KUCHING: Malaysia’s Small and Medium-size Entreprises (SMEs) are adopting the Environmental, Social and Governance (ESG) framework in greater numbers, but many still take a wait-and-see approach.
Universiti Malaya’s Department of Finance, Faculty of Business and Economics Associate Professor, Dr Rozaimah Zainudin, and Monash University (Malaysia) School of Business Associate Professor, Dr Karren Lee-Hwei Khaw, said SMEs are central to ESG adoption because they account for most business activity.
“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,” they said.
They noted that the uptake figures show improvement, but a sizable share of firms is still not embedding ESG into core operations.
“The Alliance Bank ESG 2.0 report shows that 32 per cent of SMEs are full adopters, integrating ESG into core business operations, while 28 per cent 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.”
They said the toughest obstacles are concentrated among micro and small firms, especially those not pulled along by export requirements or large-corporate supply chains.
“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,” they added.
“Many micro and small SMEs continue to operate in ‘survival mode’, especially in the post COVID-19 period. Their top priority remains on maintaining cash flows, securing sales, meeting delivery commitments and managing rising costs related to labour, compliance and inputs.”
They further said the cost side remains the clearest brake, particularly when firms cannot see near-term returns.
“Consultancy and compliance costs can absorb a substantial share of annual profits, making ESG integration difficult to justify without clear and immediate commercial returns. As a result, for many non-adopters, ESG remains an aspirational rather than a commercially viable concept,” they opined.
They stressed that support schemes can be hard for SMEs to access and act on, even when assistance is available.
“Government support for ESG adoption, while well-intentioned, can be difficult for SMEs to navigate. As a result, many SMEs view ESG-related programmes as administratively burdensome and instead prioritise immediate operational needs and business growth,” they elaborated.
They pointed out that reporting demands often outstrip SME capacity, with basic systems and overlapping requirements adding friction.
“Data collection is frequently carried out using manual and unsophisticated methods, such as basic spreadsheets, rather than structured software systems or integrated dashboards,” they said.
“Navigating technical jargon, lengthy reporting templates and overlapping requirements across multiple standards and lender-specific criteria can contribute to confusion and fatigue.”
They said the business case is clearer when ESG is tied to operational discipline rather than treated as a separate compliance track.
“Despite these challenges, ESG adoption should not be viewed solely as a compliance obligation,” they stressef.
“ESG adopters often experience cost savings through improved energy efficiency, better waste management and more disciplined operational processes.”
They said the policy priority should be practical simplification, so SMEs can act without needing specialised capacity.
“Instead of complex, jargon-heavy frameworks, SMEs require user-friendly, tiered guidelines that reflect firm size and capability,” they added.
“More flexible incentive structures that allow businesses to realise cost savings before committing significant resources would help lower adoption barriers, especially for small firms.”
They said ESG adoption will spread faster if access to grants is clearer and the message is grounded in commercial outcomes.
“At the institutional level, a single, centralised platform for ESG grants and incentives would reduce confusion and improve accessibility,” they concluded.
“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.”
