PETALING JAYA: Malaysian exporters will still feel the indirect impact of the proposed sustainability reporting standard by the European Financial Reporting Advisory Group despite the earnings threshold for compliance of non-European Union (EU) parent companies and their branches and subsidiaries located in the EU having been raised.
The proposed threshold was raised to RM2.1bil in net turnover for non-EU parent companies over two years, while the threshold for their EU branch or subsidiary has been raised to RM930mil in net turnover from RM697mil for non-EU parent companies, with EU branches and subsidiaries of these companies coming under this compliance regime if they generated RM186mil.
In a report, MBSB Research said the impact would likely be felt by local companies with direct compliance while exporters could face indirect pressure in supply chains.
According to the research house, thousands of exporters could be affected as Malaysia has deep trading links with the EU in electronics, palm oil, rubber, and chemical manufacturing.
“For Malaysia suppliers, high scrutiny areas include Scope 1, 2 & 3 carbon footprint data, which are audited product-level carbon footprint data.
“EU buyers will also want proof of fair labour, ethical recruitment, and safe working conditions.
“Another area that will be impacted are the exporters of palm oil, timber, and agricultural commodities that will need to have clear traceability data,” MBSB Research explained.
However, the research house pointed out companies facing direct impact are far and few in between, which means only a few would fall under this mandatory reporting category.
“Due to the revised rules requiring a non-EU parent company to generate over RM2.1bil in net turnover within the EU, most Malaysian corporations are excluded from direct group-level Corporate Sustainability Reporting Directive reporting, apart from conglomerates within the energy, palm oil and international property sectors with heavy European footprints,” it said.
The new threshold provides some relief for in-scope companies, including solely reporting on operations that impact the environment and societal issues, as well as limited reporting for non-climate impact.
There is also no requirement for financial risks and opportunities reporting required.
Companies that have been proactively collecting carbon and impact data are more likely to win contracts over regional competitors that lag in environmental, social and governance (ESG) reporting.
“Malaysia’s National Sustainability Reporting Framework (NSRF) and National Action Plan on Forced Labour had already pushed local companies toward ESG disclosures.
“This change in the Omnibus package would be used to accelerate the need to move from policy to verifiable data collection,” the research house noted.
Key beneficiaries of this change include the plantation, technology, gloves and utilities.
As for local suppliers that do not have verifiable ESG impact metrics risk, they will probably drop out from the EU-headquartered multinationals.
“Other risks include greenwashing risks and discrepancies between reported data and actual practices, as the EU Due Diligence requires the new reporting thresholds to work in tandem with the EU Corporate Sustainability Due Diligence Directive and EU Deforestation Regulation.
“Failure to comply with these requirements could trigger legal liability and trade bans.”
With that, MBSB Research said Malaysian companies should implement targeted action depending on where they’re at in the ecosystem.
The research house noted initiatives like moving away from generic sector averages for carbon calculations while investing in software tools that can help need to be done.In addition to that, for larger conglomerates, they need to harmonise reporting with the NSRF while visibly handling the approach.
As for non-suppliers or conglomerates, MBSB Research advised them to treat carbon reporting the same way they treat financial reporting.
The research house concluded the revision effectively shifts the focus for Malaysian corporates from defensive regulatory compliance to commercial market positioning.
“We also opine that this revision is a good stepping stone to encourage audits of Scope 1-3 and labour data for companies, proactively promoting ESG data governance and third-party verification as a vital competitive edge for companies potentially supplying to the EU in the near future.”
