Companies are increasingly held accountable for the ethical and sustainable practices of their supply chains. As Environmental, Social and Governance (ESG) considerations become central to business operations, due diligence in supply chain management is not only a corporate responsibility but also a legal and strategic necessity. The urgency of robust supply chain management has been underscored by recent allegations of labour exploitation in Malaysia’s electronics sector, emphasizing the critical need for businesses to prioritize ESG compliance.
ESG compliance involves meeting regulations and standards governing environmental stewardship, social responsibility and governance practices. Compliance ensures transparency, mitigating risk and preventing issues like greenwashing and social washing.
Due Diligence in Supply Chain Management
Supply chain due diligence involves the process of identifying, preventing, mitigating and addressing adverse ESG impacts linked to a company’s operations, supply chain or business relationships. Beyond risk management, it demonstrates a company’s commitment to ethical practices, environmental preservation and protecting workers’ rights across its value chain.
In Malaysia, challenges such as labour exploitation, environmental degradation and weak governance in supply chains have become critical concerns. Companies that fail to perform adequate due diligence may expose themselves to legal penalties, reputational damage and even disruptions to their business operations. International scrutiny, such as bans on products linked to labour violations, can result in costly recalls, diminished investor confidence and loss of market opportunities.
Malaysia Legal Framework & Guideline in Supporting ESG Due Diligence in Supply Chain Management
Malaysia’s legal landscape and guidelines provides a foundation for businesses to embed ESG due diligence practices within their supply chains. The key laws and regulations include:
1. Employment Act 1955 (Revised 1981) (Act 265)
Act 265 is the cornerstone piece of labour legislation that outlines the minimum standards and protections for employees. It regulates the relationship between employers and employees, ensuring fair treatment, equitable compensation and protection of workers’ rights. The Act prescribes legal standards for employment contracts, working hours, leave entitlements and termination procedures. The Act is the foundation for protecting workers’ rights and ensuring ethical practices in supply chains, making it a critical aspect of ESG compliance in Malaysia.
2. Anti-Trafficking in Persons and Anti-Smuggling of Migrants Act 2007 (Act 670)
Act 670 (ATIPSOM) aimed at combating human trafficking and migrant smuggling. It imposes stringent penalties for violations and mandates protective measures for victims. For companies, compliance with ATIPSOM is essential for ESG due diligence in supply chain management, ensuring prevention of exploitation, the protection of workers’ rights and the promotion of ethical business operations and practices.
3. Employees’ Minimum Standards of Housing, Accommodations and Amenities Act 1990 (Act 446)
The latest amendment to Act 446 that took effect on 1 June 2020 mandates that workers are provided with adequate housing and essential amenities that complies with the minimum standards required under the Act emphasizing the importance of maintaining their dignity and well-being. It aims to safeguard worker welfare and uphold ethical practices in employment. Companies are required to ensure that workers are afforded safe, healthy and decent living and working conditions. A safe and healthy workplace environment is equally vital to prevent work-related accidents, injuries and illnesses, aligning with ESG principles and responsible business conduct.
4. Occupational Safety and Health Act 1994 (Act 514)
Act 514 (OSHA) provides the legal framework for workplace safety and health standards, mandating employers to maintain safe working environments, conduct risk assessments and provide training to mitigate occupational hazards. The 2024 amendments to OSHA introduce additional obligations and safeguards aimed at further enhancing workplace safety and compliance. For a detailed overview of these amendments, please refer to our article: Overview of Key Amendments to Occupational Safety and Health Act 1994.
5. National Wages Consultative Council Act 2011 (Act 732)
This Act governs the establishment, implementation and enforcement of minimum wages across various sectors. It empowers the council to regulate and periodically review minimum wage levels, ensuring fair compensation for workers and addressing income disparities within the workforce. By prioritizing wage compliance in supply chain due diligence, companies can demonstrate their commitment to social responsibility and governance, while contributing to sustainable economic development.
6.Passports Act 1966 (Revised 1974) (Act 150)
The Act governs the issuance, possession and handling of passports and travel documents. While primarily focused on immigration and travel, it holds significant relevance for ESG compliance and supply chain management by addressing issues such as passport retention—a common indicator of forced labour and worker exploitation. Under the Act, ccompanies are prohibited from retaining the workers’ passports. Withholding such personal documentation, thereby restricting workers’ access or creating a perception that they cannot leave their employment without risking the loss of their passports, constitutes a violation. Adherence to this legislation is essential for ensuring ethical labour practices and preventing exploitation within supply chains.
7. Environmental Quality Act 1974 (Act 127)
Act 127 (EQA) establishes the legal framework for environmental compliance across Malaysia. It is supplemented by subsidiary legislation, including environmental orders, rules and regulations, which provide comprehensive provisions governing specific environmental areas such as air quality, noise pollution, waste management and water resources. The 2024 amendments to Act 127 entail more stringent measures to control environmental pollution, such as stricter penalties and expanded enforcement powers of the relevant authorities. Adherence to the EQA and its subsidiary legislation is therefore essential for ensuring compliance with environmental standards and promoting sustainable practices.
8. Simplified ESG Disclosure Guide (SEDG)
SEDG is an initiative by Capital Markets Malaysia (CMM), an affiliate of the Securities Commission Malaysia (SC), designed to assist small and medium-sized enterprises (SMEs) in meeting ESG disclosure requirement. By consolidating commonly required ESG disclosures, SEDG provides a streamlined framework to enhance data transparency and availability, facilitating alignment with global standards.
By adopting the SEDG, Malaysian SMEs can improve the availability and transparency of ESG data, thereby strengthening their positions within global supply chains and contributing to sustainable economic development. The guide also serves as a valuable resource for larger corporations seeking to assess and enhance ESG compliance within their supply chains, ensuring alignment with international standards and local requirements.
Global Trends in Supply Chain Due Diligence and Their Implications for Malaysia
There has been a growing focus on human rights abuses by corporations within their supply chains, including issues like forced labour, human trafficking and modern slavery. These problems have been found in various industries. Companies must also align with international guidelines such as: –
1. European Union’s Corporate Sustainability Due Diligence Directive (CSDDD)
This CSDDD imposes stringent obligations on companies operating within or trading with the EU. These obligations include identifying, preventing, and mitigating adverse ESG impacts throughout supply chains. Malaysian companies which exporting to the EU must ensure compliance with these requirements to maintain market access, uphold business continuity and avoid potential sanctions.
2. German Supply Chain Due Diligence Act (LkSG)
This legislation mandates companies in Germany to conduct robust due diligence across their supply chains to addresses various human rights risks. These risks are defined as situations where there is a significant likelihood, based on factual evidence, of violating specific prohibitions outlined by the Act. Organizations are obligated to monitor and address such violations not only within their own operations but also in the operations of their direct suppliers and customers. This obligation extends to all stages of the supply chain, from the extraction of raw materials to the delivery of goods, whether these activities occur within Germany or abroad.
For Malaysian companies, this means adhering to stricter ESG standards to maintain their business relationships with EU-based companies. Comprehensive due diligence must be undertaken to ensure that labour practices, environmental sustainability, and governance standards align with EU requirements. Non-compliance may lead to termination of contracts with EU partners, as European procurers are likely to favour suppliers who present minimal ESG risks.
Conclusion
As ESG considerations increasingly shape the global business landscape, Malaysia has taken proactive steps to establish a robust framework that supports due diligence in supply chain management. Through a combination of legal mandates and practical resources like SEDG, businesses are empowered to meet the evolving expectations of stakeholders, align with international standards, and promote ethical and sustainable practices.
Effective due diligence not only helps companies comply with regulatory requirements but also enhances their competitiveness within global supply chains, mitigates reputational risks, and fosters trust with stakeholders. Prioritizing ESG compliance and embedding due diligence into their supply chain strategies will enable Malaysian businesses to contribute to a sustainable and equitable future while securing long-term value and global market relevance.
About the author
Janice Ooi Jia Ming
Senior Associate
ESG Practice Group
Halim Hong & Quek
jmooi@hhq.com.my
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