In Malaysia's dynamic business landscape, Start-ups and Small-Medium Enterprises (SMEs) continue to be pivotal contributors to the nation's economic growth. As responsible and sustainable business practices become increasingly relevant to business of all sizes big and small, understanding how ESG trends will impact early-stage fundraising within the context of Malaysian laws is crucial for both entrepreneurs and venture capitalists.
In this article, we explore the increasing relevance of ESG factors on early-stage fundraising, focusing on the alignment of their businesses with the existing Malaysian regulatory frameworks and expectations of various stakeholders.
- The Evolution of ESG in the Malaysian Business Environment
Over recent years, Malaysia has witnessed a growing emphasis on ESG factors, spearheaded by large businesses and publicly listed companies. As the world moves its focus towards sustainability, all Malaysian companies, including start-ups and SMEs, will now need to respond to the resounding call for responsible business practices to go beyond just financial profitability.
Start-ups and SMEs, although typically associated with disruption, innovation and agility, once being given a free pass from ESG considerations due to their smaller size, footprint and reach, are now also being placed under the ESG microscope.
- ESG Integration into Investment Decisions
1. Investor Expectations
Venture capitalists, family offices and financial institutions, both locally and globally, are increasingly factoring ESG considerations into their investment decisions. They recognize that businesses that earnestly address ESG issues not only mitigate risks but are also well positioned to seize opportunities for growth.
Start-ups and SMEs that design their business model, growth plans and align their operations with ESG principles can certainly stand out from the crowd to attract investors who share these same values and investment criteria. On the other hand, businesses that ignore ESG considerations can quickly find themselves being turned away or labelled 'un-investable' by investors for those reasons.
Example: Impact investors in Malaysia such as Khazanah Nasional's Future Malaysia Programme, an initiative under its Dana Impak mandate, which prioritizes investments in businesses that generate both financial returns and positive social and environmental impacts.
2. Impact Investing
Malaysian investors, both institutional and individuals, are showing interest in impact investing – investing in companies that generate positive environmental or social impact alongside financial returns. In their search for investable businesses, identifying and quantifying of ESG-related risks have become equally or sometimes even more important than financial performance and financial returns alone.
ESG-related risks such as polluting the environment, poor labour practices and human rights violations, and the absence of proper corporate governance frameworks or policies, are now at the forefront of due diligence exercises before such investments are made. Investors now want demonstrable assurance that their investments are resilient against ESG-related risks and challenges.
- ESG Opportunities for Malaysian Start-Ups and SMEs
1. Greater Access to Capital
Companies that prioritize ESG or incorporate credible ESG plans into their businesses can benefit from having better access to diverse sources of funding, including impact investors, sustainable funds, and corporate venture capital. Even traditional financial institutions and banks are now providing 'green financing' at affordable interest rates to businesses that have implemented ESG-related initiatives that positively impact the overall environment and social community, measured by on non-financial benchmarks.
These investors are more likely to provide 'patient capital' (i.e long-term investment, in the form of debt or equity, where sustainable growth is prioritised), which can be vital during the early stages of a business that may not have a long enough financial track record.
Example: The Malaysian Government (through the Malaysian Green Technology and Climate Change Corporation) has allocated funds for sustainable development projects through the renewal of the Green Technology Financing Scheme (GTFS) and a fresh allocation of MYR1 billion, which aims to support Malaysian companies with ESG-focused technologies or initiatives.
2. Competitive Edge
ESG initiatives can differentiate start-ups and SMEs in crowded markets. Sustainable and ethical practices can appeal to conscious consumers and provide a competitive advantage. As an example, the organic food industry in Malaysia has witnessed the success of start-ups that prioritize sustainable agriculture and ethical sourcing, capturing a market niche based on ESG principles.
3. Talent Attraction and Retention
ESG-aligned companies tend to attract top talent who are motivated by a sense of purpose. Building a diverse, inclusive, and responsible workplace can be a key asset for recruitment and retention efforts. Malaysia has seen a growing trend of start-ups emphasizing gender diversity and equal pay which then correlates to their ability in attracting a diverse talent pool, enhancing innovation and corporate reputation.
- Integrating ESG into Fundraising Strategy
1. Be Prepared for ESG Due Diligence
ESG due diligence is a systematic process used by investors, businesses, and other stakeholders to assess and evaluate the environmental, social, and governance factors associated with a company or investment. Some of these ESG factors are in fact already governed by existing laws and regulations in Malaysia, while other ESG factors are not specifically regulated by law per se.
Here is a short breakdown of what ESG due diligence and their corresponding Malaysian laws (if applicable) can entail:
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Environmental (E): |
Relevant Malaysian Laws |
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Climate Risks: Evaluating a company's exposure to climate change risks, such as physical risks (e.g., extreme weather events) and transition risks (e.g., regulatory changes related to carbon emissions). |
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Resource Efficiency: Assessing how efficiently a company uses natural resources and manages waste, including water, energy, and raw materials. |
None |
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Biodiversity and Conservation: Examining a company's impact on biodiversity and ecosystems, especially for businesses operating in ecologically sensitive areas. |
None |
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Social (S): |
Relevant Malaysian Laws |
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Labor Practices: Evaluating how a company treats its employees, including issues related to worker safety, fair wages, and diversity and inclusion. |
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Community Impact: Assessing a company's impact on the communities in which it operates, including factors like community engagement, philanthropy, and the mitigation of negative social impacts. |
None |
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Human Rights: Examining how a company respects and supports human rights, both within its operations and across its supply chain. |
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Governance (G): |
Relevant Malaysian Laws |
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Corporate Governance: Assessing the company's board structure, executive compensation, shareholder rights, and overall governance practices. |
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Ethical Behaviour: Evaluating the company's commitment to ethical conduct, transparency, and accountability. |
Malaysian Code on Corporate Governance (MCCG) |
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Risk Management: Examining the company's approach to identifying and managing risks, including financial and non-financial risks. |
None |
2. Transparency and Reporting
Transparent ESG reporting demonstrates a commitment to accountability. Startups and SMEs that are serious about sustainable growth should consider adopting internationally recognized frameworks such as the Global Reporting Initiative (GRI) or Sustainability Accounting Standards Board (SASB) standards, which are widely used by companies globally to quantify and measure their impact in non-financial areas.
Having properly documented ESG related frameworks, written policies and processes even at the early stages, will help Startups and SMEs demonstrate their commitment (or at the very least, awareness) to investors and other stakeholders of ESG compliance.
Some examples of common ESG-related policies include:
- Environmental protection & sustainability policy
- Diversity and inclusion policy
- Risk management policy
- Anti-sexual harassment policy
- Personal data protection policy
- Anti-corruption and Whistleblowing policy
Essentially, these will set a strong foundation and build discipline for when the company eventually qualifies for fundraising from the public markets (ie IPO). At that stage, such companies will be legally obligated to conduct sustainability reporting and disclosures under the Bursa Malaysia Listing Requirements and Malaysian Code on Corporate Governance (MCCG).
2. Stakeholder Engagement & Communication
Engaging with stakeholders, including employees, customers, and local communities, can help build a comprehensive ESG strategy. Their input can provide valuable insights and enhance the authenticity of a company's ESG initiatives. Setting the 'tone from the top' by top management regularly communicating with stakeholders about the various ESG initiatives, policies and reporting being done by the business will also build ESG-focused culture and mindset.
ESG considerations are becoming integral to the Malaysian business and regulatory landscape as seen through the Malaysian government's commitment to various international treaties and conventions. The notable ones include the United Nations Sustainable Development Goals (UN SDGs), which has led to regulatory developments aimed at aligning business practices with these global goals. Once Malaysia has ratified these international agreements, changes to its domestic legislation will inevitably follow suit.
Therefore, embracing ESG principles isn't just a moral imperative; it's a strategic necessity for securing capital, building a resilient business, complying with legal obligations and thriving in an increasingly responsible and sustainable world.
As a starting point, by documenting and adopting selected ESG-related policies into their organizations, Malaysian Start-ups and SMEs can quickly position themselves to seize opportunities and thrive in a business environment where ESG is no longer a trend but a fundamental driver of success.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
