This article first appeared in The Edge Malaysia Weekly on September 30, 2024 - October 6, 2024

THE National Sustainability Reporting Framework (NSRF), launched last Tuesday, represents a huge step forward for Malaysia as it mandates sustainability reporting for large non-listed companies (NLCos) with annual revenue of RM2 billion and above for the first time.

Additionally, it adopts the use of the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB) for Main Market and ACE Market public-listed companies (PLCs) and NLCos.

The ISSB is a global effort to create a standardised sustainability reporting baseline. Malaysia joins over 20 jurisdictions around the world to integrate ISSB standards into their legal or regulatory framework.

Prior to this, only PLCs in Malaysia were mandated by Bursa Malaysia to publish sustainability reports. Regulators in Singapore, the UK and the European Union (EU) have also expanded this requirement to large NLCos.

“The key is this is a whole-of-society approach … You can’t just cover PLCs without looking at all the companies that are emitting [greenhouse gas emissions],” Datuk Mohammad Faiz Azmi, chairman of the Securities Commission Malaysia (SC), tells The Edge in an exclusive interview after the launch.

The SC is chair of the Advisory Committee on Sustainability Reporting (ACSR), which was set up last May. It includes representatives from Bank Negara Malaysia, Bursa Malaysia, the Companies Commission of Malaysia, Audit Oversight Board (AOB) and Financial Reporting Foundation.

Around 260 NLCos are affected by this new requirement. Many of these big companies are already doing some form of sustainability reporting, says Mohammad Faiz, thanks to their exposure to foreign markets.

With regulations such as the EU’s Carbon Border Adjustment Mechanism coming into effect soon, having a clear idea of one’s emission baselines and a sustainability report that follows global standards would be useful.

“Prior to the ISSB, there were many different standards. People were wondering, which one should I choose? Do I choose what my customers are asking me to use, or from my regulator? At the same time, there was a feeling that there was too much of it. The ISSB was given the mandate to come up with a standard that didn’t reinvent the wheel,” he says.

The ISSB is investor-focused and therefore requires information on how sustainability and climate change matters will impact a company’s financial bottom line. “It fundamentally comes to, are you a company that I want to invest in? The more prepared you are, the more comfort I get as an investor that you have a plan,” Mohammad Faiz says.

Another important implication of the NSRF is the adoption of ISSB, which demands Scope 3 emissions disclosure. These emissions cover those from the supply chain, meaning that the PLCs and NLCos will need to ask their suppliers — many of which are small and medium enterprises (SMEs) — for information.

Scope 3 emissions data is notoriously difficult to collect due to the lack of capability and resources by SMEs to collect such information and the complexity of business supply chains.

That is why the ACSR is giving companies more time to comply with this requirement, says Mohammad Faiz. For instance, Main Market PLCs with market capitalisation above RM2 billion have to begin reporting according to ISSB’s IFRS S1 and S2 standards by 2025, but Scope 3 emission disclosures are only required in 2027 (see infographic).

This is similar to Singapore’s ISSB adoption timeline, which was announced just a day before on Monday. However, their large PLCs are expected to report on Scope 3 data by 2026.

Mohammad Faiz says it is important to note that SMEs are not mandated to prepare an ISSB-aligned sustainability report. There are no plans to introduce such a requirement at the moment, even for LEAP market listed companies.

“But we recognise that there is a problem because they need to provide some data to their purchasers, so we are voluntarily giving them materials on how to do it … They are constantly being asked these questions because they are part of a global supply chain,” he adds.

The SC has the free Simplified ESG Disclosure Guide for SMEs and plans to publish more toolkits to help SMEs prepare these data.

The most common complaint from PLCs about preparing sustainability reports is the lack of talent and cost of hiring consultants.

To address this, the ACSR introduced the PACE (policy, assumptions, calculators and education) initiative, which will provide policy guidance, digital platforms, emissions calculators, educational resources and templates for companies to use.

Targeted resources, such as a toolkit to help companies that are familiar with GRI (Global Reporting Initiative) standards to understand the ISSB standards, are in the works. The ACSR will also do what it can to provide standardised data, such as that required for scenario analysis to assess a company’s climate resilience and emission factors for Malaysia.

Mohammad Faiz adds that the ACSR is asking the government to extend the incentives given to companies to do sustainability reporting. In Budget 2024, tax deductions of up to RM50,000 for each year of assessment from 2024 to 2027 were given for environmental, social and governance-related expenditure.

Meanwhile, the SC is paying to train two individuals from each of the 37 AOB-registered audit firms on the ISSB standards in October. The training may be extended to report preparers in the coming year.

“Companies can look at this as a cost, which it is. But I come back to the word ‘opportunity’ because when you do these calculations, it makes you understand better what your business is doing. The next question is, ‘Can I do my business better without emitting so much or spending so much on power?’” he says.

To implement the NSRF requirements for NLCos, the Companies Act 2016 will have to be amended, and the Companies Commission of Malaysia has to make a few changes to its processes. For instance, should NLCos be required to publish their sustainability reports publicly, as PLCs are expected to do? There is also the question of penalties for failure of compliance.

“Personally, I am not keen on punishing people who are trying hard. Of course, there may be people who don’t try at all. But I think if you’ve made genuine mistakes and you’re learning, we have to take that into account,” says Mohammad Faiz.

According to the NSRF, reasonable assurance of the reports is expected from 2027, subject to further consultation. This will ensure that the sustainability reporting is not merely a greenwashing exercise.

The challenges are, again, cost and a lack of talent. Some PLCs have started doing limited assurance, whether internal or external, for their sustainability reports. A new global sustainability assurance standard, the International Standard on Sustainability Assurance 5000, was just approved earlier this month.

Mohammad Faiz says the ACSR will continue to engage with companies on these matters through industry-led committees.

“At least, I get to hear on a regular basis what the problems out there are. Is it because of money, resources or expertise? It’s for us at the ACSR to figure out how to provide it. Much of what we have at PACE is because of that feedback, but I’m sure once we start doing it, there will be more questions.” 

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