This article first appeared in The Edge Malaysia Weekly on December 25, 2023 - January 7, 2024

A spotlight was shone on the manufacturing sector this year as scrutiny of the industry’s environmental, social and governance (ESG) compliance increased and risks like carbon taxes became more imminent.

However, ESG was being framed not just as a risk management strategy against regulations and customer demand but also as an economic opportunity to tap new areas, based on the Ministry of Investment, Trade and Industry’s (Miti) i-ESG Framework and New Industrial Master Plan (NIMP) 2030 released this year.

“To us in Miti, we focus on the manufacturing industry, and manufacturing companies do a lot of exports. The big companies are not in danger because they understand and they also have stakeholders who want them to meet ESG requirements. But [targeting] the whole supply chain means big companies also need their suppliers to be ESG-compliant,” Minister of Investment, Trade and Industry Tengku Datuk Seri Zafrul Abdul Aziz tells ESG.

“This is where small and medium enterprises (SMEs) in Malaysia need to realise the importance [of ESG.] There’s a timeline and [they are not expected to adopt it] overnight, but they need to start investing in knowledge and capacity building in both systems and processes.”

The i-ESG includes a free assessment tool, after which companies are given a guide on how to begin the sustainability journey. Miti is also conducting clinic sessions and outreach programmes called KenalESG across the country.

NIMP2030 emphasises decarbonisation pathways and greener production processes for the manufacturing sector, and Miti is currently gathering data on the sector’s exact energy needs to determine how renewable energy (RE) can make a difference.

The manufacturing sector is a huge user of energy and the third largest contributor of emissions in Malaysia (under the industrial processes and product use category).

The European Union (EU) Carbon Border Adjustment Mechanism (CBAM) — of which the transitional phase began in October and will run until end-2025 — is one of the most immediate threats for Malaysian exporters of iron and steel, cement, fertiliser and aluminium. These are known as the hard-to-abate industries, for which solutions to reduce emissions are still expensive or difficult to implement.

“I think it’s important that we make sure companies are ready for this but at the same time, as a policymaker, we want to make sure that CBAM cannot be used as a non-tariff barrier,” says Zafrul.

But he does acknowledge that other countries will likely come up with similar policies.

“Even companies themselves have a net zero target, some as early as 2030. When they come here to invest, they ask, ‘do you have renewable energy? Where is the raw material from?’ This is their own commitment. Forget [just talking] about what the EU wants, right?”

Are Malaysian manufacturing firms ready? “Of course not. The world is not ready. But we have to start somewhere,” says Zafrul.

“Under NIMP2030, we have a seven-year runway to get to our key targets by 2030, and we will review our progress year by year and readjust, if necessary.”

The government is currently studying the feasibility of introducing carbon pricing mechanisms like carbon taxes, which Zafrul says will be helpful in incentivising companies to transition.

Carbon taxes will make carbon-intensive products more expensive, thus benefiting companies that have invested in solutions to decarbonise. Additionally, the CBAM can be mitigated if it is proven that the suppliers are already subjected to carbon pricing in their country of origin.

“The Ministry of Natural Resources, Environment and Climate Change (now Ministry of Natural Resources and Environmental Sustainability) is looking at that and they told us that within the next two years, this will be finalised,” he says.

Taxes are, of course, never popular. But the climate crisis at hand must be addressed, says Zafrul in response. “You have to think of your children and grandchildren. ESG is no joke. Look at the flooding, the rising temperature and all the natural disasters. It is imperative that we do something about it.”

Funding is a key enabler for NIMP2030 missions, he adds. Budget 2024 allocated RM200 million for NIMP2030 activities, a portion of which is dedicated to helping companies implement ESG initiatives. The process of identifying qualified export-oriented companies will be done by the Malaysia External Trade Development Corporation (Matrade) and the grant allocation will start in 2024.

Other incentives include RM20 billion in guarantee funding by Syarikat Jaminan Pembiayaan Perniagaan Bhd (SJPP) for SMEs involved in the green economy, technology and halal fields, as well as tax deductions of up to RM50,000 for each year of assessment on ESG-related expenditure from 2024 to 2027.

Capacity building to help companies begin this journey and address the shortage of talent and funding to offset the costs of decarbonisation will be key areas that Miti will focus on next year, says Zafrul.

Malaysians would have noticed this year that at least three ministries were talking about sustainability-related strategies. There is the Ministry of Natural Resources and Environmental Sustainability on all environmental-related issues, the Ministry of Economy on the National Energy Transition Roadmap (NETR) and Miti.

This highlights how ESG cuts through various ministries, touching on matters related to the environment; industry; transport; commodities; labour; science and technology; and finance.

“We work well together; there is no issue about that because the objective is the same. All targets are shared. Under the NETR and NIMP2030, we all move towards the same net zero target we have committed to,” says Zafrul.

One complaint, however, is that there are many different guidelines and resources launched by different parties, causing some confusion. For instance, there are varying ESG disclosure resources for SMEs, which are currently not mandatory. In response, Zafrul says Miti is working with Bursa Malaysia to harmonise the various ESG disclosure formats and integrate systems.

Ultimately, he is excited about some of the emerging industries in the low-carbon economy identified in the NIMP, such as electric vehicle (EV) manufacturing; advanced materials; RE; and carbon capture, utilisation and storage. Miti’s goal is to attract RM20 billion in investments in EVs by 2025 and RM40 billion by 2030. As at June, RM26.2 billion in EV investments have been approved.

“The catalytic effect of EV will further boost the growth of related sectors in, among others, parts; components and equipment supply; charging infrastructure; and software development for an EV ecosystem. These would encourage cross-sectoral collaboration across industries, including metal; electrical and electronics; digital; and chemical, which will rally the entire manufacturing ecosystem and create broad-based spillovers,” he says.

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