A non-Environmental, Social and Governance (ESG) compliant SME’s risks losing large corporations as its importers and exporters; unable to attract new customers; bad reputation makes it challenging to attract new investors; and disqualified for sustainability-related tax incentives, among others.
Malaysian small and medium-sized enterprises (SMEs) risk losing RM292 billion in revenue due to non-ESG compliance, according to report findings by the Sustainable Finance Institute Asia 2022.
SMEs without incorporating ESG principles in their business operations are losing out in the eyes of investors, customers, government tax incentive, and financing bodies.
A research by Xiamen University Malaysia and Universiti Teknologi Brunei shows that investors like companies that share information about their ESG.
When companies do not provide enough ESG information, it is a sign of business risks, like issues specific to that company, not the overall market. These risks can negatively affect a company’s image and decrease its brand value.
Overall, small businesses that do not follow ESG rules are seen as having bad management and not caring about the environment or long-term sustainability.
If your business is non-ESG compliant, you risk losing these perks:
The Malaysian government supports the implementation of ESG via numerous tax incentives for firms to be actively engaged in ESG disclosures that benefit their business value-chain as well as their shareholders.
Tax deduction on ESG related expenditure
To encourage more companies to comply with ESG standards, the government proposed in Budget 2024 that a tax deduction of up to RM50,000 for each year of assessment from 2024 to 2027 be given for ESG related expenditures as follows:
Further tax deduction for development of carbon projects
Further tax deduction of up to RM300,000 for costs incurred by companies for the Development and Measurement, Reporting and Verification (MRV) in relation to the development of carbon projects.
This is deductible against income earned from carbon credits traded on Bursa Carbon Exchange (BCX).
This applies to applications received by the Malaysia Green Technology and Climate Change Corporation (MGTC) from Jan 1, 2024 until Dec 31, 2026.
Green Technology Tax Incentive
Malaysia offers tax incentives to support SMEs in adopting green technology, fostering eco-friendly practices, and promoting a shift toward a sustainable, low-carbon economy.
For example, the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) allows businesses to claim tax deductions for investments in approved green technology projects, as highlighted by the Malaysian Investment Development Authority (MIDA).
Bank Negara Malaysia's Low-Carbon Transition Facility (LCTF)
BNM launched the RM2 billion Low-Carbon Transition Facility (LCTF) in February 2022, which provides affordable financing for SMEs’ working capital or capital expenditures related to low-carbon practices.
Big dangers linked to businesses that don't follow ESG rules
Trading risks associated with non-ESG compliance
According to MIDA, ESG is very important in Malaysia's investment policies. SMEs are crucial for attracting foreign investments.
If SMEs don't follow ESG practices, it could hurt Malaysia's ability to compete globally.
Malaysia does a lot of trading with other countries, so it is vital for small businesses to follow ESG rules because they are part of the worldwide supply chain.
Large companies that are ESG-compliant now want their suppliers (including small businesses) to also meet these standards. This can affect SMEs.
The world is moving towards being more environmentally friendly. This means there are good opportunities for businesses to grow and make money by creating eco-friendly products and services.
Banks are becoming more stringent with ESG financing
“The trend of requiring businesses to adhere to ESG principles is not limited to a single region but rather constitutes a global phenomenon,” said deputy investment, trade and industry minister Liew Chin Tong.
Liew said banks had to comply with their customer’s (SMEs’) customers (listed companies).
For example, a local SME that exports to listed companies. These listed companies have to vet their supply chain to make sure they import from SMEs that follow ESG.
It is a situation where the more ESG adaptability that one can actually achieve, the easier one can get funding.
Obtaining loans will only become harder, banks are transitioning towards ESG-centric lending practices, he said.
The cost of inaction
Without the support from large investors, smaller companies might struggle to recover from adverse incidents (such as natural disasters, economic downturns, legal issues, accidents, or any other circumstances that could disrupt the normal business operations and financial health of a company).
In short, ESG risk is material risk, and failing to address it promptly and appropriately can lead to a range of consequences.
If you are an SME, here is how you can start on your journey
Embracing ESG practices is of paramount importance for SMEs, it opens doors for SMEs to enter the supply chains of large corporations and multinational companies (MNCs) that require their vendors and suppliers to adopt ESG practices.
As an SME, adopting such practices can help improve productivity, achieve cost savings, and enhance brand reputation.
However, starting out on your ESG or sustainability journey may be a challenge especially without the technical know-hows.
Understanding this challenge, UN Global Compact Network Malaysia & Brunei has developed the SME ESG Hub, to provide SMEs with fundamental understanding and free practical tools needed to kickstart their ESG journey and incorporate ESG practices into their businesses.
The hub is a one-stop online ESG resource platform for Malaysian SMEs and is available in English and Bahasa Malaysia. FREE access is available to all via a one-time registration.