While the top 100 companies in the KLCI demonstrate good performance in reporting, the mid-tier and small-cap companies are not reporting comprehensively, says Phang Oy Cheng, head of ESG and sustainability advisory at consulting firm KPMG Malaysia.

Many companies are missing out on an opportunity to showcase their commitment to sustainability, says Phang, as they are failing to see the value in reporting on what is important to them and the measures being taken to address issues that arise.

“In essence, what Bursa Malaysia has done with the new NSRF is actually very good because it mandates these requirements, which provides a structure for companies to focus on what they need to report on,” says Phang.

The NSRF, which is based on the International Financial Reporting Standards (IFRS) S1 and S2, promotes a more holistic approach to sustainability reporting.

IFRS S1 is for sustainability-related financial disclosures and IFRS S2 is for climate-related disclosures. The NSRF emphasises the connection between material matters and financial implications for a company.

Reporting on the right matters is important. Customers and investors are interested in understanding how companies are crafting their climate transition plans, climate risk management and revenue-generating strategies from climate-related activities.

“A major focus of ESG reporting is identifying what is material to you from an ESG perspective,” says Phang.

Once material issues are identified, the next step is to link them to potential risks. This involves assessing how these issues could affect the company’s operations, financial performance or reputation.

While fiduciary duty is important, board members of the company must also factor in the non-financial risk, as it can affect a company’s long-term value.

“But the smaller-cap companies have not started looking at this. In fact, a lot of them will consider it a burden because they are more concerned with survivability and you can’t argue against that. So, everything will happen in its good time but, as a board of directors, these are questions you need to keep on asking,” says Phang.

Currently, Bursa requires public-listed companies (PLCs) to report on 11 common matters, from anti-corruption to data privacy and waste management matters, regardless of its materiality to the company.

Norges Bank Investment Management called for a more flexible method for PLCs to disclose material environmental and social impacts of their operations and value chains, while referring to the Global Reporting Initiative standards as guidance.

“I can see both sides of the coin, but I tend to let companies select what is material and more important to them. We haven’t reached that level of maturity yet; so, I can see why Bursa mandated the 11 indicators because of the inability to provide adequate data in some companies,” says Phang.

Property developers face a unique challenge on Scope 3 emissions reporting because of the industry’s vast supply chain. Real estate, construction and property development affect more than 140 upstream and downstream businesses. As a consequence, the industry’s Scope 3 is huge, making up 80% to 90% of total emissions from the sector.

“Owing to the phased implementation of the NSRF, the immediate impact should be manageable, as we have already started implementing the recommendations of the Task Force on Climate-related Financial Disclosures as required by Bursa,” says Datuk Chang Khim Wah, president and CEO of Eco World Development Group Bhd (EcoWorld).

Having said that, the NSRF transitional reliefs expire in 2027 and full adoption of the ISSB Standards, including Scope 3 emissions disclosures, will then become mandatory.

Chang says the biggest challenge of reporting Scope 3 emissions is getting the entire supply chain on board to, first, appreciate why it needs to be done and, next, commit to doing it consistently.

To ensure its suppliers are in alignment with its sustainability aspirations, EcoWorld took a strategic top-down and bottom-up approach.

“Our CEO personally communicated EcoWorld’s commitment to achieve net zero by 2050 to all our contractors, consultants and suppliers at the start of the year,” says Chang.

EcoWorld has also worked with UN Global Compact Network Malaysia & Brunei and Alliance Bank to help its supply chain partners complete a climate maturity assessment. Furthermore, it is also following through with its efforts by conducting workshops for key contractors and suppliers on the need for and how to start emissions reporting as well as the benefits of going green.

“We monitor their progress and compliance level via evaluations, which also considers ESG-related matters,” says Chang.

EcoWorld plans to collaborate with key stakeholders in the sustainability reporting field to provide practical training support and sharing of best practices.

This initiative aims to bring the entire supply chain on board within the next two years, enabling them to contribute meaningfully to Scope 3 emissions reporting by 2027, as mandated by the NSRF.

The NSRF is a necessary step forward towards a more sustainable future, but the rollout still poses challenges for SMEs in Malaysia. Many SMEs lack the resources and expertise to comply with the new regulations, especially given the tight timeline.

As a result, SMEs, even those not directly mandated, may struggle to meet the reporting requirements and risk falling behind in the transition to a sustainable economy.

“To facilitate early acceptance by SMEs of the concept of disclosure and reporting, Samenta (Small and Medium Enterprises Association Malaysia) is a partner under the Simplified ESG Disclosure Guide (SEDG) programme by Capital Markets Malaysia. The goal is to educate and help SMEs familiarise themselves with this ‘light’ version of ESG disclosure,” says Datuk William Ng, national president of Samenta.

The SEDG is a guide to provide SMEs with a simple and standard set of disclosures to track and report. It consolidates and simplifies the many complex global and local ESG-related frameworks to improve the availability of ESG data and information by SMEs.

While more training and exposure will help bring more SMEs on board and close the knowledge gap, the issue of resources remains a significant barrier, according to Ng.

“Many SMEs simply will never be able to do the disclosures without external help, and this includes many SME owners who are not necessarily highly educated. The availability of external help is also limited, as the number of ESG professionals in Malaysia is still lagging far behind what’s required to make this work,” says Ng.

He estimates that in Malaysia, there are about 1,000 operational due diligence ESG professionals who can prepare ESG disclosures and reporting independently. For the NSRF to roll out effectively and bring the costs down for businesses, however, this figure will have to be closer to 10,000 by 2030.

“Do we have a framework to churn out this number of professionals to support the ambitious plan? Our current approach is to transition [the number of] professionals in audit and assurance to double that in sustainability reporting. This is not the best route, given that sustainability is a rapidly evolving sector that requires specialised practitioners,” says Ng.

In view of these challenges, it is important that SMEs realise this huge roadblock and be prepared for them. Data collection is key and must start now.“The government is trying to support this transition by providing fiscal incentives to businesses — however, the problem is not with money, but the availability of talents. That should be our focus,” says Ng.