Carbon pricing and global disclosure rules signal stricter climate compliance for Malaysian firms

MALAYSIA’S path to a low-carbon economy is tightening, with a carbon tax on the horizon and new sustainability reporting rules placing greater pressure on large companies to disclose climate-related financial risks.

Sustainability advisor Dr Ann Marie Sidhu noted that a carbon tax is coming to Malaysia and that its policy is expected to align with the European Union’s Carbon Border Adjustment Mechanism (CBAM), which has now been deferred to 2027.

Malaysia is developing a carbon pricing mechanism, with expectations that companies may eventually be allowed to use carbon credits to offset a portion of their emissions — subject to final policy design.

“One of the expectations there is that companies may be allowed to use carbon credits to reduce their emissions and therefore be taxed on the balance. Only 5% of emissions may be offset, with the tax applied to the remaining 95%, “ she told a webinar hosted by ESGright Sdn Bhd, a boutique training and consulting firm providing ESG advisory services.

Malaysia’s carbon reduction pledge under its Nationally Determined Contributions (NDCs) is a 45% reduction in greenhouse gas (GHG) emissions intensity by 2030. The energy, iron and steel sectors — which form a core part of Malaysia’s manufacturing base — are among those expected to be most impacted, Sidhu said.

At the same time, Malaysian regulators are ramping up sustainability reporting requirements via the National Sustainability Reporting Framework (NSRF), which began rollout in 2024. Large public companies (Group 1), those with a market cap of RM2 billion and above, must begin phased reporting aligned with International Financial Reporting Standards (IFRS) S1 and S2 standards — previously based on the Task Force on Climate-Related Financial Disclosures (TCFD).

Malaysia’s carbon tax will allow limited offsets, says Sidhu (Source: ESGright)

Crucially, companies are being given transitional reliefs. For instance, Scope 3 emissions reporting is deferred for Group 1 companies, while Group 2 and 3 (smaller listed firms and large private companies) have longer timelines. Deadline for Group 2 for full implementation of IFRS S1 and 2 is 2028.

She stated many Malaysian companies are unsure whether to stick with GRI or transition to the more finance-focused IFRS S1/S2, but noted both frameworks are becoming increasingly interoperable.

She explained that Global Reporting Initiative (GRI) focuses on outward impacts — environment, society, human rights — while IFRS are more investor-focused and looks inward at financial risks and opportunities. She remarked that when both pillars are used together, they reflect the “double materiality” approach adopted in the European Union (EU).

The convergence is already underway. GRI Standard 305 on emissions is being mapped to IFRS S2 and the new GRI 102 (climate change), effective January 2027, is expected to be largely equivalent.

Sidhu also flagged another underreported shift: Digital sustainability reporting. Just as Malaysia’s Companies Commission has begun mandating eXtensible Business Reporting Language (XBRL) format for financial statements, she said it’s “only a matter of time” before sustainability data follows suit — replacing traditional portable document format (PDF) reports.

“Internationally, countries are moving towards using XBRL for sustainability reporting…because traditional PDFs are actually quite hard to analyse. If we’re talking about investors and regulators and other stakeholders, comparing maybe 200 reports becomes very problematic,” she said.

“In this case, it’s a really great way of enabling automation and validation and comparability… We’re only introducing this in Malaysia for financial reporting, but it will move eventually to sustainability reporting. And once companies are familiar with it…it will be quite easy for them then to adopt it for sustainability reporting. I think that’s the direction that we are going globally,” she added.

Meanwhile, Malaysia is also considering the adoption of ISSA 5000, a global assurance standard for sustainability disclosures, which Sidhu said would professionalise the assurance process by including accountants and other subject matter experts.