Malaysia does not currently have a specific law requiring a reduction in greenhouse gas emissions. However, the Ministry of Energy, Science, Technology, Environment and Climate Change (MESTECC) has since 16 May 2019 entered into a four (4)-year collaboration with the U.K. to engage in a scoping review to ascertain whether a Climate Change Act is required and engage in knowledge-sharing with the U.K. on the latter’s experiences in adopting its own Climate Change Act in 2008.1 It has further been reported that the Ministry of Environment and Water (formerly MESTECC under the previous administration) completed the climate change legal framework in December 2021, which shall form the basis for a Climate Change Bill which is to include the formation of a climate change committee to ensure climate change adaptation in the face of floods, climate change mitigation and compliance mechanisms with existing laws.2The development of the Climate Change Bill is expected to take two to three years from 2023.3
The Malaysian government has launched the Twelfth Malaysia Plan,4 which was approved by the Senate on 21 October 20215 and sets out the national development strategy for 2021-2025, including a reiteration of the goal to reduce GHG emissions by up to 45% to GDP by 2030 relative to 2005 under Malaysia’s Nationally Defined Contribution6 and a feasibility study on carbon pricing, such as carbon tax and an emissions trading scheme.7
Directors' Duties and Climate Change
Malaysia is a common law jurisdiction and the Companies Act 2016 (CA 2016) codifies the fiduciary duty8 of loyalty of a director, established under common law. The CA 2016 sets out certain general duties of directors. Section 213 of the CA 2016 provides that a director has a duty to exercise his9 powers, at all times, for a proper purpose and in good faith in the best interest of the company,10 and also to exercise reasonable care, skill and diligence with the knowledge, skill and experience that may reasonably be expected of a director having the same responsibilities and any additional knowledge, skill and experience that the director in fact has.11
In determining whether a director has acted in good faith and in the best interest of the company, the Malaysian courts adopt both a subjective and objective test12 – the subjective element is determined based on an assessment of the state of mind of the director,13 whilst the objective element is determined by whether an honest and intelligent man in the position of the director could reasonably have believed the transaction was for the benefit of the company.14
Whilst there have yet to be any Malaysian court decisions expressly linking the exercise of these duties with climate-related considerations, decisions of courts in other common law jurisdictions will be persuasive authority in Malaysia, particularly where claims have been brought by shareholders and members of the public against the directors of a company for failing to factor in climate change considerations in business decisions.
The SC has issued Guidelines on Conduct of Directors of Listed Corporations and their Subsidiaries dated 30 July 2020 (revised 12 April 2021) (SC Guidelines), which reiterate the duties under the CA 2016 for a director of a corporation to exercise his powers for a proper purpose and in good faith in the best interest of the corporation in which he sits as a board member.15 The SC Guidelines further provide under Chapter 5 on group governance (which took effect on 1 January 202116) that a listed corporation and its directors must establish and ensure that the group-wide framework on corporate governance include, amongst others, managing material sustainability risks.17
The Malaysian Code on Corporate Governance (updated as at 28 April 2021) (MCCG) issued by the SC has long been a tool for promoting good corporate governance practices in publicly-listed companies (PLCs).18 Non-listed entities are also encouraged to adopt the MCCG in their practices.19 The MCCG provides that effective board leadership and oversight require the integration of sustainability considerations in corporate strategy, governance and decision-making, as sustainability and its underlying ESG issues become increasingly material to the ability of companies to create durable and sustainable value and maintain confidence of their stakeholders.20 Furthermore, boards should, in discharging their responsibilities, ensure that the strategic plan of the company supports long-term value creation and includes strategies on the economic, environmental and social considerations underpinning sustainability.21 The Corporate Governance Guide 2021 (4th edition) issued by Bursa Malaysia Berhad22 (Bursa Malaysia) further elaborates on corporate governance related best practices such as the involvement of board chairmen committees, the exercise of proper and effective oversight on material sustainability matters, the formulation of a fair, transparent and well-structured remuneration policy and putting in place transparent shareholder engagement practices for virtual general meetings.23
In light of the above, it is imperative that directors evaluate and incorporate climate risks and considerations into their board decisions, as it can be anticipated that the Malaysian courts would likely step in to align the law with modern circumstances by expressly endorsing climate change as a key consideration for determining if a director was carrying out his duties under statute and common law to act in the best interest of the company.
If directors do not proactively take into account and mitigate against climate-related risks and information in their board decisions and in the operations of the companies of which they are directors, they risk exposing themselves to statutory liability and common law actions which can manifest as tangible risks to the company.24
Furthermore, directors can be found personally liable under the Environmental Quality Act 1974 (EQA 1974) for allowing practices by their companies that are harmful towards the environment, unless such director can prove that the offence was committed without his consent or connivance, and that he had exercised all such diligence to prevent the commission of the offence.25 In specific relation to climate change, the EQA 1974 and certain regulations made under it generally prohibit the emission of environmentally hazardous substances into different areas of the environment above prescribed limits. For example, the Environmental Quality (Prohibition on the Use of Chlorofluorocarbons and Other Gases as Propellants and Blowing Agents) Order 1993 was introduced under the EQA 1974 pursuant to Malaysia’s ratification of the Montreal Protocol26 to prohibit the use of controlled substances such as chlorofluorocarbons, one of the primary greenhouse gases contributing to climate change.
Additional provisions for regulated financial institutions
The Joint Committee on Climate Change (JC3) was formed on 27 September 2019 by both the Central Bank of Malaysia (Bank Negara Malaysia or BNM) and the Securities Commission Malaysia (SC) with the intention of pursuing collaborative actions for building climate resilience in Malaysia whilst being guided by three (3) principal mandates, one of which is to build capacity through the sharing of knowledge, expertise, and best practices in assessing and managing climate-related risks.27
On 30 April 2021, the BNM issued the Climate Change and Principle-based Taxonomy guidance document (BNM Taxonomy Guidance Document),2829 prepared in collaboration with the Risk Management sub-committee30 of the JC3, in which it acknowledged that climate change has significant impacts on the society, economy, and financial system.31 Specifically, BNM noted that this impact would manifest in three (3) dimensions of risk, namely physical risk (damaged property, reduced productivity and disrupted trade), transition risk (changes in legislative and regulatory framework, shift in consumer and investor behaviour) and liability risk (legal risk and claims on damages and losses).32
The BNM Taxonomy Guidance Document provides that it is imperative that financial institutions integrate climate change considerations into all aspects of their business strategies,33 and also recognises that financial institutions play a pivotal role in accelerating their customers’ transition towards more sustainable practices in their business operations.34 Furthermore, the BNM Taxonomy Guidance Document provides that a consistent and systematic classification of economic activities can facilitate and promote the channelling of financial flows to activities that support climate change and environmental objectives, and further classifies35 economic activities into three (3) broad categories of “Climate Supporting”, “Transitioning”, and “Watchlist” which are structured around five (5) guiding principles:36 (i) “climate change mitigation”; (ii) “climate change adaptation”; (iii) “no significant harm to the environment”; (iv) “remedial measures to transition”; and (v) “prohibited activities”.37
On 30 November 2022, BNM published a policy document and supplemental guidance on climate risk management and scenario analysis for financial institutions (the BNM Climate Risk Policy Document).38 The BNM Climate Risk Policy Document requires that: (i) the board and senior management of financial institutions should have overall responsibility and effective oversight over climate change-related risks to safeguard the financial institution’s resilience against climate change, including appointing a dedicated Chief Sustainability Officer to oversee the effective management of climate-related risks or expanding the current responsibilities of an existing senior management officer for this purpose;39 (ii) the board and management should ensure that they have a sound understanding of climate-related risks to inform the financial institution’s business and risk management strategies;40 (iii) climate-related risks should be incorporated and embedded into, amongst others, the financial institution’s business strategies and risk appetite frameworks;41 (iv) financial institutions to continuously develop data capabilities, tools and methodologies to effectively aggregate and report material climate-related risks;42 (v) financial institutions to actively monitor and escalate material and potential climate-related risks in a timely manner;43 (vi) financial institutions to understand the transmission and impact of climate-related risks on existing risk types such as credit and liquidity risks and ensure their risk management systems account for material climate-related risks; 44 (vii) financial institutions should conduct scenario analysis to determine the resilience of their business strategies to material climate-related risks;45 and (viii) financial institutions should disclose climate-related risks.46 The BNM Climate Risk Policy Document applies both at the entity level (including overseas branch operations) and consolidated level (including both financial and non-financial subsidiaries) of financial institutions.47 The BNM will monitor compliance with the BNM Climate Risk Policy Document as part of its supervisory process.48
Directors in the financial industry are therefore expressly encouraged to consider the impact of climate change in their decision-making processes; this is reflected in the requirements in the BNM Climate Risk Policy Document. More importantly, the BNM Taxonomy Guidance Document and the BNM Climate Risk Policy Document will definitely have an effect on the profile of industries that financial institutions are prepared to lend to, and will see a trickle-down effect to the wider economy by encouraging (and later, effectively compelling) a shift in funding and investments towards businesses with satisfactory environmental and sustainability practices and governance. Directors of non-financial companies would therefore also do well to incorporate such practices in their companies’ daily operations.
Directors' Disclosure Obligations and Climate Change
There are a number of disclosure requirements and initiatives specific to PLCs that need to be considered by the directors of those entities.
Chapter 9 of the Main Market Listing Requirements (updated as of 1 March 2021) issued by Bursa Malaysia Securities provides that a PLC needs to include a narrative statement of its management of material economic, environmental and social risks and opportunities (Sustainability Statement), in the manner prescribed by Bursa Malaysia Securities, in its annual report.49
On 26 September 2022, Bursa Malaysia issued amendments to the Main Market Listing Requirements and ACE Market Listing Requirements to increase the sustainability practices and disclosures of listed issuers.50 These new requirements: (i) require disclosure of prescribed sustainability matters51 and indicators that are deemed material for listed issuers across all sectors;52 (ii) introduce climate change related disclosures in line with the recommendations of the TCFD;53 (iii) require disclosure of prescribed sustainability matters and indicators that are deemed material for listed issuers in specified sectors;54 (iv) introduce enhanced disclosure requirements of the companies’ quantitative information on material sustainability matters;55 and (v) require a statement on whether the Sustainability Statement (as defined above) has been internally reviewed and independently assured, and if so, the scope covered by the review or assurance.56 These requirements apply to Sustainability Statements issued either for the financial year ending on or after 31 December 2023 (or on or after 31 December 2024).57
In addition, Chapter 15 of the Main Market Listing Requirements58 (updated as at 31 December 2022) issued by Bursa Malaysia Securities Berhad59 (Bursa Malaysia Securities) imposes a requirement on PLCs to ensure that their directors provide an overview of the application of the principles set out under the MCCG in the annual report of the PLCs.60 Furthermore, the PLCs would need to disclose the application of each of the “practices” set out under the MCCG, i.e. action items that PLCs are expected to adopt to achieve a specific outcome, during the financial year, to Bursa Malaysia Securities in the prescribed format and announce the same together with the announcement of its annual report.61 As mentioned in the preceding section, the MCCG provides that directors should ensure that the strategic plan of the company includes environmental considerations.
Bursa Malaysia has made a number of indications as to its commitment to sustainability. In its 2020 Sustainability Report, Bursa Malaysia stated that it became an official supporter of the recommendations of the TCFD in 2018.62 Furthermore, it had in 2020 joined the United Nations Sustainable Stock Exchanges Initiative Advisory Group on Climate Disclosure, a new workstream launched in 2020 that aims to support exchanges in developing best practice guidance for issuers on climate-related disclosures,63 and also organised a ‘Sustainability Thematic Workshop on Climate Change: Practical Steps in Measuring and Managing Greenhouse Gas (GHG) Emissions’, aimed at providing guidance to PLCs on measuring and managing GHG emissions using widely-recognised frameworks and standards.64 Bursa Malaysia has also previously launched the FTSE4Good Bursa Malaysia Index (F4GBM Index) on 22 December 2014.65 To be included in the index, companies need to meet a variety of ESG inclusion criteria.66 The PLCs included in the F4GBM Index are listed publicly on the official website of Bursa Malaysia67 and are able to increase their profile and exposure,68 whilst attracting investors who want to incorporate ESG elements into their investment decisions.69 Assessments are based on publicly-available data sources and therefore PLCs are encouraged to ensure that high quality data and information are provided publicly on their practices.70
Additional provisions for regulated financial institutions
The BNM Climate Risk Policy Document requires financial institutions to establish a board-level policy on climate disclosures, and make annual climate-related disclosures in line with TCFD requirements, to be published together with the annual financial reports for financial years beginning on or after 1 January 2024.71
Furthermore, financial institutions are required to separately address specific areas in the annual disclosures, including governance around climate-related risks and opportunities and actual and potential impact of climate-related risks and opportunities on business, strategy and financial planning.
In June 2022, the JC3 issued a TCFD-aligned application guide for disclosures on climate-related risks by financial institutions (TCFD Climate Disclosures Application Guide), which includes guidance on “Basic” and more sophisticated “Stretch” disclosures which the JC3 expects of financial institutions.72The appendices to the BNM Climate Risk Policy Document provide the description of the disclosures aligned to the “Basic” and “Stretch” recommendations outlined in the TCFD Climate Disclosures Application Guide.
Malaysia’s Financial Sector Blueprint 2022-2026 states that biodiversity is equally important as climate. 75The Twelfth Malaysia Plan cites biodiversity loss as a key issue requiring urgent attention, and aims to reduce dependency on natural resources and maintain at least 50% forest cover.76 Malaysia has at least 40 environment-related acts covering everything from terrestrial to marine to pollution and urbanisation.77While there are no specific environmental protections in the Federal Constitution, Article 5 provides for the right to life and liberty which has been interpreted by a court to include the right to live in a reasonably healthy environment.78 BNM’s assessment of nature-related financial risks for the Malaysian banking sector found that many of Malaysia’s economic activities are directly or indirectly dependent on nature and the degradation of biodiversity and ecosystems could lead to physical and transition risks that could transmit through the economy. About 54% of Malaysian banks’ commercial lending portfolio could currently be exposed to physical risk and about 87% of Malaysian banks’ commercial lending portfolio could currently be exposed to sectors that strongly impact ecosystem services, thus facing a higher level of transition risk.79 The Governor of BNM said that the economic threat posed by nature-related risks cannot be ignored.80 The Climate Change and Principles based Taxonomy adopted for the financial sector in Malaysia adopts a “do no harm” approach, requiring economic activities to protect ecosystems and biodiversity.81 Malaysia’s Platform for Business and Biodiversity pledged to introduce mandatory requirements for businesses to disclose their dependencies and impacts on biodiversity.82 In light of these policy and regulatory developments, directors may wish to begin considering biodiversity risk in order to ensure that they are fulfilling their legal duties and disclosure responsibilities. |
Practical considerations for directors
Given the increasing focus of Malaysian capital market and financial regulators on climate change and sustainability issues, including an increased emphasis on climate-related risk management; the potential for increased mandatory obligations on climate-related disclosures; and the potential for legislation requiring nationwide reductions in greenhouse gases, well-counselled directors of Malaysian companies, and in particular directors of financial institutions, should:
- delegate climate risk identification and evaluation to a clearly identified team in management which reports directly to the CEO and board;
- put on the agenda for the board within 3 to 6 months a process to start developing a climate transition roadmap to 2050 with transparent carbon neutrality or reduction targets, with clear interim targets for 2040, 2030, and within the current rolling multi-year strategic plan, and periodically thereafter report back to the board;
- delegate to the appropriate committee(s) of the board, such as risk, audit, legal and governance, scenarios / strategy, nominations / remuneration, or sustainability / corporate responsibility, the task of translating the long-term strategy into a clear decision-making process for each aspect that is relevant to each committee; and
- discuss disclosure obligations and best practice with appropriate counsel and subject experts, in order to develop an external engagement and communications plan.
Contributors:
- To’ Puan Janet Looi, SKRINE Malaysia
- Francine Ariel Paul, SKRINE Malaysia
- Bar Council Environment & Climate Change Committee
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