads the positioning and profiling of the Malaysian capital market through various initiatives and partnerships, focusing on areas such as sustainable finance and investing, the Islamic capital market, the digital market and capital market funding opportunities through the private market.
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The guide distils various global and local frameworks, standards, acts and regulations – [including] on forced labour and child labour – and simplifies the terminology to provide SME employers with comprehensive guidance on what they need to report on concerning these areas.
Navina Balasingam, General Manager, Capital Markets Malaysia
SEDG adoption
Balasingam shares that major corporations including oil and gas company Petronas, telecommunications company Telekom Malaysia, Nestlé Malaysia, and Malaysian conglomerate Sunway Group are some examples of companies that have adopted the SEDG to elevate sustainability within their supply chains.
This, Balasingam noted, effectively means that thousands of Malaysian SMEs that form part of these companies’ supply chains are benefitting from the SEDG. “The simple and structured nature of the disclosures, as well as the availability of templates and additional guidance, has eased the process of incorporating sustainability within their supply chains.”
The SEDG, she adds, serves as both a reporting guide and a tool for informed decision-making.
“[The SEDG] assists SMEs in determining what to measure, how to report, and how to effectively communicate their sustainability journey,” Balasingam said.
These efforts are critical as Scope 3 reporting becomes mandatory in two years. Large Malaysian publicly-listed companies will have to report the greenhouse gas emissions of their entire value chain starting from 2027according to the NSRF.
Enhanced guidance
In a bid to extend its SEDG, CMM released its Sector Guides or enhanced ESG disclosure guidelines on 30 May 2024 for five sectors significant to the Malaysian economy: agriculture; construction and real estate; energy; manufacturing; and transport and logistics. The targeted sectors are among the highest contributors to carbon emissions in Malaysia.
These are also among the top industries projected to be most impacted by the roll-out of the EU Deforestation Regulation (EUDR), which will first apply to large companies in December 2025 and then micro and small companies in June 2026. The EUDR aims to enforce traceability and supply chain transparency by prohibiting products and commodities linked to deforestation and forest degradation.
As an operator that exports to European countries, Thumbprints is hoping the Sector Guides will kickstart sustainability reporting for most of its local supply chain partners – especially as a company that heavily relies on paper and ink products.
“I tell our suppliers that when we talk about sustainability, it’s no longer just about being eco-friendly. It’s about business continuity and growth,” explained Lim. “Over time, it’s going to be tough to be in business for those who refuse or are reluctant to embrace the concepts of ESG now.”
The Sector Guides outline additional considerations required by these specific sectors, which range from environmental aspects such as biodiversity and climate, to social aspects like child and forced labour.
“The guide distils various global and local frameworks, standards, acts and regulations – [including] on forced labour and child labour – and simplifies the terminology to provide SME employers with comprehensive guidance on what they need to report on concerning these areas,” Balasingam said.
The SEDG also aims to simplify ESG reporting for businesses with limited experience in sustainability practices and to build an ecosystem between SMEs and their larger corporate partners, Fairuz added.
“[Initially,] SMEs may lack the motivation to adopt the necessary steps toward sustainability, as the short-term costs often seem prohibitive,” she said. “By translating complex global standards into manageable, easy-to-understand steps, the guide empowers SMEs to confidently embark on their ESG reporting journey. “
With many suppliers and SMEs still unsure of how to disclose, companies should take the initiative and inform them about available guidance such as the SEDG, Lim concludes, noting that the SEDG can provide a “clear pathway” for their partners to follow when it comes to sustainability reporting and ESG disclosures.
“Sustainability reporting is not just about disclosing data [anymore] – it’s about demonstrating your company’s commitment to creating long-term value for all stakeholders,” Lim said.
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