This article first appeared in Forum, The Edge Malaysia Weekly on July 31, 2023 - August 6, 2023

A few weeks ago, Arup and Oxford Economics sat down with 12 business leaders from across Malaysia’s key economic sectors to discuss the country’s green transition. As the conversation went on, one thing became apparent to all: that the global green agenda could be the key to Malaysia’s future economic prosperity, or its downfall.

The challenge is real. Malaysia’s export revenues amount to as much as 70% of its gross domestic product. Therefore, a lot of the pressure to green the economy comes from final end-market demands, that is, from governments and consumers in the US, the European Union, Japan, China and Singapore, many of whom are calling for more sustainable products and supply chains. This means that the regulations and taxation systems being developed outside of Malaysia, such as the Carbon Border Adjustment Mechanism (CBAM) and European Sustainability Reporting Standards (ESRS), have an oversized effect on the competitiveness of Malaysian businesses. Those who cannot meet these standards might very well see themselves “frozen out” from global markets.

This is not to say that Malaysian businesses have not been actively embracing sustainability. Many large companies in Malaysia have adopted Science-Based Targets initiative (SBTi) commitments and published their plans to green their operations in annual sustainability reports while a growing number of palm oil businesses, even small plantations, have been certified under the Malaysian Sustainable Palm Oil (MSPO) certification schemes.

However, challenges abound. Many decarbonisation efforts do not meet the high standards being developed in Organisation for Economic Co-operation and Development (OECD) markets. Nature-based solutions, for example, must meet very demanding criteria relating to the regeneration of ecosystems to be considered acceptable. Many businesses, particularly smaller ones, do not have access to the skills, technology or funds to make the transition to these new ways of operating quickly enough, and might find themselves “blacklisted” by overseas regulators or scrupulous buyers in the short run. In addition, individual enterprises have little control over the carbon content of their power supply. Their decarbonisation depends on the pace of Tenaga Nasional Bhd’s transition to renewable energy sources, which the national monopoly has been relatively slow to embrace.

The silver lining, however, is that the green transition also offers a tremendous opportunity for Malaysia’s economy. A recent joint study by Arup and Oxford Economics found that the global market for green goods and services could be worth US$10.3 trillion by 2050, and a large chunk of that prize could be claimed by Malaysian businesses. Modelling by Oxford Economics suggests the green electric power generation sector in Malaysia could be worth RM25 billion by 2050, up from closer to RM5 billion today.

And the opportunity goes beyond renewable energy. From biofuels to sustainable agriculture, green extraction and electric vehicles (EVs), the global move to a greener future is crying out for the skills, resources and technologies that Malaysia is well positioned to provide. The key for Malaysia’s economy will be to identify its own niches within this evolving landscape in which it can compete against the global green giants — for example, developing an EV two-wheeler and component ecosystem, providing renewable energy on site for global companies, exporting the by-product of palm oil production to feed circular supply chains in Japan, or tapping into its large forested areas to provide trusted, certified, carbon credits to the world.

In fact, the business leaders we spoke to saw an opportunity for Malaysian companies to compete on value rather than volume, by changing their international profile from a high-risk node in the supply chain that could undermine their clients’ sustainability commitments, to a low-risk provider of certifiably sustainable materials.

Capturing these opportunities will not be easy, however. Following the spate of carbon credit and greenwashing-related scandals, being a hub for carbon credits will require the development and adoption of solid certification frameworks. Similarly, many national and global regulations are constantly moving, making it difficult for Malaysian businesses to develop products they know will meet constantly evolving standards. For example, whether wood pallets can be turned into a circular economy opportunity depends on whether global markets will keep classifying biomass as “renewable energy”.

To foster the development of local green industries, Malaysia’s government has taken steps quite similar to other countries in the region: formulate national level policies (like the National Green Technology Policy), set up investment promotion authorities (like the Malaysian Green Technology and Climate Change Corporation) and announcing RM4.9 billion worth of green projects. But this will not be enough. A focused and clear-eyed national export strategy, one that cleans current export flows and creates globally competitive green export products and services, is critical to both protect and enhance Malaysia’s position in global trade. This strategy must be formulated in collaboration between the public sector, which can drive the right infrastructure investment and export policies, and the private sector, which is much more attuned to the rapidly changing needs of their global customers. Only then can Malaysia’s export-driven economy turn what is a very complex transition into a real opportunity.

Brice Richard is strategy consulting lead at Arup and James Lambert is director of economic consulting, Asia at Oxford Economics

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