JANUARY 7 — Malaysia is strengthening its sustainability agenda through a national sustainable framework and long-term transition plans. The government has committed to achieving net-zero greenhouse gas emissions by 2050 and raising the share of renewable energy to 70 per cent.
These commitments have accelerated the adoption of environmental, social, and governance (ESG) practices among listed companies, supported by regulators, government agencies, and financial institutions. Increasingly, however, policy attention is shifting beyond large corporations, with policymakers urging small and medium enterprises (SMEs) to play a more active role in the transition to a low-carbon and more resilient economy.
SMEs form the backbone of the Malaysian economy. According to the Department of Statistics Malaysia, 1,101,725 SMEs and MSMEs accounted for 96.9 per cent of all business establishments in 2024. They contributed 39.5 per cent of national GDP (RM652.4 billion), generated RM196.8 billion in exports, and provided nearly half of total employment. Given their economic significance, SME participation in ESG is no longer optional; it is essential.
Encouragingly, ESG adoption among SMEs is gaining traction. The Alliance Bank ESG 2.0 report shows that 32 per centof SMEs are full adopters, integrating ESG into core business operations, while 28% are partial adopters. This represents a marked improvement from ESG 1.0, where only 12 per cent were full adopters and 16 per cent partial adopters. Despite this progress, significant challenges remain in encouraging more SMEs to transition from partial or non-adoption to comprehensive ESG integration.
Closing this gap is thus critical to ensuring that ESG adoption extends beyond early movers.
ESG compliance challenges among SMEs
Interviews with SMEs highlight a complex set of financial, technical, and institutional barriers that constrain formal ESG adoption. These challenges are most acute among micro and small enterprises, particularly those operating outside the supply chains of large corporations or export-oriented sectors. The absence of mandatory rules and market pressure often leads ESG to be viewed as a non-essential burden rather than a strategic priority, causing firms to adopt a cautious “wait-and-see” approach.
Many micro and small SMEs continue to operate in “survival mode,” especially in the post-COVID period. Their top priority remains on maintaining cash flows, securing sales, meeting delivery commitments, and managing rising costs related to labour, compliance, and inputs. Within these challenges, ESG implementation is frequently perceived as a discretionary expense. Consultancy and compliance costs can absorb a substantial share of annual profits, making ESG integration difficult to justify without clear and immediate commercial returns.
Furthermore, intense competition and thin margins aggravate these constraints. ESG-related measures, such as sustainable inputs or eco-friendly packaging, often raise production costs, undermining price competitiveness in highly price-sensitive markets. As a result, for many non-adopters, ESG remains an aspirational rather than a commercially viable concept.
Government support for ESG adoption, while well-intentioned, can be difficult for SMEs to navigate. Grants and incentives are often dispersed across multiple agencies, lack coordination, and are not always clearly communicated. Eligibility criteria may also exclude smaller businesses, while approved funding may be insufficient to support meaningful ESG initiatives. As a result, many SMEs view ESG-related programmes as administratively burdensome and instead prioritise immediate operational needs and business growth.
In addition, SMEs face substantial difficulties in meeting ESG data collection and reporting requirements due to limited capacity and information overload. Many SMEs lack the workforce, technical expertise, and formal documentation systems needed to generate the extensive evidence required for compliance, despite already engaging in informal good practices that remain undocumented. Data collection is frequently carried out using manual and unsophisticated methods, such as basic spreadsheets, rather than structured software systems or integrated dashboards.
The proliferation of ESG guidelines and disclosure frameworks worsens this challenge. Even simplified guidelines are often perceived as rigid and not adequately calibrated to SME operating realities, making it difficult for firms to translate their activities into required disclosures. Navigating technical jargon, lengthy reporting templates, and overlapping requirements across multiple standards and lender-specific criteria can contribute to confusion and fatigue.
Breaking the ESG barriers
Despite these challenges, ESG adoption should not be viewed solely as a compliance obligation. For SMEs, ESG can deliver tangible business benefits when approached pragmatically. ESG adopters often experience cost savings through improved energy efficiency, better waste management, and more disciplined operational processes. Strong governance practices can enhance internal controls and decision-making, while sustainability initiatives can improve business resilience as operating costs, regulations, and customer expectations continue to evolve.
To help SMEs overcome ESG barriers, policymakers should simplify the approach, making it more practical and accessible. Instead of complex, jargon-heavy frameworks, SMEs require user-friendly, tiered guidelines that reflect firm size and capability. Ready-made templates, digital dashboards, and short educational materials can reduce reliance on costly consultants.
Support mechanisms must also align with SME cash-flow realities. Upfront investments in green initiatives are often unrealistic for small firms. More flexible incentive structures that allow businesses to realise cost savings before committing significant resources would help lower adoption barriers, especially for small firms.
At the institutional level, a single, centralised platform for ESG grants and incentives would reduce confusion and improve accessibility. Hands-on technical support, provided through advisors or ESG “troubleshooters,” could help SMEs translate sustainability concepts into actionable steps. Market-driven collaboration also plays a crucial role. Large corporations can support ESG-ready SMEs through vendor development programmes, while collective approaches, such as SME cooperatives, can help smaller firms share costs and access larger opportunities.
Ultimately, framing ESG in terms of cost savings, operational efficiency, and business resilience, rather than abstract sustainability goals, is key to making ESG adoption commercially meaningful for SMEs.
*Associate Professor Dr Rozaimah Zainudin is an Associate Professor at the Department of Finance, Faculty of Business and Economics, Universiti Malaya and Associate Professor Dr Karren Lee-Hwei Khaw is an Associate Professor at the School of Business, Monash University (Malaysia).
***This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.
