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Consistent with global trends, Malaysia’s regulatory landscape has seen increased emphasis on integrating environmental, social and governance (ESG) considerations into regulatory frameworks across sectors including the financial sector, with growing focus on transparency, sustainability and ethical practices.

Bank Negara Malaysia (BNM)

The central bank of Malaysia, the BNM, has issued key policy frameworks and documents aimed at guiding financial institutions in managing climate-related risks and promoting sustainable finance practices, including:

1. 1. Policy document on Climate Risk Management and Scenario Analysis (CRMSA PD). Most recently, on 17 March 2025, the BNM issued the updated CRMSA PD, guiding financial institutions – including licensed banks, investment banks, Islamic banks (both local and international), prescribed development financial institutions, insurers and reinsurers, takaful operators and retakaful operators (sharia-compliant Islamic insurers), as well as financial holding companies – in managing climate-related risks and incorporating sustainable finance practices into their operations. The CRMSA PD introduces 14 principles for managing climate-related risks across six core areas, as follows:

• • 1. Governance: Management and understanding of climate risks, and integrating climate risks into internal controls;
    2. Strategy: Adopting climate risk in business strategies;
    3. Risk appetite: Integrating climate risk in risk appetite and capital assessment;
    4. Risk management: Incorporating climate risk in enterprise-wide risk frameworks; continually developing data capabilities, tools and methodologies for reporting climate risk; comprehensively assessing risks; monitoring and escalating material and potential climate risk; implementing climate risk controls and assessing the impact of climate risk on existing risk types; and ensuring risk management
       systems and processes account for climate risks;
    5. Scenario analysis: Using scenario analysis to assess climate risk resilience and effective scenario analysis for climate risk; and
    6. Disclosure: Providing reliable climate-related disclosures.

1. 2. Climate Change and Principle-based Taxonomy (CCPT). The CCPT issued in 2021 by the BNM was prepared in collaboration with the Joint Committee on Climate Change, with substantial additional input from the World Wide Fund for Nature (Malaysia and Singapore offices), particularly on aspects of environmental sustainability. Like the CRMSA PD, the CCPT applies to the same categories of financial institutions, providing a guiding framework to help them identify and classify economic activities that align with climate change objectives. The CCPT also outlines potential risks climate change poses to the financial system and encourages the redirection of financial resources towards initiatives that support a transition to a low-carbon and climate-resilient economy.

Securities Commission (SC)

The SC has introduced several measures as part of its efforts towards ESG integration, including:

1. 1. National Sustainability Reporting Framework (NSRF). The SC launched the NSRF on 24 September 2024 with the main objective of enhancing the standard of sustainability disclosures in Malaysia. It is being implemented via a phased and developmental approach to support widespread adoption and continuous improvement in the quality of disclosures across different categories of companies. The NSRF addresses the use of the International Financial Reporting Standards’ (IFRS) Sustainability Disclosure Standards issued by the International Sustainability Standards Board – specifically the IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, and IFRS S2 Climate-related Disclosures – as the baseline sustainability disclosure standards for companies, as well as assurance requirements for sustainability reporting.
   2. Principles-based sustainable and responsible investment (SRI) Taxonomy for Malaysia’s capital market (SRI Taxonomy). Issued by the SC in 2022, the SRI Taxonomy guides the Malaysian capital market and its constituents in identifying economic activities aligned with environmental, social and sustainability objectives, providing clarity and guidance for market participants in identifying activities that could qualify for sustainable investments.

The SRI Taxonomy provides qualitative assessment criteria in the classification of economic activities that contribute to the environmental goals on complying with the minimum threshold. Economic activities are classified into three broad categories under the environmental component of the SRI Taxonomy, based on their contribution to its environmental objectives.

Bursa Malaysia

Malaysia’s stock exchange operator introduced the Enhancements to Bursa’s Main Market and ACE Market Listing Requirements in 2022, aiming to elevate the sustainability practices and disclosures of listed issuers.

The enhancement requires listed issuers to include climate change-related disclosures within their annual reports.

More recently, on 23 December 2024, the Bursa announced a subsequent enhancement to encourage the use of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures as the baseline standards for sustainability reporting by listed issuers.

Governance and disputes

While the environmental and social elements of ESG have yet to see significant litigation in Malaysia’s financial sector, the governance pillar has attracted increasing legal and regulatory attention.

Governance in this context refers to accountability, transparency and compliance as core principles in the regulation of financial institutions.

Key statutes such as the Companies Act 2016, Financial Services Act 2013 (FSA), Islamic Financial Services Act 2013 (IFSA), and Central Bank of Malaysia Act 2009 impose strict governance obligations. These include requirements around internal controls, board oversight, disclosure duties and fair treatment of customers.

One prominent area of litigation concerns the duty of confidentiality. Under section 133 of the FSA (and its equivalent under the IFSA), financial institutions must safeguard customer information. Breaches may result in civil suits or regulatory action. In Protasco Bhd v Tey Por Yee & Anor and another appeal [2021], the Federal Court reaffirmed the strict parameters of this duty, with only narrow statutory exceptions.

Another recurring issue is mis-selling and product disclosure failures. Courts and regulators have increasingly scrutinised financial institutions for failing to conduct proper suitability assessments or for providing incomplete risk disclosures.

These obligations are canvassed in BNM’s Policy Document on Fair Treatment of Financial Consumers and the SC’s Guidelines on Sales Practices of Unlisted Capital Market Products. Financial institutions must ensure that products are suitable for the intended investor and clearly explained, or risk exposure to regulatory or civil proceedings.

The increasing complexity of financial services has also driven demand for alternative dispute resolution. The Securities Industry Dispute Resolution Centre (SIDREC), established by the SC (presently known as Financial Markets Ombudsman Service, which operates under the joint purview of the BNM and the SC), has played a crucial role.

From 2011 to 2024, the SIDREC handled more than 3,900 claims and enquiries, with more than 700 qualifying as eligible disputes. In 2024, half of the disputes were resolved through case management or mediation, highlighting the value of efficient and cost-effective resolution.

In parallel, the surge in online banking fraud has triggered legal actions challenging the extent of banks’ responsibilities under the Quincecare duty (a common law principle recognised in Malaysia), thereby testing the application of traditional legal obligations in the face of modern
digital threats.

Governance-related litigation also encompasses compliance with the BNM’s Anti-Money Laundering, Countering Financing of Terrorism, Countering Proliferation Financing and Targeted Financial Sanctions for Financial Institutions Policy Document. Failures in KYC procedures and financial crime reporting can trigger enforcement and reputational damage, reinforcing the importance of effective governance.

Key takeaways

As ESG continues to evolve within Malaysia’s financial sector, the focus will shift from policy adoption to meaningful implementation, measurable impact and accountability.

With regulatory expectations rising and litigation trends emerging – particularly around governance – financial institutions must prepare for closer scrutiny, heightened stakeholder demands, and growing convergence between sustainability and legal compliance.

The future lies in building resilient, transparent and ethically grounded institutions that treat ESG not just as a regulatory obligation, but as a strategic imperative.

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