The practice of Environmental, Social, and Governance (ESG) is not a novel concept but had begun in the 1960s by embracing the concept of corporate social responsibility (CSR). This has since evolved into the modern-day ESG framework which is primarily driven by market concerns over climate change and the environment.

ESG adoption has become crucial to public-listed companies in securing capital as more investors are incorporating ESG considerations in investment decisions and adopting sustainability criteria in their investment portfolios. ESG ratings appraises the long-term resilience of companies in ESG matters through the industry-specific evaluation of key ESG risks and opportunities.

There is a delicate difference between ESG and sustainability reporting where "ESG looks at how the world impacts a company or investment, whereas sustainability focuses on how a company (or investment) impacts the world." ESG reporting is mainly used by investors to assess an organisation's performance and risk based on established standards, while sustainability reporting has a wider stakeholder outreach which consists of employees, consumers and other stakeholders.

ESG reporting discloses data on environmental, social, and corporate governance using detailed and established standards, which reveals the risk profile of the organisation to its investors. On the contrary, a sustainability report is made available publicly to share the organisation's corporate, social, and environmental responsibilities to their stakeholders as this will strengthen the reputation of the organisation and their branding. While the various standards for ESG reporting can be applicable to the sustainability report, the purpose and the target group of stakeholders are different with the ESG report being more structured than the sustainability report.

ESG reporting and ratings are major indicators that are used by organisations to distinguish themselves from their competitors. For example, the Global Reporting Initiative (GRI), presents a comprehensive ESG reporting framework with extensive indicators, while MSCI looks into governance and considerations on ethics, tax, corruption, and product certification. The Carbon Disclosure Project (CDP) on the other hand has specific and measured indicators with focus on climate change, forests, and water security.

The Malaysian palm oil industry has been addressing sustainability concerns, including the environmental, social, and governance (ESG) criteria as early as the 2000s, through Good Agricultural Practices such as Zero Burning policy and the introduction of voluntary sustainability schemes, e.g. the Roundtable on Sustainable Palm Oil (RSPO). Plantation companies have since stepped up their sustainability commitments when the Malaysian Sustainable Palm Oil (MSPO) certification became a national agenda and was made mandatory by the end of 2019.

The palm oil industry is associated with several ESG risks, the most prominent being deforestation and climate change risks. Major players have forest-related policies in place such as No Deforestation, No Peat and No Exploitation (NDPE) policy and zero-burning policy, but there are opportunities for improvements to avoid lagging in reporting that could affect ESG rating.

Meanwhile, regulatory and trade barriers such as the EU Renewable Energy Directive (RED), the EU Deforestation Regulation and the EU Forced Labour Regulation remain a challenge that could negatively affect the reputation and ESG ratings of plantation companies.

In terms of the social aspects, labour exploitation concerns have been associated with the palm oil industry. For example, under the directive of the US Customs and Border Protection (US CBP), products imported from Sime Darby Plantations Berhad and FGV Holdings Berhad were denied entry into the US, over allegations of forced labour, citing issues on debt bondage, retention of passports, as well as poor living and working conditions. Other examples of social risk include child labour, gender inequality and indigenous land rights.

Plantation companies that export their products to mature markets such as the EU and the US tend to have better ESG policies in place, and as such perform better in ESG ratings. On the other hand, certain companies may display a lack of ESG commitment due to various factors including insufficient data and the lack of capacity and resources. Some companies may not even have a dedicated sustainability department to steer its ESG and sustainability commitments.

Despite the many ESG issues faced by the palm oil industry, Malaysia is well-placed to meet these challenges and lead the ESG related efforts amongst the many industries in the country.

The Malaysian palm oil industry is one of the few commodities with regulated and audited zero deforestation commitments reflected in its sustainability certification schemes. The 'No Deforestation' criterion in MSPO and RSPO ensures that palm oil sourced from Malaysia are sustainably produced, and not from plantations involved in illegal deforestation.

This is further supported by the Malaysian government's decision to cap the total oil palm planted area to 6.5 million hectares, which currently stands at 5.74 million hectares.

Traceability tools to verify that Malaysian palm oil is sourced from sustainably produced plantations are readily available and accessible, such as the MSPO Trace and the RSPO Palm Trace. The emergence of independent resources keeping track of illegal deforestation activities, such as World Resources Institute's Global Forest Watch and Malaysia's Hutanwatch now provides a check and balance to enable stakeholders to validate the industry's deforestation-free claims. Adoption of IR 4.0 technologies by the palm oil industry, such as blockchain, will further reinforce the integrity and robustness of its traceability tools.

Since the 2020 US ban on selected Malaysian companies due to elements of forced labour practices, a number of important steps have been undertaken in addressing these allegations, and in improving the foreign workers employment process and conditions.

Malaysia has launched a national policy to address the issue of workers' rights and forced labour through the formulation of the National Action Plan in 2021, with the support of the International Labour Organization (ILO). This is followed by Malaysia's ratification of the ILO Convention on Forced Labour in March 2022, to adopt stringent measures and requirements outlined in addressing these issues, and to provide remedial measures to workers impacted by these conditions.

The Malaysian Palm Oil Association (MPOA) has launched its Responsible Employment Charter in December 2021, to ensure that its members meet international requirements for responsible recruitment practices, labour rights as well as decent working and living environments for its plantation workers. The Malaysian Palm Oil Council (MPOC) is working tirelessly through a series of workshops and engagements with the US CBP, ILO and SUHAKAM to create a better understanding on the requirements in addressing the forced labour issue in Malaysia.

These commitments are also embedded within the palm oil sustainability certification schemes. The recently revised MSPO standards (MS 2530:2022) and RSPO's Principles and Criteria and Decent Living Wage guidance (introduced in 2019) ensure that workers receive equal employment opportunities, a safe working environment, and sufficient remuneration. These regulatory and industry-driven developments heighten the Malaysian palm oil industry's efforts of addressing workers' rights and forced labour concerns, and provide all employees with a non-discriminatory and conducive working environment.

While ESG reporting in its current form is imperfect, it has been mandated for key publicly listed companies in Malaysia. However, the quality, depth, and scope of the coverage have been criticised as not being entirely impactful. For example, when it comes to GHG emissions reporting, companies can opt to report their GHG emissions, without stating the GHG reduction targets, which carry a bigger significance.

After Bursa Malaysia's enhanced sustainability requirements were announced in September 2022, companies now need to provide additional reporting, and climate-related disclosures. Plantation companies have an edge due to their experiences in planning, implementing and monitoring sustainability policies to meet the auditing requirements of MSPO or RSPO certification schemes. The areas audited include corporate governance aspects for example management commitment and responsibilities, and compliance with governance requirements, including corporate integrity and anti-corruption. Non-compliances are also publicly accessible to ensure a higher degree of transparency for the governance aspect of Malaysian palm oil companies.

The ESG momentum is not showing any signs of slowing down, while the market continuously indicates that businesses will do well from ESG investments. Eventually, organisations will need to think about ESG as part of their overall strategy. With these developments and opportunities in place, the Malaysian palm oil companies are in a better position to better their ESG ratings. Commendable ESG ratings will also attract better investor attention and enable wider access to financial institutions, and this will translate to a more progressive and inclusive Malaysian palm oil industry.