While the EU Green Deal presents challenges like stricter regulations for products, it also offers opportunities for Malaysia’s trade and export through sustainable practices and early compliance, requiring strategic adaptation
THE rise of implementing the environmental, social and governance (ESG) standards within the economic framework has driven international policies, influenced investments and sparked a flurry of green financing across different sectors and industries around the globe — simply because no company, or country, is its own island.
Today, the continent taking the lead in ESG implementation is undeniably the European Union (EU).
According to the Malaysia External Trade Development Corporation (Matrade), the EU is a crucial trading partner for Malaysia, accounting for approximately 8% of its total exports.
With the EU’s ambitious European Green Deal, which aims to make Europe climate neutral by 2050, Asean countries, including Malaysia, can expect increased demand for ESG-driven products and services.
However, this shift also presents challenges for Malaysia, such as potential disruptions in the supply chain and the need to adhere to new sustainability standards.
To overcome these challenges, Malaysian companies must adopt ESG practices and establish partnerships to support and comply with international sustainability requirements.
A strategic ally
Mustafa: “Trade partners have varying prerequisites, but common requirements include reporting on energy, water, waste, biodiversityand sustainable sourcing. Compliance with environmentaland social standards like iSo 14001 and Sa8000 are expected.”According to Matrade chief executive officer Datuk Mohd Mustafa Abdul Aziz, “although the European Green Deal is the EU’s domestic response to global climate change, it will affect Malaysia’s export to the market — particularly sectors which fall under new legislative changes such as the Carbon Border Adjustment Mechanism (CBAM).“A carbon tax will be imposed on foreign good entering the EU market hence, market access to the EU will have additional cost,” he adds.
Moving forward, future export development and promotion will focus more on the 21 sectors under the New Industrial Master Plan 2030 (NIMP 2030).
As the EU Green Deal aims to make Europe climate neutral by 2050, and to reduce emissions by at least 55% by 2030, it may lead to an increased demand for products and services that meet the ESG requirements in the Asean market.
He emphasises the need to address disruptions related to the deal, citing how Malaysian companies must start adopting ESG practices within established partnership to support the new requirements in the Malaysia-Europe supply and value chain.
“This can include investing in cleaner or renewable energy, promoting sustainable agriculture, adopting green infrastructure, implementing local systems to identify and monitor carbon intensity and reporting, to align with the requirements stated in the European Sustainability Reporting Standards (ESRS),” he says.
Adjusting to the transition
The reaction from Asean nations to the deal was one of concern. The reality is that small and medium sized enterprises (SMEs) are the economic lifeblood of each country.
Therefore, a greater cohesion has to be forged within the individual Asean states in order to bring onboard the many local businesses that have yet to embrace ESG.
According to the latest available figures in the Economic Census 2016: Environmental Compliance published by the Statistics Department Malaysia, SMEs contributed RM433.2mil (17.0%) to environmental protection expenditure as compared to RM2,118.1mil (83.0%) by large establishments.
While a report by Alliance Bank, Global Compact Network and SME Corporation in April last year showed that 72% of SMEs have yet to adopt ESG within their business framework.
Yet if Asean member countries were to move forward in ESG, their SMEs need to overcome several challenges.
Abu Bakar: “The EU's commitment to supporting asean partners intheir green transition initiatives can enhance knowledge exchange,collaboration, research, information sharing and capacity building. Thiswill address challenges and barriers, accelerating overalleconomic transformation andglobal competitiveness.”Matrade deputy chief executive officer (Exports Acceleration) Abu Bakar Yusof says that “even without financial constraints on transitioning, there are also challenges in navigating international compliances, managing data and reporting while embracing innovation going forward.”
For example, Malaysian companies have to be shown how to address and comply with multiple international ESG initiatives and reporting by various international regulations such as the EU Green Deal, EU Human rights due diligence, US Anti-Slavery Law and the German Supply Chain Due Diligence Act.
Companies would need to know how to navigate the multiple agencies particularly in cases where overlapping of jurisdiction exists to access the sustainability and ESG information to help them in their transition.
Involving smaller players
Based on industry feedback and input from related stakeholders, it is observed that a minimum of 50% of Malaysian SMEs have embraced at least one aspect of ESG when doing international business.
This includes activities such as reporting on environmental performance, implementing social responsibility programmes, and adopting corporate governance standards.
This can be attributed from the proactive advocacy and awareness programmes implemented by the Investment, Trade and Industry Ministry (Miti) and Matrade as well as other government bodies responsible for enforcing corporate governance such as Bursa Malaysia and the Securities Commission Malaysia.
Active outreach programmes conducted by various SME associations and industry groups have also contributed to greater awareness and adoption of ESG in international trade.
Abu Bakar adds that Matrade is helping companies keep abreast with international market developments by disseminating timely relevant information and market intelligence to help Malaysian companies gain a competitive edge.
“A Corporate Shared Values (CSV) programme called Sustainability Action Values for Exporters, or S.A.V.E, was launched in 2019 to influence the adoption of sustainability practices based on the United Nations’ Sustainable Development Goals (UN SDGs) among Malaysian exporters as a means to give them a strategic advantage in export. From the perspective of international trade, the need to demonstrate sustainability adoption has become a requirement in the global supply chain and to gain market access,” he explains.
In 2023, Matrade introduced the Government Sustainability Engagement Programme (GSEP), a programme designed for the public sector particularly government officers to be empowered on their knowledge and capability related to sustainability international trade and Greening of Export Supply Chain Initiative (GxSCI) for private partnership programme that aims to create awareness among Malaysian exporters and sustainability agenda, and to bring Malaysia’s export supply chain up to speed in the context of global business.
Both programmes are designed to enhance market access and positive response towards global trend.
He adds that the region is currently spearheading the Asean Digital Economy Framework Agreement (DEFA) in preparation for the bloc to be a leading digital economy.
Besides incorporating sustainability elements, the EU Green Deal is also reshaping trade through its carbon neutrality goals.
“As an economy that is heavily reliant on fossil fuel, Asean can capitalise on the growing demand for green products and services to foster the development of renewable energy. The International Energy Agency forecasts that energy demand in the region will grow by as much as 60% by 2040,” notes Abu Bakar.
