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1. What is ESG?
Businesses are facing increased pressure to adopt sustainable and responsible practices that go beyond mere profit-making. Environmental, Social, and Governance ("ESG") principles have emerged as a powerful framework for ensuring sustainable success of corporations whilst holding them accountable.
ESG laws cover a broad range of subjects, but the overall goal is ensuring companies act as good corporate citizens. This is determined by how companies protect the environment, treat their employees, ensure there are no corrupt activities in their operations, etc. In essence, it is the law regulating the ethical conduct of businesses.
ESG has become a key determinative factor for corporations (especially Public Listed Corporations and MNCs) in deciding who they wish to do business with - the more ESG compliant, the more attractive as a business partner.
This article provides a brief overview of the 3 pillars of ESG law in Malaysia and how these concepts operate in practice within the country. Further articles shall follow, exploring each pillar in depth.
2. (E) Environmental
Environmental focuses on a company's environmental impact and its efforts to reduce harm to the planet. It includes initiatives related to energy efficiency, carbon footprint reduction, waste and pollution management, and the use of green technologies.
A. Malaysia’s International Obligations
Malaysia is a party to the United Nations Framework Convention on Climate Change (UNFCCC) and has ratified the Paris Agreement (a global treaty to reduce global warming). Pursuant to this, Malaysia has committed to reduce its greenhouse gas emissions by 45% by 2030.
To achieve this target, the Government is working on implementing a Malaysian Climate Change Act (expected in 2024). The proposed act is expected to have substantial new obligations and restrictions on businesses to ensure their operations do not damage the environment and to prevent global warming.
B. Key Laws and Penalties for Breach
Malaysia also has existing legislation on environmental protection- i.e. the Environmental Quality Act 1974 ("EQA"). The EQA sets strict standards and guidelines for pollution control, waste management, and conservation.
The EQA legislates on:
Businesses and Industries that need to obtain specific licenses for emissions
General restrictions on emissions for all persons/corporations
Prohibitions and rules on soil, water, noise and air pollution, waste management and the handling of hazardous substances
Specific rules on industries ranging from fossil fuels to palm oil production
Failure to comply with the provisions of the EQA include failure to obtain a license, failure to comply with license conditions, unauthorised discharge of hazardous substance or pollutants above permissible levels, open burning and discharges into waterways. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Maximum of 2 to 5 Years (Depending on Offence)
Fines: From RM 25,000 to RM 500,000 (Depending on Offence)
Other Action: Closure of Business.
3. (S) Social
Social encompasses a company's interactions with its employees, customers and workers. It involves promoting workplace diversity and inclusion, safeguarding human rights, supporting employee welfare.
A. Malaysia’s International Obligations
Malaysia is a member of the International Labour Organization ("ILO"), a United Nations agency that sets international labour standards to protect the rights and safety of workers. Malaysia has in fact ratified several ILO conventions including:
The Forced Labour Convention (prohibiting forced labour and human trafficking)
The Equal Remuneration Convention (promoting equal pay for men and women)
The Minimum Age Convention (setting the minimum age for employment)
However, as a party to the ILO, Malaysia must also interpret its local laws consistently with the ILO (even where conventions are not ratified) – see CAS v MPPL & Anor [2019]. The recent Court of Appeal case of Angee Lee v Fice Fransina Nenobais (2021) clearly shows that the Malaysian Courts will uphold the rights of all people (including “illegal immigrants”) and will not allow employers to escape paying fair wages. In this case a migrant worker was allowed to sue her employer for unpaid wages even though the migrant did not have a legal permit to work in Malaysia.
This will open the doors to greater protections of workers and stricter requirements of businesses in the future.
B. Key Laws and Penalties for Breach
There are various social protections offered to employees as set out in the below (non-exhaustive) legislation:
Employment Act 1955
The key legislation in Malaysia that governs the employment relationship and provides protection to workers. It covers various aspects and protections including working hours, fair wages, rest days, non-discrimination, protection from harassment. Breaches of the same carries penalties:
Fines: Up to RM 10,000
Minimum Wages Order 2022
Fixes minimum wage for all Malaysian employees (excluding ‘domestic servants’) at RM 1,500 a month and a minimum hourly rate of RM 7.21. Failure to comply with the same carries penalties:
Fines: Up to RM 10,000
Occupational Safety And Health Act 1994
Mandates that proper systems and measures are in place to protect the safety of employees. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Up to 2 Years
Fines: Up to RM 50,000
Anti-Trafficking in Persons And Anti-Smuggling Of Migrants Act 2007
Prohibits maintaining labour through the use of coercion and not through willing employment. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Up to 20 Years
Fines: (No specified limit)
4. (G) Governance
Governance focuses on the transparency, accountability, and ethical behaviour of a company, covering broad aspects including anti-bribery and anti-money laundering measures, compliance with competition and PDPA laws, and the conduct of the board in overseeing the company's strategy and risk management.
A. Key Laws and Penalties for Breach
The last decade has seen the greatest shift in increased legislation and enforcement to ensure corporations operate with good governance. Non-exhaustive examples of which include:
Competition Act 2010
Prohibits enterprises that are competitors from working together to fix the prices of goods, sharing the market, limiting production (which have the effect of preventing competition). Breaches of the same carries penalties as below:
Fines: Up to 10% of the worldwide turnover of the Enterprise
Personal Data Protection Act 2010
Prohibits entities that collect personal data from disclosing data for any other purpose than why it was disclosed, processing data without consent and creates obligations to ensure all steps to protect the data from loss or misuse or unauthorised disclosure are implemented. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Up to 2 years
Fine: Up to RM 300,000
Malaysian Anti-Corruption Commission Act 2009 (“MACC Act”)
Creates responsibilities for corporations over the conduct of their employees. Under Section 17A of the MACC Act, where an employee or agent of a corporation engages in corruption that leads to a benefit for the corporation, the corporation is deemed to have committed the corrupt act, unless it is able to establish that it has in place adequate procedures to prevent corruption. In this regard, the Prime Minister’s Department had issued the Guidelines on Adequate Procedures to assist corporations in understanding the adequate procedures that should be implemented to prevent corruption. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Up to 20 years
Fine: Up to 10 times the value of the gratification
Anti-Money Laundering, Anti-Terrorism Financing And Proceeds Of Unlawful Activities Act 2001 ("AMLA Act")
Designates various businesses that deal with clients as “Reporting Institutions” including Financial Institutions, Law Firms, Accounting Firms, Company Secretaries, Trust Companies, etc. The AMLA Act mandates that Reporting Institutions:
Must undertake a Know-Your-Client (KYC) check as part of a due diligence exercise, to determine the true identity and beneficial ownership of their clients.
Must properly keep and retain all documentation relating to the due diligence exercise and transactions with their clients for at least 6 years.
Must immediately report suspicious client transactions to Bank Negara Malaysia.
Breaches of any of the above are criminal offences, carrying penalties:
Imprisonment: Up to 3 years
Fine: Up to RM 1,000,000 and RM 3,000 for every day the offence continues.
All companies are prohibited from undertaking any transactions with persons sanctioned under the Ministry of Home Affairs and United Nations' Sanction Lists. Accordingly, all potential clients must be screened against these lists. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Up to 5 years
Fine: Up to RM 3,000,000.
The AMLA Act further creates an offence of knowingly engaging in transactions that involve monies from unlawful activities or acquiring, using or possessing monies from unlawful activities. Breaches of the same are criminal offences, carrying penalties:
Imprisonment: Up to 15 years
Fines: 5 times the proceeds of the unlawful activity or RM 5,000,000, whichever greater.
*All legislation above also contain vicarious liability provisions - i.e an offence committed by the corporation is also deemed to have been committed by the Director/CEO/controller etc of such company, who may be jointly charged.
5. How can Businesses Protect Themselves
Non-compliance with ESG practices can have significant consequences, including reputational damage, decreased investor confidence and most substantially, potential legal liabilities (which include imprisonment).
To protect against the potential liabilities and to serve as a defence in court if prosecuted, Corporations must ensure that all reasonable safeguards were implemented ensure such offences were not committed and/or such offences were committed outside the scope of control and knowledge of the corporation. To do so, corporations should undertake the following steps:
Have a comprehensive ESG Compliance Manual for the Company (covering Environmental, Fair Worker Treatment, Competition Law, PDPA, Anti-bribery, Anti-Money Laundering and Whistle Blower Protection Policies);
Regularly update such Compliance Manuals to ensure consistency with latest legislative changes;
Undertake regular corporate ESG training for all members of staff and management, mandating attendance;
Undertake compliance audits accordingly to certified standards;
Conduct proper due-diligence on all clients, agents, service providers and employees before engaging the same and keep a record of such background checks;
Have independent reporting channels in place to report breaches of law, including money laundering and corruption;
Ensure all contracts and agreements are contingent upon compliance with legislation, with termination in the event of breach.