UN Global Compact Network Malaysia and Brunei executive director Faroze Nadar.
What does 2026 hold for companies in terms of sustainability and ESG in Malaysia?
The Climate Change Bill is slated to be tabled in March, before a carbon tax is implemented. Beginning last year, large main market listed issuers have started to adopt the National Sustainability Reporting Framework (NSRF), with other listed and non-listed companies expected to follow in phases.
Internationally, the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) is applied in its definitive regime from 2026, covering energy-intensive products such as iron and steel, cement, fertilisers, electricity and hydrogen.
These have been dominating conversations for some time, but they are only part of a much broader sustainability landscape that companies will need to navigate.
PwC Malaysia partner and sustainability and climate change leader Andrew Chan.“In Malaysia, 2026 represents a decisive shift from ESG intent to execution,” said UN Global Compact Network Malaysia and Brunei (UNGCMYB) executive director Faroze Nadar. “A convergence of national policy developments, regulatory mechanisms and global market forces is reshaping sustainability from a compliance topic into a core business and competitiveness issue.”
This shift is also expected to widen the range of risks that companies must manage. PwC Malaysia partner and sustainability and climate change leader Andrew Chan noted that it is almost certain that the menu of ESG risks will expand for businesses as the economic and regulatory landscape grows in complexity. “The window to make important changes for continued resilience—and to do it responsibly is small,” he cautioned.
Against this backdrop, he added, leading businesses will be those that build their reserves to manage near-term priorities while priming themselves for long-term success.
“This includes understanding the impact of market developments (both direct and indirect) on their supply chain and working with others to pursue a just transition; investing in climate adaptation; and enhancing transparency in various aspects of the business from reporting and managing their operations to their response to human rights issues.”
“Such a company understands its full impact across the value chain, manages climate and social risks proactively, and invests in people, technology and innovation to build long‑term resilience. It engages openly with stakeholders, demonstrates transparency in reporting and shows measurable progress across both financial and non‑financial metrics.
“Ultimately, it sees ESG not as an obligation, but as a source of competitiveness, trust and future growth.”
Here, ESG experts analysed the key trends set to shape the year ahead:
NSRF
Under the NSRF, sustainability reporting requirements have been tightened to align Malaysia more closely with international sustainability disclosure standards.
Reporting and disclosure under IFRS S1 will serve to round out climate governance by more robust environmental and social sustainability measures, Climate Governance Malaysia’s (CGM) chair of council Dr Gary Theseira noted. Compliance with IFRS S2, meanwhile, will require corporations to examine and assess their entire value chain for exposure to and vulnerability from climate impacts.
Bernard Business Consulting ESG and sustainability consultant Ng Jia Xin.Beyond governance and risk assessment, the quality of sustainability data will come under closer scrutiny. Bernard Business Consulting’s ESG and sustainability consultant Ng Jia Xin emphasised that businesses need to ensure that the data they collect is both traceable and verifiable.
She recommended using digital tools—Excel spreadsheets, ESG software, artificial intelligence (AI) and the like—and internationally recognised databases to improve the accuracy and completeness of emissions reporting, which will be critical for future audits.
As adoption grows, ESG software and other digital tools are becoming more affordable, she said.
Scope 3 and supply chain
Reporting expectations under the NSRF extend beyond direct operations to include Scope 3 emissions, placing greater emphasis on supply chain transparency, noted UNGCMYB’s Faroze. In many cases, value chain emissions far exceed those from direct operations, making supplier engagement unavoidable.
“Corporates that proactively manage supply chain ESG risks, including emissions, labour practices and environmental standards, are better positioned to meet disclosure requirements, maintain market access and protect brand value,” he said. “Conversely, weak supply chain practices can translate into regulatory, financial and trade risks, particularly in export markets affected by the CBAM and related regulations.”
From a practical implementation standpoint, Ng advised businesses to support their suppliers in understanding the fundamentals of carbon accounting in order to receive the high-quality data required for their own compliance.
“The pushback from supply chain partners stems from a lack of knowledge,” she said. “They are eager to learn, recognising it as important to secure sales even though they don’t know how and face budget constraints. By having our clients offer training to them, they become more willing to come onboard.”
Climate adaption
Once-rare, extreme climate events, such as heatwaves and intense rainfall outside monsoon season, are now increasingly common, reinforcing the urgency for stronger climate adaptation, PwC’s Chan observed.
For corporations, the economic consequences are increasingly tangible. Physical asset damage, rising insurance premiums and reduced workforce productivity demonstrate that adaptation is not merely a compliance requirement, but a strategic investment that protects value and strengthens long-term competitiveness, he added.
The public sector, too, faces similar challenges. “Adaptation planning must consider broader risks in addition to maintaining liveability and meeting the rakyat’s needs while building a climate resilient economy,” he said.
“A practical starting point is understanding climate exposure. For businesses, this means assessing risks across the value chain; for the government, it requires a whole-of-economy approach that evaluates vulnerabilities at the sector and industry level.”
Such assessments, Chan continued, enable better planning, budgeting and capital allocation for targeted adaptation measures.
Climate Governance Malaysia’s chair of council Dr Gary Theseira.Citing agroforestry as an example, he said several companies globally have adopted practices that integrate trees with crops and livestock pastureland, producing ecological and economic advantages that include improved water retention and enhanced soil diversity, as well as land use efficiency.
Meanwhile, policy developments—the National Adaptation Plan slated for a 2026 launch, and the recently launched Sarawak Net Zero Strategy and Carbon Plan anchored on a sectoral decarbonisation approach—send a positive signal on the government’s commitment to bolster Malaysia’s resilience against climate impacts, he added.
Climate risk is not confined to flood risk only, KPMG’s Liu stressed. Climate-related regulations, readiness of climate adaptations technologies, market and talent expectations and supply readiness are all part of the risks.
Key areas include land use and deforestation, water stress and water quality, ecosystem degradation, health and safety risks, etc, she added.
Labour rights
The implementation of Malaysia’s National Action Plan on Business and Human Rights (NAPBHR) formally elevates labour rights, ethical business conduct and governance as national ESG priorities, UNGCMYB’s Faroze noted.
“This signals a clear expectation that companies must move beyond high-level commitments and actively manage human rights risks across operations and supply chains, particularly in labour-intensive and export-oriented sectors,” he said.
This focus is reinforced by growing international scrutiny. Chan pointed out that companies must enhance transparency around how they manage human rights and social impact issues, in line with mounting global investor expectations, reporting requirements and other evolving regulatory developments, including recent US-Malaysia and EU trade agreements.
Key risks include forced and child labour, poor working conditions and community rights violations, especially in sectors like manufacturing, electronics, palm oil, construction, mining, and to a certain extent, oil and gas, where supply chains are complex and globally dispersed.
“To differentiate themselves in the marketplace, Malaysian companies would do well to embed NAPBHR commitments, comply with ISSB reporting standards and align with US and EU trade requirements to transform human rights risks into strategic opportunities,” Chan said.
He outlined several immediate actions companies can take: conduct human rights assessments across operations and supply chain, strengthen supplier due diligence and monitor for ethical compliance, and update and clearly communicate human rights and procurement policies to suppliers and key stakeholders.
“In tandem, companies will need to provide targeted training on human rights risks and ISSB reporting requirements for their stakeholders. Digital tools will be critical to enhancing transparency via supply chain traceability and risk tracking,” Chan said.
Energy transition and efficiency
Malaysia’s energy transition is also becoming more tangible, Faroze observed.
The country is preparing to launch its first utility-scale wind project in Sabah, signalling diversification beyond solar and hydro power. At the same time, solar deployment continues to expand, including hybrid hydro-solar projects by Sarawak Energy, which demonstrate innovative use of existing infrastructure to accelerate renewable capacity, he said.
“In parallel, policy discussions under the National Energy Transition Roadmap and the 13th Malaysia Plan (13MP) include exploring nuclear energy as a long-term baseload option, reflecting a pragmatic approach to balancing decarbonisation, energy security and economic growth.”
Alongside supply side measures, energy efficiency remains one of the most under-appreciated climate solutions, Faroze added. The Energy Efficiency and Conservation Act (EECA) places renewed regulatory focus on systematic energy management, particularly for large energy users.
Global research by the International Energy Agency shows that energy efficiency can deliver a substantial share of the emission reductions needed this decade, he said. “For corporations, efficiency investments offer immediate cost savings, faster payback periods and reduced exposure to future carbon costs, making them one of the most commercially attractive ESG actions available.”
Nature and biodiversity
Nature and biodiversity are also moving into the mainstream of corporate sustainability considerations alongside climate priorities, PwC’s Chan shared.
“It’s easy to see why, with 58% of the combined market capitalisation of Asia Pacific stock exchanges including companies with higher or moderate dependence on nature based on PwC’s research,” he said.
“‘How do we act?’ will be a key question, driven by the Taskforce on Nature-related Financial Disclosures (TNFD) and the prospect of an IFRS Sustainability Disclosure Standard on nature.
“While TNFD-aligned disclosure is not yet mandatory in Malaysia, getting involved early will be important for organisations that wish to remain competitive and meet regulatory expectations,” he said, noting that IFRS S1 already requires the disclosure of nature-related risks and opportunities if these are considered material to an organisation.
The 13MP provides a further policy signal, he noted. “Its emphasis on biodiversity, forest carbon, blue carbon and broader ecosystem protection underscores the direction for our country’s sustainable development agenda. This points to a future in which nature-related risks and opportunities become increasingly central to business strategy, investment decisions, and reporting.”
As global standards such as TNFD gain traction, KPMG’s Liu added, companies will increasingly be expected to quantify their dependencies on natural assets and demonstrate credible nature positive strategies. “Failure to do so may lead to financing constraints, reputational risks, or supply chain exclusion,” she said.
Enterprise risk management
To meet the ISSB Standards’ requirements on disclosing ESG risk management practices, companies must proactively manage sustainability risks as part of their enterprise risk management (ERM) framework, said Chan.
A robust ERM framework, he explained, should include refined roles of board committees and redefined lines of defenses for oversight and management of sustainability risks.
Instead of merely adding new risk categories or impact areas to address additional ESG considerations, companies must transform existing areas to empower risk practitioners with a broader array of parameters for more comprehensive risk assessments, he added.
In this context, emerging risks like climate adaptation and resilience considerations, supply chain vulnerabilities as well as the use of AI, need to be incorporated in the risk response.
“The impact and possibility of risks today and in five years’ time may be vastly different, because of many internal and external factors,” he said. “By using a time horizon to assess, organisations can focus on what matters now and what needs longer-term planning.”
To support this approach, separate ERM heat maps used to monitor short, medium and long-term risks will need to be updated to existing ERM frameworks. Quantifying the financial impact of ESG risks will need to be performed using discounted future cash flows, Chan added.
“Through this quantification exercise, impacts will be assessed to benchmark the company using ERM risk impact ratings.”
In practice, Liu has observed a growing number of companies using climate risk assessment for decision making.
Examples include a property company integrating climate risk assessment into investment decisions for new residential projects; a utility company embedding climate risks assessment into climate adaption plan to ensure continuity of power supply and business resiliency; and a food and beverage company assessing human rights risk exposure within its supply chain.
Climate governance
Robust climate governance, CGM’s Theseira noted, can only be achieved through active engagement among Malaysian companies, regulators, policy and lawmakers, research institutes, think tanks and non-governmental organisations.
Such collaboration should take place on an open and inclusive platform to enable stakeholders to identify near-term threats and risks and develop immediate guidance and emergency response measures to prevent loss of lives and property.
“Stakeholders will need to initiate mid-term programmes to identify vulnerable assets and infrastructure for possible relocation. They also need to develop long-term strategies, which are informed by future climate scenarios, to ensure that all future development is sustainable and climate resilient.
“Given the severity of the recent climate disasters, good climate governance demands that early warning and short-term emergency response measures be in place and tested by live simulations and drills by as early as the end of 2026.”
Sustainable finance
With Malaysia aiming for 50% of new financing capacity to be ESG-linked by 2026, banks are prioritising ESG-linked loans and companies with strong ESG performance stand to gain better financing terms, KPMG’s Liu said.
At the same time, Malaysia is leveraging the principles of Islamic finance to support ESG objectives and climate goals. Regulators are introducing initiatives that not only expand green and social finance, but also strengthen the inclusivity and governance of the broader Islamic financial system.
A key growth area, according to Theseira, is sustainability sukuk and social finance, driven by continued issuance of Islamic bonds for green and social projects (e.g. SDG Sukuk). Complementing these are Value-Based Finance instruments that support sustainable economic growth and social justice, aligned with the Financial Sector Blueprint 2022-2026.
Initiatives such as affordable takaful (Islamic insurance Perlindungan Tenang) and Islamic Interbank Money Market products facilitate liquidity and fund broader protection, all while promoting inclusion and creating a resilient and globally integrated Islamic finance ecosystem.
Regulators are also enhancing the resilience and transparency of the Islamic financial system. These efforts include the transition from the Kuala Lumpur Islamic Reference Rate (KLIRR) to the Malaysia Islamic Overnight Rate (MYOR-i) to standardise contracts and improve transparency, as well as the development of Islamic repurchasing agreements to improve liquidity and short-term funding.
Similarly, the Islamic Derivative Master Agreement (IDMA) and enhancements to tawarruq frameworks aim to improve risk management and enable more innovative applications.
Finally, digital and future-ready finance initiatives support sustainability by promoting inclusion and innovation. Licensing of digital Islamic banks and the piloting of blockchain-enabled smart sukuk require regulatory alignment between Bank Negara Malaysia, Securities Commission and the Shariah Advisory Council, he added.
