Small and medium-sized enterprises now adopt Environmental, Social, and Governance (ESG) practices, not just large corporations. Malaysian small and medium enterprises (SMEs) now face growing pressure from customers, banks, and regulators to adopt sustainable business practices. Yet many SME owners remain hesitant due to widespread misconceptions about what ESG entails and whether it benefits their businesses.
This guide cuts through the noise and separates ESG fact from fiction. Whether you run a manufacturing firm in Selangor or a service business in Penang, understanding the truth about ESG can help you make smarter decisions, reduce costs, and stay competitive in an evolving marketplace.
For broader context on Malaysia’s net‑zero ambitions, policy direction, and key national programmes, see A Deep Dive into ESG and Environmental Sustainability in Malaysia: Progress, Challenges, and Initiatives.
Understanding ESG and Why It Matters for Malaysian SMEs
ESG stands for Environmental, Social, and Governance. These three pillars form a framework that helps businesses measure their impact on the planet, people, and corporate ethics. Environmental factors include energy use, waste management, and carbon emissions. Social aspects cover employee welfare, community engagement, and labour practices. Governance examines leadership structure, transparency, and ethical decision-making.
SMEs make up 97.4% of all businesses in Malaysia and contribute approximately 38.4% to the nation’s GDP, so when SMEs embrace sustainability, their collective impact on Malaysia’s environmental and economic goals is substantial.
The Malaysian government has set ambitious targets, including achieving net-zero carbon emissions by 2050. SMEs play a crucial role in reaching this milestone.
Recent data shows remarkable progress in ESG awareness among Malaysian SMEs. According to the Alliance Bank ESG 2.0 Report, awareness rose from 14% in 2022 to 80% in 2024. This sixfold increase reflects a growing recognition that sustainability is no longer optional; it has become a business necessity.
Myth 1: ESG Is Only for Big Listed Corporations
The Reality: ESG practices apply to businesses of all sizes. Customers, banks, and regulators increasingly expect SMEs to demonstrate basic ESG practices. Many incentives and tools are now specifically designed for smaller enterprises.
Many people still think ESG belongs only in the boardrooms of publicly listed companies, but that view is outdated. Large corporations now face mandatory reporting requirements, and they increasingly pull SMEs into ESG conversations through their supply chains.
When large companies report on their Scope 3 emissions, which cover their entire value chain, they need data from their suppliers. If your SME supplies goods or services to a larger firm, that customer will increasingly ask you for information on your carbon footprint, sustainability targets, and ESG practices. Major corporations, including Petronas, Telekom Malaysia, Nestlé Malaysia, and Sunway Group, have already adopted frameworks that require their SME suppliers to provide ESG disclosures.
Many large buyers now ask their suppliers to report on Scope 1, 2 and 3 emissions as part of their ESG requirements, so understanding these categories is essential for any SME that wants to stay in the value chain, as outlined by McKinsey’s explainer on Scope 1, 2 and 3 emissions.
Professor Suhaiza Zailani from the University of Malaya emphasises this point clearly: “ESG is not just for large corporations; SMEs can also greatly benefit from ESG implementation”. Beyond supply chain requirements, Malaysian SMEs now have access to numerous resources tailored to their needs.
Tools and Support Available for Malaysian SMEs:
- ESG Quick Guide for MSMEs: Launched by SME Corp Malaysia in February 2024, this guide offers eight straightforward steps to help businesses understand ESG. It includes 13 fundamental indicators suitable for all MSMEs regardless of sector or size.
- Simplified ESG Disclosure Guide (SEDG): Developed by Capital Markets Malaysia, this guide makes Malaysia the first country globally to provide SMEs with streamlined ESG disclosure guidelines. It comprises 35 priority disclosures categorised into basic, intermediate, and advanced levels.
- PROGRESS Climate Assessment Tool: Created by the UN Global Compact Network Malaysia & Brunei (UNGCMYB) in collaboration with Alliance Bank, this free tool helps SMEs measure their climate performance across three dimensions: Climate Governance, GHG Emissions, and Business Integration. Completing the assessment generates a Climate Maturity Report with a customised Climate Transition Action Plan.
These resources prove that ESG is accessible and achievable for businesses of every size. The message is clear: waiting until ESG becomes mandatory could mean missing valuable opportunities available today.
Malaysian SMEs looking to tap into government support can refer to Maximising the MIDA DIAF Grant to Kickstart ESG Adoption for Malaysian SMEs for step‑by‑step guidance on securing funding for their sustainability journey.
Myth 2: ESG Always Increases Costs and Kills Profit
The Reality: Energy efficiency, waste reduction, and better risk management can significantly cut costs and protect profit margins. More and more business leaders now treat ESG as a pathway to long-term financial sustainability rather than a drain on resources.
Many SME owners worry that going green will hurt their bottom line. This concern is understandable but largely unfounded. Research consistently shows that ESG initiatives can lead to substantial cost savings when implemented thoughtfully.
McKinsey research shows that effective ESG strategies can influence operating profits by as much as 60%, mainly through improved resource efficiency and lower operating costs. In Malaysia, the SME ESG Survey 2.0 reveals that 53% of SMEs cite cost savings as a primary motivator for ESG adoption. That focus on savings reflects real business outcomes, not coincidence.
Practical Examples of Cost Savings:
- Energy Efficiency: One manufacturer in Selangor reviewed their monthly energy usage, replaced conventional lighting with LEDs, and optimised air-conditioning settings. These simple changes led to an 18% reduction in electricity costs within six months. Under the Net Energy Metering (NEM) scheme, businesses installing rooftop solar can reduce electricity costs by up to 75%.
- Waste Reduction: Research shows that energy efficiency and waste management improve financial performance, enhancing Return on Assets (ROA) and Return on Equity (ROE). By minimising waste and adopting circular-economy principles, manufacturers can reduce raw-material and disposal costs.
- Operational Efficiency: ESG strategies can affect operating profits by as much as 60% through improved automation and resource management. Simply switching halogen bulbs to LED alternatives can save £2-£3 per bulb per year, small changes that accumulate into meaningful savings.
The Malaysian government has also introduced financial incentives to reduce the burden of ESG adoption. Tax deductions of up to RM50,000 per year are available for ESG‑related expenditure from 2024 to 2027, covering costs such as ESG consultancy, training, software systems, and greenhouse gas emissions tracking.
Rather than viewing ESG as an expense, forward-thinking SMEs recognise it as an investment that delivers measurable returns.
To make ESG more affordable, companies can take advantage of new tax rules. How to Maximise the ESG Tax Deduction for Malaysian Companies breaks down eligibility, claimable items, and practical examples.
Myth 3: ESG Is Just Public Relations and Greenwashing
The Reality: Regulators worldwide are cracking down on greenwashing. Genuine ESG requires data, metrics, and real change, not just marketing claims.
Some business owners dismiss ESG as a marketing exercise with no substance. They assume companies can slap an “eco-friendly” label on products and call it sustainability. This misconception ignores the significant regulatory shift happening globally and in Malaysia.
Greenwashing, when companies make misleading environmental claims, is facing increasing scrutiny. In April 2025, German asset manager DWS was fined €25 million for misleading statements about its ESG integration in investment decisions. This high-profile case demonstrates that regulators are serious about enforcement.
Global Regulatory Developments:
- European Union: The Empowering Consumers Directive, which enters force in September 2026, bans generic environmental claims without proof. Companies must verify all sustainability statements through independent bodies. Penalties for non-compliance can reach up to 4% of annual turnover.
- United Kingdom: The Financial Conduct Authority’s anti-greenwashing rule came into effect in May 2024. The Competition and Markets Authority now has powers to fine companies up to 10% of their global turnover for misleading environmental claims under the Digital Markets, Competition and Consumers Act 2024.
- Malaysia: While Malaysia does not yet have specific anti-greenwashing legislation, several existing frameworks address misleading claims. The Consumer Protection Act 1999 prohibits false representations about product quality. The Malaysian Code of Advertising Practice requires all environmental claims to be transparent, substantiated, and honest. Bursa Malaysia’s sustainability reporting requirements also mandate verifiable disclosures.
The National Sustainability Reporting Framework (NSRF), launched in September 2024, aligns Malaysian reporting with international standards set by the International Sustainability Standards Board (ISSB). This framework will eventually mandate external assurance for sustainability claims, beginning with greenhouse gas emissions.
For SMEs, this regulatory environment means that genuine ESG practices, backed by real data and measurable outcomes, will distinguish credible businesses from those making empty claims. Investing in authentic sustainability positions your company favourably as enforcement tightens.
If you are worried about saying the wrong thing in your sustainability messaging, our article on Greenwashing in Marketing: How to Avoid Common Pitfalls explains how to communicate ESG efforts honestly and avoid regulatory and reputational risks.
Myth 4: ESG Means Complicated Reporting and International Standards
The Reality: Malaysian SMEs can begin with simple, material topics such as energy, waste, and workplace safety. Local organisations and policymakers have designed practical tools to simplify this process for SMEs.
The alphabet soup of ESG frameworks can feel overwhelming. Terms like GRI, ISSB, TCFD, and CSRD create confusion and paralysis among SME owners who lack dedicated sustainability teams. However, Malaysian authorities have worked to make ESG accessible for smaller businesses.
The NSRF mandates sustainability reporting primarily for listed companies and large non-listed companies with annual revenues exceeding RM2 billion.
Implementation follows a phased approach: Group 1 companies (primary market-listed issuers with a market capitalisation of RM2 billion and above) began reporting in 2025, Group 2 in 2026, and Group 3 in 2027, as reported in UTM NewsHub. These requirements do not directly govern most SMEs.
For factory owners and industrial players, How Malaysian Manufacturers Can Achieve Sustainability Maturity outlines concrete operational measures to improve energy use, resource efficiency, and ESG performance on the shop floor.
Simplified Approaches for SMEs:
The Simplified ESG Disclosure Guide (SEDG) consolidates complex global and local frameworks into a practical format. It covers 35 priority disclosures aligned with international standards but presented in accessible terms. The guide is available in English, Bahasa Melayu, and Simplified Mandarin to ensure broad accessibility.
Capital Markets Malaysia has also launched a SEDG GHG Emissions Calculator, allowing SMEs to measure their Scope 1 and Scope 2 emissions without specialist expertise. The calculator uses pre-filled emission factors from trusted sources, including the IPCC and Malaysia’s Energy Commission.
Starting Points for Malaysian SMEs:
- Energy Management: Track monthly electricity consumption and identify high-usage equipment. Simple measures like switching off unused lights and optimising air-conditioning can deliver immediate savings.
- Waste Reduction: Implement recycling programmes and monitor waste disposal. Many waste reduction initiatives require minimal investment but yield measurable results.
- Workplace Safety: Ensure compliance with occupational health and safety requirements to protect employees and reduce liability risks.
- Employee Welfare: Basic practices such as fair wages, reasonable working hours, and respectful treatment demonstrate social responsibility.
- Use Available Tools: Complete the PROGRESS climate assessment to receive a free Climate Maturity Report and customised action plan. Use the SME Corp ESG Quick Guide to identify relevant indicators for your sector.
The key message is that SMEs need not achieve perfection immediately. Starting with material topics, those most relevant to your business operations, creates a foundation for progressive improvement.
For a clearer view of how the National Sustainability Reporting Framework and Bursa Malaysia’s rules affect businesses of different sizes, see our Business Guide to ESG Requirements in Malaysia – What Companies Need to Know.
Myth 5: There Is No Clear Financial Benefit
The Reality: Strong ESG performance helps businesses secure better access to funding, reduce their risk profile, and build stronger customer trust. High‑profile controversies show just how expensive poor ESG practices can become.
The most persistent myth is that ESG offers no tangible return on investment. This view ignores mounting evidence connecting ESG performance to financial outcomes.
Access to Funding:
Malaysian banks have committed substantial resources to sustainable financing. CIMB has mobilised RM86.2 billion, Maybank has extended RM83.2 billion in sustainable loans, and RHB has disbursed RM23.8 billion, with targets of RM50 billion by 2026. Banks and investors now increasingly link SME funding decisions to ESG performance.
The Green Technology Financing Scheme (GTFS) provides up to RM1 billion in financing to businesses adopting green technology. Benefits include a 60% government guarantee on approved funding and a 2% per annum interest rate rebate. The Low Carbon Transition Facility (LCTF) provides up to RM10 million per SME for sustainable practices, including energy efficiency improvements.
Alliance Bank has pledged RM1 billion in sustainable financing specifically for SMEs, with half already deployed. According to an international sustainable‑finance report, SMEs with access to sustainable finance are 2.5 times more likely to implement significant sustainability initiatives,” and cite the ICC–Sage report.
Financial Performance Evidence:
Research examining ASEAN-listed companies found that ESG disclosures positively influence financial outcomes by enhancing investor confidence and improving risk management. Studies show that ESG performance positively affects accounting-based financial performance, as measured by Return on Assets (ROA).
McKinsey identifies five ways ESG creates value: facilitating revenue growth, reducing costs, minimising regulatory interventions, increasing employee productivity, and optimising investment decisions. Strong ESG performers attract investment as Sustainable and Responsible Investment (SRI) fund assets in Malaysia grew from RM7.05 billion in 2022 to RM7.7 billion in 2023, as reported on the Securities Commission Malaysia Annual Report 2023.
Customer Trust and Loyalty:
Brands deriving more than half their sales from products with ESG-related claims enjoy repeat purchase rates of 32-34%, compared to under 30% for brands with less ESG focus, according to McKinsey. This difference suggests that ESG engagement enhances consumer loyalty.
Research confirms that environmental and social dimensions of ESG are particularly effective in fostering emotional bonds with consumers. Good ESG practices enhance brand reputation, which positively influences how customers perceive and interact with brands.
The Cost of Getting It Wrong:
ESG controversies demonstrate the serious financial consequences of failure. Companies experiencing ESG-related incidents face 2% to 5% stock underperformance within 6 months, and high-severity incidents average a -5% decline in market value.
Examples include:
- A major pharmaceutical company saw its stock decline by 1.7% after health-related litigation linked to one of its products.
- Wells Fargo faced a $1 billion regulatory fine and a separate $480 million shareholder settlement after regulators and investors uncovered its fraudulent sales practices.
- Volkswagen’s emissions scandal resulted in massive regulatory penalties and sustained reputational damage.
For Malaysian SMEs, these examples underscore that ESG is not merely about compliance or good intentions; it represents sound risk management that protects business value.
To explore how a structured ESG roadmap can drive revenue, reduce risk, and support long‑term competitiveness, read Understanding ESG Strategy to Add Value for Your Business Growth.
Taking Action: Your ESG Journey Starts Now
The evidence is clear: ESG offers Malaysian SMEs real benefits, including cost savings, improved access to financing, stronger customer relationships, and better risk management. The myths that once deterred adoption no longer hold water.
Practical Next Steps:
- Assess Your Current Position: Use the PROGRESS Climate Assessment Tool to understand your climate maturity level and receive a customised action plan.
- Identify Quick Wins: Start with energy efficiency measures that deliver immediate cost savings. Simple changes can significantly reduce electricity bills.
- Leverage Available Resources: Download the SME Corp ESG Quick Guide and SEDG to understand relevant disclosures for your business.
- Explore Financing Options: Investigate green financing schemes, including GTFS, LCTF, and sustainable financing programmes offered by Malaysian banks.
- Build Internal Capability: Take advantage of training programmes and workshops offered through the SEDG Adopter Programme and other capacity-building initiatives.
- Document Your Progress: Record ESG initiatives and outcomes. This information will be valuable when responding to customer enquiries, processing financing applications, or meeting supply chain requirements.
The transformation toward sustainable business practices is accelerating. SMEs that act early will lead this shift, positioning themselves for long-term success in an evolving marketplace.
Ready to begin your ESG journey? Discover how AsiaESG can support your business with practical ESG solutions tailored for Malaysian SMEs.
