ESG & Supply Chain Management: Key Risks And Considerations For Malaysian Manufacturers

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Environmental, Social and Governance (ESG) considerations have moved from the margins to the centre of supply chain management, evolving from a voluntary or reputational exercise into a material legal, commercial and transactional risk. Companies are increasingly expected to take responsibility not only for their own operations, but also for the ESG performance of their suppliers, contractors and business partners across the value chain.

For Malaysian manufacturers integrated into global supply chains, particularly those supplying into the European Union (EU), United States (US), United Kingdom (UK) and Japan, this shift has significant legal and commercial implications. ESG compliance is now influencing supplier selection, contract renewals, pricing, access to markets, financing and mergers and acquisitions (M&A) outcomes.

This alert outlines key ESG-driven supply chain risks affecting Malaysian manufacturers, highlights recent enforcement trends, and sets out practical considerations for businesses navigating increasingly complex cross-border ESG expectations.

Heightened ESG Expectations Across Global Supply Chains

Global regulatory developments are placing growing pressure on supply chains, with ESG obligations increasingly flowing downstream to non-EU and non-US suppliers. These obligations increasingly flow downstream through contractual requirements, audits and reporting demands imposed by EU- and US-based customers on non-domestic suppliers.

A key development is the EU Carbon Border Adjustment Mechanism (CBAM), which entered into force on 1.1. 2026. CBAM imposes carbon-related reporting obligations and, ultimately, carbon costs on certain imports into the EU. Malaysian exporters are now required to measure and report greenhouse gas emissions associated with their products, with clear cost and operational implications. Even manufacturers that do not export directly to the EU may be affected where they form part of an upstream supply chain serving EU markets.

Human rights and labour compliance are also under intensified scrutiny. The German Supply Chain Due Diligence Act (2021) and the EU Corporate Sustainability Due Diligence Directive (CSDDD) (2024) require EU-based companies to identify, prevent and address adverse human rights and environmental impacts across their own operations, subsidiaries and supply chains. In practice, this has resulted in EU companies imposing stricter contractual and audit requirements on suppliers in jurisdictions such as Malaysia.

In parallel, the UK Modern Slavery Act 2015 and Japan’s sustainability-focused procurement policies reinforce expectations around ethical labour practices, environmental sustainability and transparency. Failure to meet these standards may result in exclusion from tenders, termination of supply contracts, regulatory scrutiny and reputational damage.

Commercial And Enforcement Consequences Of ESG Failures

Recent enforcement actions demonstrate that ESG non-compliance within supply chains can result in immediate and severe consequences.

Over the last several years, several Malaysian manufacturers have faced contract terminations, import bans and investor scrutiny following allegations of forced labour or poor working conditions. In some cases, access to key export markets was restricted for extended periods, resulting in financial losses, reputational harm and long-term disruption to business relationships, even where remedial measures were later implemented. These developments underscore a critical point: ESG failures at the supplier level can rapidly translate into supply chain disruptions, loss of market access and diminished commercial value. From a buyer’s or investor’s perspective, such risks are increasingly viewed as material and, in some cases, deal-breaking. Notably, these consequences often arose before any regulatory finding of liability and persisted even after remedial steps were taken, underscoring the limited tolerance for ESG risk within global supply chains.

ESG As A Supply Chain And Transactional Risk

ESG considerations now form an integral part of supplier due diligence, contract management and corporate transactions.

From a supply chain perspective, multinational corporations (in the customer role) are increasingly requiring manufacturers to demonstrate (among others) compliance with labour and human rights standards, particularly in relation to migrant workers; environmental compliance, including emissions tracking and waste management; and adequate governance, policies, training and documentation.

From an M&A perspective, ESG has become a key diligence and valuation factor. Acquirers and investors are scrutinising supply chain risks to assess potential regulatory exposure, remediation costs and reputational impact post-acquisition. Weaknesses in ESG controls may result in expanded due diligence scope and timelines, valuation adjustments or pricing pressure, additional representations, warranties or indemnities, or conditional deal structures or aborted transactions. In some transactions, ESG remediation plans and post-completion compliance programmes are now being treated as value-critical conditions rather than integration matters.

As a result, manufacturers with poorly managed ESG risks across their supply chains may face reduced attractiveness as acquisition targets or strategic partners.

Navigating Fragmented ESG Standards Across Markets

One of the key challenges for Malaysian manufacturers is the lack of uniform ESG standards globally. Companies often face higher ESG expectations in markets such as the EU and US, while encountering more flexible approaches in other regions.

Over time, maintaining multiple compliance models may prove more costly and risk-prone than adopting a structured, phased alignment with internationally recognised ESG standards.

Malaysian ESG Frameworks And Transitional Support

Malaysia has begun to introduce frameworks aimed at supporting companies in their ESG transition.

The i-ESG Framework (2023), currently in Phase 1 (2024-2026) aimed at supporting manufacturing companies in beginning their ESG compliance transitions, provides tools for companies to assess ESG readiness, benchmark performance and implement improvements on a phased basis. This approach may be particularly helpful for manufacturers seeking to balance compliance with cost considerations.

The Simplified ESG Disclosure Guide (SEDG) issued by Capital Markets Malaysia offers practical guidance specifically for SMEs in supply chains. Capital Markets Malaysia has also launched sector-specific guides called the SEDG Sector Guides, which include a specific SEDG Sector Guide for the manufacturing industry, and the supplemental Human Rights and Labour Practices Guide, both of which are especially relevant for the manufacturing industry. While compliance is not mandatory, these documents provide a useful reference for identifying key ESG metrics and disclosures increasingly expected by customers and stakeholders.

In addition, the National Sustainability Reporting Framework, launched in September 2024 and to be implemented in phases, seeks to align Malaysian sustainability reporting with International Sustainability Standards Board (ISSB) standards. This framework applies not only to listed companies, but also to large non-listed entities, signalling a broader move towards standardised ESG reporting across the Malaysian market.

While these frameworks are domestic in origin, they can also serve as a practical foundation for responding to overseas customer audits and due diligence requests, particularly where international standards are not expressly mandated.

Practical Considerations For Malaysian Manufacturers

In light of these developments, Malaysian manufacturers should consider:

• conducting internal ESG and supply chain risk assessments, with particular focus on labour practices and environmental compliance;

  
  

• reviewing supplier contracts and codes of conduct to align with key international ESG expectations;

• preparing for increased ESG scrutiny in customer audits, tender processes and M&A due diligence; and

• adopting a phased, scalable ESG compliance strategy rather than reactive, jurisdiction-specific measures.

Early, structured engagement with ESG issues, supported by both in-house and external legal advisers. can help manufacturers move from reactive compliance to strategic risk management, preserving market access, deal value and long-term competitiveness in the global market

11 February 2026