What Global ESG Controversies Teach Malaysian SMEs

November 21, 2025 ASIAESG Marketing 2

Major global companies have faced tremendous financial and reputational damage from Environmental, Social, and Governance (ESG) failures. These scandals, from Volkswagen’s “Dieselgate” to labour abuses in Boohoo’s supply chain, are not just distant headlines; they are important lessons for businesses of all sizes, including Small and Medium Enterprises (SMEs) in Malaysia. When a large corporation falls into crisis due to unethical practices, the shockwaves ripple through its supply chain, hitting smaller suppliers the hardest. For Malaysian SMEs, understanding these risks is the first step towards turning potential threats into a strategic advantage. This article explores significant ESG controversies, shows how they create system-wide risks, and provides clear, practical lessons for Malaysian SMEs to build stronger, more resilient businesses.

For a broader view of how ESG and environmental sustainability are evolving nationally, and what this means for Malaysian businesses of all sizes, refer to “A Deep Dive into ESG and Environmental Sustainability in Malaysia: Progress, Challenges, and Initiatives.”

1. The High Cost of Getting ESG Wrong: Lessons from Global Scandals

ESG is about how a company performs in three key areas: protecting the environment, looking after people (social responsibility), and how it is managed (governance). When big companies ignore these areas, the results can be disastrous.

Environmental Disaster: The Volkswagen “Dieselgate” Scandal

In 2015, regulators discovered that car giant Volkswagen was cheating on emissions tests. The company had installed special software in its diesel cars to make them appear less polluting than they were. When regulators uncovered the scheme, the fallout was immense. Volkswagen faced billions of dollars in fines, with the total cost reaching over $33 billion by 2020. The company’s stock price dropped, and customer and investor trust was shattered. The Volkswagen emissions scandal shows that environmental dishonesty does not pay. Financial penalties and reputational damage can weaken even the largest companies.

Social Failures: The Boohoo Labour Abuse Case

The fast-fashion retailer Boohoo faced a major crisis in 2020 when reports revealed that workers in its UK supply chain were being paid as little as £3.50 an hour, far below the minimum wage. The working conditions were also found to be unsafe. As a result, Boohoo’s reputation was severely damaged, and it lost business as retailers dropped its products. The company had to cut ties with hundreds of its suppliers and has faced ongoing financial and reputational harm. The Boohoo supply chain scandal highlights the “S” in ESG: companies are responsible for the well-being of people in their supply chains. Ignoring these responsibilities can lead to boycotts, legal troubles, and a loss of public trust.

Governance Collapse: The Wirecard Fraud

Wirecard, a German payment processor, collapsed in 2020 after it was revealed that €1.9 billion in cash was missing. This collapse was a massive failure of corporate governance, the “G” in ESG. The company’s management had engaged in large-scale fraud, and the auditors had failed to spot it for years. The scandal led to the company’s downfall, huge losses for investors, and a crisis of confidence in Germany’s financial regulators. Wirecard teaches a critical lesson: without strong, transparent governance, a business is built on a weak foundation that can crumble at any moment.

Greenwashing: The Cost of False Claims

“Greenwashing” is when a company pretends to be more environmentally friendly than it really is. Regulators are cracking down on greenwashing practices. For example, the superannuation fund Mercer was fined $11.3 million for misleading statements about the sustainability of its investments. Other companies, like H&M and Decathlon, have been called out for using vague “eco-friendly” terms without proof. These cases show that making false ESG claims, even if well-intentioned, is a growing risk that can lead to hefty fines and public mistrust.

You can see more of The Largest Corporate Greenwashing Fines & Settlements here.

2. The Ripple Effect: How Big Scandals Hurt Small Businesses

When a large company like Volkswagen or Boohoo faces an ESG crisis, the damage spreads. Smaller businesses in their supply chain are often the most vulnerable.

Loss of Contracts: After the labour abuse scandal, Boohoo cut ties with over 400 suppliers. For the small factories that relied on Boohoo’s orders, the loss of contracts was devastating, leading to factory closures and thousands of job losses. The Boohoo case demonstrates how an ESG failure at the top can instantly cut off revenue for SMEs down the line.
Reputational Damage by Association: If a well-known brand is caught in a scandal, all its partners can be seen as guilty by association. A small Malaysian supplier linked to a multinational corporation accused of environmental pollution could find it harder to get new business, even if it did nothing wrong.
Increased Scrutiny and Costs: After a major scandal, large companies often impose stricter rules and more demanding audits on their suppliers to avoid future problems. For an SME, meeting these new, more rigorous standards can be expensive and complicated, increasing operational costs.
Financial Instability: Big companies with ESG problems can become unstable customers. They might delay payments or become financially insolvent, as in the case of Wirecard, leaving their SME creditors with unpaid bills and serious cash flow problems.

The ripple effect of these scandals shows that ESG is a system-wide issue. Malaysian SMEs are part of a global market, and the actions of their largest customers can pose significant risks.

3. Practical ESG Strategy for Malaysian SMEs

Thinking about ESG doesn’t have to be complicated or expensive. For Malaysian SMEs, it is about taking practical, manageable steps to build a more responsible and resilient business. The Malaysian government and business groups have recognised the importance of ESG adoption. They are providing resources to help, such as the SME Corp ESG Quick Guide and the Simplified ESG Disclosure Guide (SEDG). Here are four key lessons:

Lesson 1: Build Basic, Clear Governance

Good governance is the foundation of ESG. It is about running your business with honesty and accountability.

Create Clear Policies: Start with simple, written policies for essential issues. An anti-corruption policy, for example, makes it clear that your business will not tolerate bribery. A clear policy on employee conduct helps everyone understand the rules.
Ensure Owner Oversight: In a small business, the owner or board must actively oversee risks. Don’t assume everything is fine. Ask questions about how things are being done and who is responsible.
Establish a Whistleblowing Channel: Create a safe and simple way for employees to report problems without fear. Examples include a physical suggestion box or a dedicated email address. Catching problems early is key to preventing a bigger crisis.

SMEs that wish to substantiate their ESG claims and reduce the risk of greenwashing allegations can learn more about local standards and audit pathways in “ESG Certification for Companies in Malaysia: Standards and Certification Processes.”

Lesson 2: Be Honest in Your ESG Claims (Avoid Greenwashing)

Customers and investors are increasingly wary of bold environmental claims. Honesty is the best policy.

Don’t Over-Claim: If you have made an effort to reduce waste, say exactly that. Don’t claim your product is “100% green” unless you can prove it with precise data. Vague or exaggerated claims can be seen as greenwashing.
Focus on Action, Not Buzzwords: Instead of using terms like “sustainable” or “eco-friendly,” talk about what you are actually doing. For example: “We have reduced our energy consumption by 10% by switching to LED lights.” This kind of statement is specific, credible, and easy to understand.
Be Transparent About Your Journey: It is okay not to be perfect. SMEs can build trust by being honest about their ESG goals and their progress, including challenges they face along the way.

For SMEs that want to move beyond manual spreadsheets and start capturing reliable ESG data, see how digital tools can streamline reporting in “Leveraging Digital Technology for ESG Reporting to Meet Carbon Regulations and Sustainability Goals.”

Lesson 3: Track a Few Key ESG Metrics

You cannot manage what you do not measure. For SMEs, tracking a few simple metrics can make a big difference. The SEDG for Malaysian SMEs suggests a phased approach, starting with basic disclosures.

Environmental: Start with something simple, like your electricity bills, to track energy consumption, or measure how much waste you produce and how much is recycled. Free tools, like the EPA’s GHG Calculator, can help estimate your carbon footprint without needing expensive software.
Social: Track employee health and safety by recording the number of workplace incidents or accidents. You can also measure employee turnover or satisfaction through simple surveys. These metrics can help you spot problems in how your staff are being treated.
Governance: Keep a record of any ethics or compliance training you conduct. Maintaining these records shows a clear commitment to good governance.

Lesson 4: Plan for a Crisis, Even if You’re Small

A crisis can hit any business at any time. Having a basic plan can help you manage the situation and protect your reputation.

Identify Potential Risks: Think about what could go wrong. What are the most significant ESG risks for your specific business? A data breach? A safety incident? An environmental complaint?.
Decide Who Says What: Determine who your company’s spokesperson will be in a crisis. In an SME, this is usually the owner or managing director. Having a clear, designated spokesperson and communication channel prevents confusion.
Prepare Simple Templates: Draft basic statements for different types of potential crises. Having a template ready means you can respond quickly, which is crucial in the age of social media. A quick, honest response is always better than silence.

4. Why Investors and Customers Are Watching

Ignoring ESG is not just a risk to your operations; it’s a risk to your finances. Across the globe, and increasingly in Malaysia, how a company handles ESG affects its ability to attract investment, secure loans, and win customers.

Increased Cost of Capital: Scandals make investors nervous. Companies with poor ESG records are seen as riskier investments, making it more difficult and expensive for them to raise capital. Banks are also increasingly considering ESG performance when deciding whether to grant loans, with better terms offered to more sustainable businesses.
Loss of Contracts and Customers: ESG failures can lead directly to the loss of contracts and customers. Large corporations are now required to report on the sustainability of their entire supply chain, and they will drop suppliers who do not meet their standards. In Malaysia, failing to be ESG-compliant could mean losing out on business opportunities with both multinational corporations and government-linked companies.
Legal Action and Boycotts: As seen with Volkswagen and Boohoo, ESG failures can trigger expensive lawsuits from customers and investors. Consumer boycotts, amplified by social media, can cause immediate and lasting damage to a brand’s reputation and sales.

For Malaysian SMEs, adopting good ESG practices is no longer just a “nice to have.” It is becoming essential for survival and growth, opening doors to new markets, attracting talent, and securing a place in future supply chains.

If you would like to understand why investors in Malaysia are increasingly rewarding companies with strong ESG performance, take a look at “Rising ESG Investing Trends and Opportunities in Malaysia.”

Conclusion: Turning Risk into Opportunity

The major ESG scandals that have shaken global corporations carry a clear message for Malaysian SMEs: the risks of ignoring environmental, social, and governance issues are real, and they can affect your business whether you are ready or not. The fallout from these controversies, from massive fines and collapsing stock prices to lost contracts and ruined reputations, shows that unethical practices create systemic risks that impact everyone in the value chain.

However, these stories of failure also provide a strategic roadmap for success. By learning from these mistakes, Malaysian SMEs can take proactive, practical steps to build stronger, more resilient, and more trustworthy businesses. Simple measures like establishing transparent governance, tracking a few key metrics, being honest in communications, and having a basic crisis plan can make all the difference.

With growing pressure from investors, customers, and regulators, both locally and globally, ESG is quickly moving to the centre of the business world. For Malaysian SMEs, embracing ESG is not about compliance or charity; it’s about smart strategy. It’s about managing risk, building a competitive advantage, and ensuring your business is ready for the future.

Take the next step in your ESG journey. Discover how Elite Asia can support your sustainability reporting and communication needs.

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