Over the past few years, the world has entered a period of heightened economic and geopolitical uncertainty. The United States appears increasingly focused on competitiveness, industrial policy and energy resilience, while ongoing conflicts, trade tensions and supply chain realignments continue to reshape the global business landscape.
Against this backdrop, sustainability has arguably become a less visible part of the public policy conversation, prompting questions about whether governments and businesses are beginning to leave the environmental, social and governance (ESG) agenda on the back burner.
However, sustainability is not disappearing; it is evolving. What was once viewed primarily as a climate or reporting issue is increasingly becoming a matter of trade and investment competitiveness, as well as energy and economic resilience.
For Malaysia, developments such as International Sustainability Standards Board (ISSB)-aligned sustainability reporting, the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) and continued investments in renewable energy and energy storage suggest that sustainability remains firmly embedded in Malaysia’s economic future.
The question is no longer whether sustainability should remain on the agenda, but how Malaysia can position itself to compete in an increasingly carbon-conscious global economy.
Carbon tax ambitions and implementation realities
Malaysia first announced plans to introduce a carbon tax in October 2024, as part of the Budget 2025 announcement, with an initial focus on the iron, steel and energy sectors. Carbon tax was meant to take effect in 2026.
The tax would form part of Malaysia’s broader decarbonisation agenda and in part, help address potential carbon tax leakage that may arise due to the implementation of the EU’s CBAM.
However, detailed carbon tax implementation measures and tax rates have yet to be finalised, presumably pending the tabling of the Climate Change Bill.
In the absence of implementation details, it is challenging for carbon tax to be introduced and implemented effectively in a short period of time, given businesses need to factor in costs and resources to be compliance-ready, as well as having to deal with the cost of the tax itself. As with any significant tax change, early consultation with affected groups will be crucial to a successful implementation.
CBAM and the growing importance of sustainability reporting
On the other hand, the EU’s CBAM entered into its definitive regime on 1 January 2026 and currently applies to selected goods in the cement, iron and steel, aluminium, fertiliser, electricity and hydrogen sectors.
Affected EU importers or indirect customs representatives must address authorisation, embedded-emissions reporting, and the purchase and surrender of CBAM certificates.
This means that Malaysian producers to such affected EU importers will likely be required to provide reliable installation, production, or product-level emissions information, amidst increasing competitive pressures in EU supply chains.
It should also be noted that the scope of the CBAM is expected to widen to eventually cover all goods and sectors. Apart from the EU, other jurisdictions are now in the process of introducing their own CBAM, so businesses that are considering pivoting to other markets or products to avoid the impact of the EU’s CBAM will find that this may not be a viable alternative in the long run.
At the same time, Malaysian businesses are preparing to comply with the National Sustainability Reporting Framework, which adopts globally-recognised sustainability reporting standards issued by the ISSB.
While the underlying reporting framework is already in place, the implementation of mandatory assurance over certain greenhouse gas disclosures has just recently been deferred by one year, to allow time for preparers to undertake improvements in various areas, such as in reporting processes, controls and data quality.
For many businesses, particularly exporters and companies seeking access to international capital, robust sustainability reporting is becoming a business necessity rather than a compliance exercise.
Supporting businesses through the transition
To support Malaysian businesses in responding to these developments, greater efforts will be required to improve awareness, capability building and industry engagement.
Industry associations, regulators and relevant government agencies each have an important role to play in helping businesses address challenges associated with emissions measurement, reporting and verification, carbon management and energy transition planning.
Many businesses continue to face practical constraints in obtaining reliable emissions data, assessing the financial implications of carbon-related measures and identifying cost-effective pathways to reduce emissions.
While the existing tax deduction of up to RM50,000 for qualifying ESG-related expenditure (up to the year of assessment 2027) is a welcome step, it should also be noted that such deduction cap is combined with other expenses relating to transfer pricing compliance, tax corporate governance framework as well as e-Invoicing implementation.
Consideration could be given to extending and enhancing this support to help businesses strengthen their reporting capabilities, improve emissions data quality and remain competitive in an increasingly sustainability-focused global marketplace.
Whether through sustainability reporting requirements, carbon border measures such as CBAM or the gradual introduction of domestic carbon-pricing mechanisms, businesses must be accountable not only on what they produce, but also how they produce it.
As Malaysia looks towards Budget 2027 and beyond, the challenge will not be whether sustainability policies should continue, but how they can be implemented in a way that supports growth and competitiveness while equipping Malaysian businesses for a fast-changing global environment.
Sharon Yong is the Malaysia Sustainability Tax Leader and a partner at Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are the writer’s own.
