THE engine hums to life with a simple push of a button, a testament to the precision engineering behind this renowned German automaker. Yet, despite its global popularity, the brand’s reputation was severely tarnished by the “Dieselgate” scandal, in which it was revealed that the company had installed software in its diesel vehicles to cheat emissions tests.
This greenwashing tactic misled consumers into believing the cars were more environmentally friendly than they actually were. As a result, the company faced the largest-ever fine in a greenwashing lawsuit, with penalties soaring to US$34.69bil.
In another high-profile case, a Dutch airline was accused of greenwashing for misleading consumers about its carbon offset programmes. In March 2024, an Amsterdam court ruled that this airline’s sustainability claims and advertising were both misleading and unlawful, making it the first court challenge against an airline’s greenwashing practices.
These cases highlight a pressing matter - companies making bold environmental pledges without real action or measurable results and using green claims as mere branding exercises. This has fueled a surge in greenwashing litigation as consumers and regulators increasingly hold businesses accountable for misleading environmental claims.
Carbon reporting is vital, but it faces significant challenges in accuracy and consistency due to varying methodologies and a lack of standardisation. Companies are required to report Scope 1, 2, and 3 emissions, with Scope 3 being the most difficult to measure.
The risk of greenwashing intensifies with excessive reliance on offsets. Transparency, including the disclosure of setbacks, and third-party verification are key to maintaining credibility.
Moreover, carbon reporting should be integrated with financial reporting to reflect its long-term impact on performance.
Dr.Renard Siew.
Owning the narrative
Sustainability reports should not be ‘marketing brochures’. The market rewards transparency, and the biggest risk is pretending problems don’t exist, says the Malaysia Carbon Market Association (MCMA) president and Yinson Holdings Bhd Group Head of Corporate Sustainability Dr Renard Siew.
He emphasises that companies should provide accurate emissions data, including Scope 3 emissions, climate target progress, resource consumption, and supply chain impacts in their sustainability reports.
“Transparency on setbacks and areas for improvement is just as crucial as showcasing achievements. When disclosing negative truths, businesses should own the narrative, provide context, and outline corrective actions.
“Greenwashing or withholding key information erodes trust, as stakeholders value honesty over perfection. True sustainability leadership means embracing accountability and using setbacks as catalysts for stronger, more credible climate action,” says Siew.
Monash University Malaysia School of Business Accounting Department head and associate professor Dr Edwin Lim calls on businesses to disclose material ESG issues that could significantly affect operations, financial risks, and future cash flows, as key stakeholders increasingly avoid socially and environmentally irresponsible businesses.
Noting that transparency in sustainability reporting is critical for decision-making, Lim says concealing negative ESG information is risky, as it can quickly spread due to interconnected stakeholders as well as external monitoring and scrutiny.
“Although disclosing negative truths may be challenging, it allows companies to identify, address root causes and demonstrate accountability, which reassures stakeholders.”
Lim adds that withholding such information can harm stock prices, lead to poor decisions by supply chain stakeholders, and expose companies to legal risks, damaging both financial performance and reputation.
To further prove his point, his research article, Does Carbon Risk Influence Stock Price Crash Risk? International Evidence, published in the Journal of Business Finance and Accounting, highlights that higher-quality carbon disclosure reduces pricing uncertainties and mitigates stock crash risks.
Tracking and advancing green accountability
With increasing scepticism and scrutiny surrounding sustainability claims, businesses are urged to communicate their efforts to stakeholders in a way that avoids the appearance of greenwashing.
To achieve this, Lim and Siew emphasise the importance of adhering to established sustainability reporting frameworks, such as the International Financial Reporting Standards (IFRS S1/IFRS S2), the Global Reporting Initiative (GRI), the Task Force on Climate-related Financial Disclosures (TCFD) and International Sustainability Standards Board (ISSB).
They also recommend obtaining assurance from the Carbon Disclosure Project (CDP) to mitigate greenwashing concerns, enhance transparency, and build stakeholder confidence.
Setting carbon reduction targets based on initiatives like the Science-Based Targets initiative (SBTi) also ensures clarity and consistency in climate-related communications.
In addition to prioritising control and governance over transitional risks to minimise scepticism in climate reporting, Lim emphasises that hiring the right experts is essential for managing internal strategies and initiatives, setting realistic KPIs that are not overly optimistic as well as addressing ESG risks.
“Companies should maintain consistency in communications across all platforms, such as corporate reports, websites, social media among others, and avoid making claims that cannot be substantiated with robust evidence.
“A balanced reporting strategy should also acknowledge challenges, areas for improvement, corrective actions, and revised strategies, as combating climate change is complex, and a fully smooth transition is unrealistic. Companies should also consider opportunities arising from managing transitional risks,” he says.
However, Lim cautions that companies should avoid overwhelming investors with irrelevant or immaterial disclosures. Instead, they should focus on clear, concise reporting in plain language, avoiding textual obfuscation.
He also notes that in reality, companies often struggle between prioritising cost-cutting or profit maximisation for shareholders and the many initiatives they need to embark on to combat climate risk.
“Shifting the mindset demands investment and commitment at all levels to educate and incentivize the workforce, ensuring a shared goal and alignment across the organization.
“More training sessions, regular updates, focus groups, and cross-functional task forces should be established to enable companies to collaboratively develop strategies.
Dr Edwin Lim
“This collective approach ensures that decisions are well-informed and beneficial in the long run. Companies must also reassess and even educate their business partnerships to ensure shared commitments toward a carbon-resilient economy.”
Lim adds that another significant challenge in ESG reporting is overcoming the silo mentality, as addressing climate risk and other ESG issues requires integrated thinking across all business functions.
“Effective reporting demands seamless coordination rather than fragmented efforts.”
Referring to practices in more developed economies, Lim suggests that businesses can leverage technological innovations like blockchain to enhance data transparency, traceability, and trust across the supply chain, facilitating Scope 3 carbon disclosure.
He says blockchain improves the validity of emissions data, reduces verification costs, and streamlines reporting through smart contracts. It also aids in emissions mapping and sustainable product design by minimising data manipulation risks.
Also, Big Data Analytics can enable real-time energy monitoring and proactive pollution management, improving the predictiveness of carbon reduction efforts.
“For Malaysia, as a developing economy, the key questions are: Do we already have this in the market? Who can companies collaborate with to access this information?” Lim notes.
Meanwhile, Siew advocates for tracking emissions reductions using standardised methodologies like the Greenhouse Gas (GHG) Protocol to ensure full coverage across Scope 1, 2, and 3 emissions.
Noting the importance of real-time data monitoring, third-party verification, and aligning with international frameworks, Siew says progress should be consistently reported through annual sustainability reports, integrated financial disclosures, and digital dashboards.
However, he also points out challenges in current reporting systems, including inconsistent data quality, varying methodologies, and a lack of enforcement, which create opportunities for greenwashing.
“To improve reliability, companies must push for greater standardisation, independent audits, and sector-specific benchmarks for meaningful comparisons.
“Businesses must ground their climate communication on verifiable data, third-party assurance, and clear linkage to financial performance. Rather than vague net zero pledges, companies should break down targets into near-term, science-based milestones with transparent tracking.
“Disclosures should differentiate between actual emissions reductions and reliance on offsets, while also addressing Scope 3 impacts. Using standardised frameworks like ISSB, TCFD, GHG Protocol and independent audits reinforces credibility and trust.
“Most importantly, companies should be upfront about setbacks and course corrections – acknowledging challenges fosters more trust than unrealistic claims of perfection,” says Siew.
Rating sustainable excellence
When it comes down to running a sustainable business, public-listed companies are required to disclose their ESG fundamentals, but also stand to gain from sustainable investments.
As the country’s stock exchange, Bursa Malaysia enables these companies to benchmark their ESG performance, by collaborating with FTSE Russell in 2014 to launch the FTSE4Good Bursa Malaysia Index.
As a whole, the FTSE4Good index Series is generated by the globally recognised FTSE Group and is regularly used by large, mainstream institutional investors looking to meet an ESG mandate. Many companies use their inclusion in the index to show their ESG commitment.
Bursa Malaysia intelligence director Wong Chiun Chiek explained that, “FTSE4Good Bursa Malaysia is a score that Bursa Malaysia – in working with partner FTSE Russell – is giving every listed company to measure, to make the company aware, by ESG performance, if their adoption or reporting is good or bad.”
Methodology
The index itself offers ESG ratings across approximately 260 companies listed on the Bursa Malaysia Main Markets.
It provides investors a transparent and credible tool to identify and invest in companies demonstrating strong sustainability practices. It also encourages businesses to prioritise ESG integration within their operations. It uses precise rules and a focus on data to minimise subjectivity, while providing clear defined rules for constructing the indices and assessing companies.
FTSE Russell’s method examines the exposure of these companies to a wide range of significant ESG risks, categorised into 14 ESG themes and supported by over 300 detailed quantitative and qualitative indicators. The analysis looks at the specific risks faced by companies and serves as a foundation for evaluating how they manage them.
The index typically uses the overall rating from FTSE Russell’s ESG Ratings and data model to select companies for inclusion. The ESG Ratings is presented in three levels; first an overall rating that can be further categorise in three of the ESG pillars: environment, social and governance.
Each pillar is then sub-categorised to produce a total of 14 themes, which are further divided into 300 individual indicator assessments that can be applied to each company’s unique ESG risk exposures.
The analysts over at FTSE Russell can identify the level of ESG risk encountered by companies from 0 to 3 and evaluate this against detailed indicators to determine whether companies have disclosed the measures taken to mitigate these risks.
The companies are then awarded with an exposure score that shows their individual risk levels under 14 ESG themes. The analysts will then assess the disclosed actions these companies have taken to reduce their risks, giving them a performance score on a scale of 0 to 5. Both the exposure and performance scores are then calculated to form an exposure weighted ESG rating.
The reliability of the index is supported by its rigorous and transparent construction, which adheres to globally recognised ESG standards. For that, FTSE Russell employs a comprehensive research and assessment process to evaluate companies based on a wide range of ESG criteria.
Its methodology is transparent with the index and ratings available to users, so they can determine how a company is assessed. These ESG ratings are based on publicly available data.
The index is overseen by an independent external committee comprising experts within the investment community, business, NGOs, unions and academia.
Importance of being included
FTSE4Good Bursa Malaysia Index is more than just an investment vehicle, It plays a role in promoting ESG awareness and adoption within the Malaysian corporate sector.
It encourages companies to improve their ESG performance to attract investment and enhance their reputation, by strengthening their ESG policies, implementing better practices, and enhancing transparency in their reporting.
The index also facilitates greater transparency and disclosure as the detailed ESG assessments conducted by FTSE Russell – while confidential for individual companies – contribute to a broader understanding of ESG risks and opportunities.
There is also an understanding that because the index is sourced from ready reports from the companies themselves, there may be elements of greenwashing involved.
However, the index takes into account that publicly available information is usually reliable. Furthermore if companies were to greenwash data, they may face scrutiny from international NGOs.
Besides local investments, the index also attracts global investors who are increasingly incorporating ESG factors into their investment strategies and seek opportunities that demonstrate a sustainable commitment.
The index assures foreign investors that Malaysian listed companies take sustainability seriously, leading to increased foreign direct investment and contributing to the growth of the Malaysian economy while promoting sustainable development.
