Greener supply chains, Scope 3 ready


As global markets and local regulatory environments increasingly prioritise sustainability, Malaysian companies, particularly those operating within the supply chains of large local and multinational organisations find themselves under increasing pressure to be able to disclose and report on their ESG practices.

Adopting ESG practices and adhering to global disclosure requirements is not without its challenges but companies willing to invest in their sustainability efforts will find that these will unlock various strategic, financial and operational benefits.

Access to global markets

An estimated 80% of emissions globally are classified as Scope 3. This means that for many companies, the bulk of their emissions are coming from the operations of their suppliers. As more corporations globally commit to net zero targets by 2030 or 2050, they are relying on their suppliers to help them meet these commitments.

A global study by Standard Chartered several years ago revealed that 78% of multinationals (MNCs) will remove suppliers that endanger their carbon transition plan by 2025.

While this poses challenges to suppliers, there are significant competitive advantages. Corporations globally are seeking suppliers that meet not only quality and cost criteria, but also those that are able to demonstrate emissions reduction.

A report by CDP and HSBC released in November 2024 analysing 23,000 companies globally, highlighted that 13% of corporate buyers include climate-related requirements in their supplier contracts and 41% reported engaging their suppliers on climate-related issues.

There is a definite first-mover advantage - companies that are actively reducing emissions, adopting other environmental practices and are effectively communicating these measures will have an edge over their competitors in attracting environmentally conscious customers and end consumers.

Navina Balasingam, General Manager, Capital Markets MalaysiaNavina Balasingam, General Manager, Capital Markets Malaysia

Leveraging national policies and incentives

Malaysia has set an ambitious net zero target, aiming to achieve carbon neutrality by 2050. As part of the government’s efforts to achieve this goal, two important frameworks were launched in 2023: the National Industrial Masterplan 2030 (NIMP) and the National Energy Transition Roadmap (NETR). The NIMP’s overarching goals are to enhance the nation’s competitiveness, ensure long-term economic resilience and address global challenges, such as climate change and energy sustainability. Meanwhile, the NETR lays out flagship catalyst projects crucial for navigating the country’s shift from traditional fossil fuels to a green economy.

Importantly for SMEs, both frameworks carve out opportunities for SMEs to participate and benefit in Malaysia’s energy transition plans.

The conscious consumer

We are living in a time where consumers are increasingly environmentally conscious, and social media trends spread rapidly. In highly competitive sectors, the ability for companies to offer differentiation to attract conscious consumers can lead to increased brand loyalty and market share.

A strong corporate sustainability reputation can be a powerful tool in attracting talent, partners and customers. However, it is equally important to understand and avoid greenwashing, as this will have the opposite effect on brand reputation.

Growing investor demand

Investors play a critical role in driving accountability and supporting businesses on their decarbonisation journey.

Through their capital, influence and engagement with investee companies, Malaysian institutional investors, private equity and venture capital firms are helping steer businesses towards adopting decarbonisation strategies.

There is also pressure from investors for companies to disclose their environmental performance, including their carbon emissions and strategies for addressing Scopes 1, 2 and 3 emissions.

Several of Malaysia’s largest institutional investors have set ambitious aspirations to invest into green and transition assets and made commitments to significantly increase their ESG portfolio allocation.

With growing awareness of climate risk, these investors are paying close attention to how their investee companies are managing their environmental footprint.

Malaysian companies that are demonstrating their ability to measure and reduce emissions, are signalling their attractiveness to global investors, which can enhance their market valuation and access to capital.

The role of the capital market

As large corporations and SMEs navigate the complexities of Scope 3 emissions, the capital market can play a pivotal role in the offering of innovative financial solutions to support companies in meeting the cost of transition. In Malaysia, large companies have long looked to the debt market to fund sustainability projects, by issuing Sustainable and Responsible Investment (SRI) sukuk and bonds.

To support Malaysian issuers and encourage further issuances, the Securities Commission Malaysia (SC) established the SRI Sukuk and Bond Grant Scheme in 2018 which covers up to 90% of the costs incurred by issuers on independent expert reviews of sustainable sukuk and bond issuances aligned with SC’s SRI Sukuk Framework and the Asean Green, Social and Sustainability Bond Standards respectively.

For micro, small and medium enterprises (MSMEs) seeking to fund their transition or to decarbonise, the capital market offers alternative funding options such as equity crowdfunding (ECF) and peer-to-peer financing (P2P).

In this regard, the government’s Malaysia Co-Investment Fund (MyCIF), introduced in 2019 to co-invest in MSMEs through ECF and P2P platforms invests on a 1:2 ratio for ECF and P2P campaigns by MSMEs that create an impact in the environment and social impact projects.

Recognising the support needed by Malaysian SMEs operating within global supply chains to decarbonise and to meaningfully report on their sustainability measures, SC affiliate Capital Markets Malaysia published the Simplified ESG Disclosure Guide for SMEs in Supply Chains (SEDG) in October last year.

This makes Malaysia the first country globally to provide SMEs within global supply chains with a streamlined and standardised set of guidelines in relation to ESG disclosures.

The SEDG comprises 35 priority disclosures that are aligned with local and global sustainability guidelines, categorised into Basic, Intermediate and Advanced, to cater to the different levels of sustainability maturity of each SME.

Supporting SMEs in their sustainability journey is not just an investment in their future, but a step toward a more resilient economy. Governments, larger corporations, and financial institutions must continue to provide the necessary tools, resources, and incentives to help SMEs overcome the barriers they face.

SMEs can become powerful drivers of change, contributing to a low-carbon economy while reaping the benefits of improved efficiency, innovation, and reputation.

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