In an era marked by increasing environmental concerns and a growing emphasis on corporate responsibility, the adoption of environmental, social and governance (ESG) practices has become pivotal in the global market. For Malaysia, this cannot take off without the participation of small and medium enterprises (SMEs), which are integral to the nation’s economic fabric.

Recognising the importance of SMEs, which comprise 97% of business enterprises and contribute 38% to gross domestic product (GDP), Malaysia has introduced the Simplified ESG Disclosure Guide (SEDG), a significant step towards integrating sustainable practices into the core of business operations, especially those of SMEs.

The SEDG was developed to address the unique challenges SMEs face in ESG disclosures, particularly within global supply chains. Navina Balasingam, general manager of Capital Markets Malaysia, explains the motivation behind the SEDG: “SMEs’ suppliers that have effectively and meaningfully adopted ESG practices can mitigate supply chain risks and vulnerabilities ... Our goal is to help SMEs begin this journey and prepare themselves to comply with global requirements.”

The significance of ESG extends beyond individual business practices to national sustainability ambitions. Malaysia’s commitment to achieving net zero by 2050 necessitates a robust ESG framework. The SEDG aligns with key national policy initiatives, such as the New Industrial Master Plan (NIMP) 2030 and the Industry Environmental, Social and Governance Framework (i-ESG), emphasising a balanced approach to economic growth and environmental stewardship.

Balasingam further highlights the guide’s role in this broader context: “Meeting Malaysia’s net zero ambitions as early as 2050 will require a whole-of-nation approach. The intent behind the SEDG is aligned with recent national policy initiatives aimed at solidifying Malaysia’s position in the global supply chain.”

The development of the SEDG by Capital Markets Malaysia (CMM), an affiliate of the Securities Commission Malaysia marks a critical response to the challenges businesses face regarding Scope 3 reporting and the broader objective of assisting public listed companies to comply with ESG standards. Balasingam notes: “In response to feedback from our SMEs, we were determined to develop a guide that would be concise, straightforward and practical, allowing users to navigate global and local frameworks.”

Moreover, the SEDG paves the way for businesses to secure funding, particularly through private equity, where ESG compliance is increasingly a determining factor. This aspect of the guide is crucial for SMEs seeking investment in a market where sustainable practices are highly valued.

The SEDG not only aligns with national goals but also benchmarks against international standards such as Bursa Malaysia’s Sustainability Reporting Guideline and Listing Requirements ), the Malaysian Code on Corporate Governance, and the Sustainable and Responsible Investment (SRI) Taxonomy. This alignment positions Malaysian businesses to meet global ESG compliance requirements effectively.

Recent developments in Malaysia’s ESG landscape underscore the country’s commitment to sustainable business practices. In 2023, the Malaysian government announced plans to introduce a new ESG framework aimed at assisting SMEs with funding, capacity building and transitioning to renewable energy. This initiative reflects the government’s recognition of the need for SMEs to be ESG-compliant, particularly for export markets. The focus on renewable energy and local innovation, as highlighted by Minister of International Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz, is expected to attract more investment into Malaysia.

Investors’ growing expectations for companies to demonstrate coherent ESG practices are being met by Malaysian businesses, many of which have begun formalising their ESG strategies. This is evident in the actions of the Bursa Malaysia Stock Exchange; it is actively promoting ESG practices among publicly traded companies.

The impact of SEDG in lowering the knowledge hurdle for SMEs, thereby simplifying the ESG adoption process, cannot be overstated, according to Datuk William Ng, national president of the Small and Medium Enterprise Association of Malaysia (SAMENTA). “With SEDG, we are able to shorten the learning curve for members in adopting ESG reporting and disclosure.”

Rahmesh Gomez, managing director of Malaysian Yogurt Company Sdn Bhd, agrees: “The SEDG offers a clear, structured and practical framework, helping us to embark on our sustainability journey without needing extensive prior knowledge.” This simplicity and accessibility are key in encouraging SMEs to integrate ESG practices into their business models, he adds.

As Malaysia ambitiously moves towards its Net Zero 2050 goal, the SEDG is more than simply keeping up with global developments. For SMEs, it is also a vital preparation for future market demands and regulations in an increasingly sustainability-focused world. This guide is a testament to Malaysia’s proactive approach, ensuring that its SMEs are not only compliant with current standards but also competitive and forward-looking.

Business leaders see the importance of adopting ESG standards. Gomez shares his perspective: “As an SME yoghurt maker, sustainability is crucial to stay relevant and competitive. The SEDG is an important tool to get our sustainability journey off the ground. It provides a good starting point without needing a lot of prior specialised knowledge.”

Balasingam underscores this perspective: “The SEDG equips Malaysian SMEs to meet stringent ESG data requirements, preparing them to stay ahead in global supply chains and remain competitive amid evolving global norms.” This preparation is crucial for SMEs who form the backbone of the Malaysian economy, ensuring their viability and success in international markets.

Moreover, Ng acknowledges the SEDG’s role in reducing the learning curve for ESG adoption. He points out: “The SEDG helps our members meet customer disclosure requirements more easily, paving the way for them to capitalise on new business opportunities in sustainability.”

For SMEs, integrating ESG practices into their operations is no walk in the park. Adopting ESG practices effectively will not only require the business to adapt its own practices to ESG standards but also those of their vendors and suppliers — no mean feat for most businesses.

Volvo Trucks Malaysia, an early adopter of the SEDG, offers a snapshot of the complexities involved in this space. With regards to the ESG goal, Volvo Trucks is working towards achieving Net Zero by 2040. And it has a plan to ensure its suppliers are onside to support its ambitious target.

“Volvo Trucks isn’t just driving on the road; we’re driving change. Our 2040 net-zero GHG mission requires a team effort, where every supplier plays a key role. We’re transforming our operations, making green choices the default in our supply chain,” says Anthony O’Connell, managing director of Volvo Trucks Malaysia.

“In tackling Scope 3 emissions, we face industry-wide challenges like a lack of standardisation and data transparency. But we’re committed to creating an ecosystem for unified environmental accountability.”

It is a challenging road ahead for companies like Volvo Trucks, especially in terms of collecting ESG data from and supporting its SME suppliers in adopting ESG practices. Its ESG journey also involves supporting its SME vendors through a vendor development programme to ensure alignment with their sustainability strategy and integrating ESG considerations into assessing new vendors.

Volvo Trucks is among several other organisations with large supply chains that have committed to adopting the SEDG in guiding their supply chains, including Gamuda, Sunway Group and Nestle Malaysia, according to CMM’s Balasingam. These SEDG Adopters are among a growing list of companies that will benefit from CMM’s Adopter programme which provides SME suppliers with in-person workshops to guide Malaysian SMEs in adopting the disclosures.

While the road ahead is challenging for SMEs, effective ESG integration into their operations will accelerate the contribution of Malaysian SMEs to the nation’s broader sustainability goals while securing their place in the global market.

And that is a goal worth striving for through the introduction of the SEDG.