Problem Statement

Despite the growing global emphasis on ESG principles, ESG adoption in Malaysian companies remains in its early stages. As a key factor in responsible decision-making and long-term value creation, ESG is increasingly recognised as essential for organisational sustainability across various industries. Consequently, investors are placing greater importance on ESG considerations when making investment decisions.

In December 2023, Bursa Malaysia launched its ESG Reporting Platform for publicly listed companies on the Main Market and ACE Market. However, these regulatory measures apply only to publicly listed entities, leaving non-publicly listed companies and small businesses outside the compliance framework. While businesses are becoming more aware of the tangible benefits of ESG adoption—including enhanced reputation, stronger stakeholder trust, and alignment with consumer expectations—there remains a pressing need for SMEs to integrate ESG principles into their operations.

This research aims to deepen the understanding of ESG adoption within the C&M industry by analysing comparative ESG Ratings and ESG Disclosure Scores. The study will evaluate key areas of ESG implementation, assess the significance of various ESG investments, and identify challenges and risks associated with ESG adoption. Additionally, it seeks to provide practical insights and strategic recommendations to support businesses, particularly SMEs, in navigating their ESG journey effectively.

Research Objectives

In the broader scope, this research aims to investigate the level of ESG adoption among companies in the C&M industry, focusing on SME businesses, as well as to identify the key challenges and risks associated with ESG adoption and strategies for overcoming them. The specific objectives were as follows:

Literature Review

Stakeholder theory suggests that businesses should consider both short-term financial goals and broader ESG principles (Wang et al., 2020). Stakeholder pressure—whether from governments, NGOs, the public, shareholders, or employees—plays a key role in corporate decision-making and disaster management (Damert & Baumgartner, 2017). Henriques and Sadorsky (1996) found that pressure from customers, regulators, and community groups encourages environmental initiatives. Similarly, Lee et al. (2018) highlighted that both internal and external stakeholder support drive ESG adoption, enhancing corporate legitimacy and sustainability. Cañón-de-Francia and Garcés-Ayerbe (2019) further demonstrated that environmental focus can provide economic benefits.

Decision-making within organisations is often goal-oriented, with stakeholders’ objectives shaping both strategic choices and overall company performance (Chkanikova & Mont, 2015). Traditional economic theories suggest that decisions are driven by knowledge, experience, expectations, and the ability to capitalise on opportunities (Testa, Boiral, & Iraldo, 2018). Several studies highlight the relationship between environmental considerations and corporate decision-making. For instance, Dowell and Muthulingam (2017) found that investors in the United States consider environmental concerns when assessing a company’s social responsibility. Similarly, Narayanan, Baird, and Tay (2021) revealed that environmental concerns significantly influence Australian managers when setting non-economic investment objectives. In Indonesia, Musfialdy (2019) examined mining companies listed on the Indonesia Stock Exchange from 2013 to 2016 and found that nine companies actively incorporated environmental considerations into their investment decisions

Overall, the literature suggests that integrating ESG principles into decision-making aligns with stakeholder expectations and contributes to long-term sustainability and economic benefits. As companies face increasing environmental and social challenges, embedding ESG considerations in corporate strategies is crucial for resilience and maintaining a competitive edge

Challenges and Risks in ESG Implementation

Based on the literature review, the key challenges and risks associated with ESG implementation can be categorised into internal and external factors.

Methodology

In order to achieve the objectives progressively, mixed method research adopted by using questionnaires survey and Focus Group Discussions (FGDs). Details, as follows:

Findings and Analysis

The discussion of findings provides an in-depth analysis of the key insights derived from the study, focusing on the implementation of ESG practices among C&M organisations. This section examines the challenges faced in ESG adoption, the strategic allocation of resources across the ESG pillars, and the frameworks used to measure ESG performance. By integrating descriptive analysis with reliability tests, the discussion explores the varying levels of ESG engagement, particularly between SMEs and larger organisations.

DESCRIPTIVE ANALYSIS

Age of Respondents

Age of Respondents

Figure 2: : Age of Respondents.

Figure 2 illustrate the age distribution of respondents, categorised into four distinct groups: 20 to 30 years, 31 to 40 years, 41 to 50 years, and 51 years and above. Among these, the majority of respondents (37.7 per cent, n=23) fall within the 41–50 years age group, indicating that this category constitutes the largest segment of the sample. The second-largest group consists of respondents aged 51 years and above, accounting for 26.2 per cent (n=16) of the total. This is followed by the 31 to 40 years age group, which comprises 23 per cent (n=14) of the respondents. The smallest proportion of participants is found in the 20 to 30 years age group, representing only 13.1 per cent (n=8) of the sample. Cumulatively, 63.9 per cent of respondents are aged 41 years and above, suggesting a significant concentration of older participants in the sample. This age distribution may have implications for the findings, particularly in relation to any variables that might be influenced by the respondents' age.

Gender

Gender of Respondents

Figure 3: Gender of Respondents.

The gender distribution of the respondents indicates a slightly higher representation of males compared to females as illustrated in Figure 3. Out of the total 61 respondents, 32 individuals (52.5 per cent) are male, while 29 individuals (47.5 per cent) are female. This distribution shows a fairly balanced representation of genders, with a modest predominance of males within the sample.

Type of company registration

Type of company registration

Figure 4: Type of company registration

Figure 4 illustrates the vast majority of respondents, 60 out of 61 (98.4 per cent), represent private limited companies (Sdn. Bhd.), indicating that this is the most common business structure among the sample. Only a small proportion of respondents are affiliated with other types of companies, with 1 respondent (1.7 per cent) representing a public limited company (Berhad).

Does the company have subsidiaries abroad?

Does the company have subsidiaries abroad?

Figure 5: Does the company have subsidiaries abroad?

Figure 5 illustrates the majority of respondents, 54 out of 61 (88.5 per cent), indicated that their companies do not have subsidiaries abroad. Only a small proportion, 7 respondents (11.5 per cent), reported that their companies do have subsidiaries in foreign locations. This distribution underscores that most companies in the sample are domestically focused, with a minority having international operational extensions

Company revenue for the year 2023

Company revenue for the year 2023

Figure 6: Company revenue for the year 2023.

The data on company revenue for 2023 reveals a diverse range of financial performance among the sampled companies as illustrated in Figure 6. Notably, the largest proportion of companies, 31.1 per cent (n=19), reported annual revenues exceeding RM15,000,000. This indicates a significant presence of high-revenue companies within the sample, suggesting that a substantial portion of the businesses operate at a large scale or within high-revenue industries. On the other hand, a considerable number of companies reported revenues within the mid to lower ranges. For instance, 19.7 per cent (n=12) earned between RM1,000,001 and RM5,000,000, 16.4 per cent (n=10) earned between RM300,001 and RM1,000,000 and 13.1 per cent (n=8) earned between RM5,000,001 to RM10,000,000. Together, these three categories represent a significant portion of mid-sized companies, highlighting the diversity in company sizes within the sample. At the lower end of the revenue spectrum, 9.8 per cent (n=6) of companies reported earning less than RM300,000 annually, reflecting a smaller subset of businesses that may be in the early stages of operation or engaged in low-revenue sectors. Similarly, 9.8 per cent (n=6) of companies fell into the RM10,000,001 to RM15,000,000 range, showcasing a smaller group of well-established but not top-tier revenue-generating companies. Cumulatively, 45.9 per cent of companies earned revenues of RM5,000,000 or less, while the remaining 54.1 per cent exceeded this amount. This distribution suggests that while the sample includes a notable number of high-performing companies, there is also a strong representation of mid-sized and smaller enterprises.

Number of employees

Number of employees

Figure 7: Number of employees.

The data on the number of employees within the sampled companies reveals a varied distribution as illustrated in Figure 7, reflecting a mix of small, medium, and larger organisations. The majority of companies, 45.9 per cent (n=28), reported having between 6 to 35 employees, indicating that a significant portion of the sample consists of small to medium-sized enterprises (SMEs). This category dominates the sample, highlighting its importance in the overall business landscape represented. A notable proportion, 18.0 per cent (n=11), are micro-enterprises with 1 to 5 employees, reflecting businesses operating on a smaller scale. These companies may represent startups, family-run businesses, or those in specialised niches. The data also shows representation of companies with 36 to 74 employees (16.4 per cent, n=10) and those with more than 75 employees (19.7 per cent, n=12). These categories reflect medium to larger businesses, with the latter group likely representing more established or resource-intensive operations. Cumulatively, 63.9 per cent of companies reported having 35 or fewer employees, emphasising the predominance of SMEs in the sample. Meanwhile, 36.1 per cent reported having 36 or more employees, signifying a smaller but significant presence of medium to large organisations.

RESEARCH QUESTION 1

This section discusses findings related to the first research question, what are the primary challenges and risks associated with implementing ESG practices? The focus of this analysis is to identify the barriers organisations encounter in adopting ESG principles, with particular attention to the context of SMEs. The discussion explores the unique constraints faced by SMEs, including resource limitations, lack of expertise, and fragmented regulatory environments, which hinder the effective integration of ESG practices into business operations.

Internal and External Factors

SMEs encounter multiple internal and external challenges in adopting ESG practices. Internally, five key factors hinder adoption: awareness, organisational culture, employee engagement, management support, and knowledge/expertise. Externally, SMEs face challenges from competitive pressure, supplier practices, customer expectations, government regulations, and societal expectations. Table 1 outlines these internal and external challenges and their impact on ESG adoption.

	Internal Factors			External Factors
	Variables	Mean	Median	Variables	Mean	Median
ENVIRONMENTAL	Awareness	3.11	3.00	Competitor	2.73	3.00
	Culture	3.41	3.33	Supplier	3.38	3.00
	Employee	3.09	3.00	Customer	2.97	3.00
	Knowledge	2.82	3.00	Government	3.02	3.00
	Support	3.36	3.17	Social Community	2.96	3.00
SOCIAL	Awareness	3.58	3.50	Competitor	2.47	2.50
	Culture	4.01	4.00	Supplier	3.47	3.00
	Employee	4.00	4.17	Customer	3.39	3.25
	Knowledge	3.71	3.83	Government	3.22	3.00
	Support	3.72	4.00	Social Community	2.71	3.00
GOVERNANCE	Awareness	3.90	4.00	Competitor	2.51	2.67
	Culture	4.28	4.50	Supplier	3.58	3.33
	Employee	3.26	3.00	Customer	3.74	3.67
	Knowledge	3.69	4.00	Government	3.31	3.33
	Management Support	3.79	4.00	Social Community	3.29	3.00

Table 1: Primary challenges in implementing ESG practices (internal and external factors).

In summary, Figure 8 shows the primary challenges (internal and external factors) faced by SMEs in adoption of ESG practices in their business.

Environmental

Internal factors

Culture

External factors

Supplier

Social

Internal factors

Employee

External factors

Customer

Governance

Internal factors

Culture

External factors

Customer

Figure 8: The primary challenges (internal and external factors) faced by SMEs in adoption of ESG practices.

The findings align with insights from the FGD, which highlight that awareness and knowledge of ESG practices among workers and companies are steadily increasing. Companies are gradually adopting sustainability initiatives, such as paperless transactions, cloud-based reporting systems, and digital documentation, which reduce operational costs and improve efficiency. This growing awareness suggests that knowledge and awareness are no longer the primary barriers to ESG adoption for SMEs. Instead, the focus should shift toward overcoming structural and cultural challenges within organisations, securing management buy-in, and fostering a work environment that actively encourages ESG integration. While SMEs are making progress in incorporating ESG principles, more structured policies and incentives will be necessary to ensure comprehensive adoption across all levels of business operations.

RESEARCH QUESTION 2

The findings reveal that ESG spending is largely influenced by operational constraints, stakeholder pressures, and regulatory requirements rather than a clear strategic framework. Organisations, particularly SMEs, adopt a reactive approach, prioritise governance for compliance, workforce-related social initiatives, and only minimal environmental investments due to financial and technical limitations.

Governance as the Dominant ESG Pillar

Governance spending is consistently prioritised, especially among private limited companies (Sdn. Bhd.), as it directly aligns with compliance requirements and operational stability. SMEs focus on basic regulatory adherence, while larger firms integrate governance within global ESG frameworks. FGD insights confirm that governance is typically the first ESG component adopted, followed by social and environmental initiatives.

Social Pillar: Workforce-Centric Approach

Organisations emphasise workforce well-being, diversity, and inclusion, with high internal consistency in measuring employee-related metrics (Cronbach's Alpha = 0.955). However, broader societal initiatives, such as community engagement, remain inconsistently addressed, particularly by SMEs. A structured assessment framework, like Social Impact Measurement (SIM), is needed to enhance the effectiveness of social spending.

Environmental Spending: Limited and Cost-Constrained

SMEs allocate minimal resources to environmental initiatives due to high costs and lack of expertise. Investments are mainly in cost-saving measures like energy efficiency rather than sustainability-driven projects. Larger firms, particularly those in global markets, allocate more towards environmental compliance. The FGD highlights SMEs' financial struggles in adopting proper waste management practices, emphasising the need for skilled personnel and financial support to bridge the ESG adoption gap between SMEs and larger corporations.

Governance

Governance: The Dominant Pillar in ESG Spending

1. Governance is the most consistently prioritised ESG pillar.
2. Focus is due to its direct link with compliance and operational stability.
3. Governance spending targets regulatory requirements like:
   • Financial reporting
   • Anti-corruption measures
   • Policy documentation.

Social

Social Pillar: Focus on Workforce-Centric Metrics

Employee well-being, retention, diversity, inclusion, and satisfaction are prioritised for productivity and stakeholder trust.

Environmental

Environmental Spending: Limited and Resource-Constrained

Low Priority: Environmental initiatives receive minimal attention among SMEs.

Barriers: High costs and technical expertise required to adopt.

Larger Companies' Role: Companies with revenues > RM15 million allocate more resources to environmental initiatives, driven by global competitiveness and stakeholder expectations.

SMEs' Challenges: Limited financial and technical capacity

Figure 9: The SMEs allocation of spending towards each ESG pillar.

The rationale guiding ESG spending allocation is shaped by a combination of regulatory requirements, operational priorities, resource availability, and stakeholder expectations. These factors collectively determine the emphasis placed on each ESG pillar and the strategic or reactive nature of resource distribution.

Governance spending is heavily influenced by the need to comply with mandatory regulations, ensuring operational continuity and maintaining stakeholder trust. This compliance-driven approach is particularly pronounced among SMEs of mitigating risks and fulfilling legal obligations.

Social spending often addresses immediate operational needs, such as employee retention, satisfaction, and productivity. This workforce-centric focus reflects a practical approach to ESG allocation, where resources are directed toward initiatives that deliver direct organisational benefits. Such spending is critical for ensuring stability in operations, particularly for companies with constrained resources.

Environmental spending is notably constrained by financial and technical barriers, especially for SMEs. The high costs and expertise required for comprehensive environmental initiatives, such as renewable energy adoption or carbon reduction strategies, often deter investment in this pillar. Consequently, companies tend to focus on low-cost, regulatory-compliant measures, such as waste management or energy efficiency, rather than pursuing proactive sustainability projects.

Larger companies with international exposure face greater scrutiny from stakeholders, including investors, customers, and regulatory bodies. This pressure drives a more balanced allocation of resources across all ESG pillars, aligning spending with global sustainability standards. In contrast, domestically focused SMEs are less subject to such scrutiny, resulting in a reactive approach to ESG spending that addresses immediate pressures without a cohesive strategic framework.

The findings reveal that while organisations allocate spending across the three ESG pillars, this allocation is often reactive and influenced by operational and contextual factors rather than guided by a cohesive strategic framework. Governance is the most consistently prioritised pillar, reflecting its direct link to compliance and operational stability. Social spending, though significant, is fragmented, focusing primarily on workforce-related metrics. Environmental initiatives receive the least attention, highlighting the need for targeted support to enable organisations, particularly SMEs, to adopt proactive sustainability practices. Addressing these disparities through tailored frameworks, capacity-building initiatives, and financial incentives is essential to fostering more strategic and balanced ESG spending across organisations. As conclusion, Figure 10 illustrates the rationale behind ESG allocation.

Figure 10: The rationale behind ESG allocation.

RESEARCH QUESTIONS 3

This section examines the ESG measurement frameworks used by organisations, revealing significant disparities influenced by company size, resources, and operational focus. With 98.4 per cent of the sample comprising private limited companies (Sdn. Bhd.), the absence of mandatory ESG reporting results in inconsistent assessments.

For the environmental pillar, SMEs rarely adopt global frameworks like GRI or CDP due to financial and technical constraints. Instead, they measure performance through operational metrics such as energy efficiency, waste management compliance, and water conservation. Larger firms earning over RM15 million annually are more likely to align with global standards, highlighting a benchmarking gap for SMEs.

The social pillar is primarily workforce-centric, with key metrics including employee satisfaction, retention rates, and diversity. The high reliability of social factors (Cronbach's Alpha = 0.955) underscores the focus on employee well-being. However, the absence of structured tools like Social Impact Measurement (SIM) or UN SDG alignment limits broader societal impact assessments.

Governance is the most structured ESG pillar, driven by compliance with financial reporting, anti-bribery policies, and transparency standards. SMEs focus on regulatory adherence, while larger firms integrate international frameworks like ISO 37001 and GRI governance indicators. The governance factors scale (Cronbach's Alpha = 0.936) confirms its reliability but highlights the lack of proactive governance strategies among SMEs.

Overall, the lack of standardised ESG reporting frameworks, particularly for SMEs, creates inconsistencies in performance evaluation. Addressing these gaps requires simplified ESG tools, financial incentives, and capacity-building initiatives to enhance ESG measurement, ensuring sustainability and competitiveness in an evolving global economy.

Recommendations

The findings of this study provide a comprehensive understanding of ESG implementation across different organisational contexts, particularly among SMEs and larger companies. The analysis highlights key challenges and disparities in ESG adoption, including fragmented implementation, resource constraints, and the absence of industry-specific ESG tools. Addressing these challenges requires a multi-faceted approach involving policy interventions, financial incentives, capacity-building initiatives, and enhanced stakeholder engagement. The following recommendations outline actionable strategies to promote ESG adoption across industries:

A national ESG framework with clear rules is needed. Many SMEs already follow ESG-friendly practices but lack awareness. Awareness campaigns can help businesses understand the benefits of ESG adoption.

Different industries have unique ESG challenges, so tailored frameworks are necessary. For example, waste management is a major issue for industrial sectors, requiring specialised solutions.

ESG adoption is costly, especially for SMEs. Offering tax breaks, grants, and low-interest loans can encourage compliance. Government-funded training can also help businesses implement ESG strategies.

Public recognition through certifications and awards can motivate businesses. Many SMEs engage in ESG practices but do not report them, missing opportunities for credibility and investment.

Large companies have structured ESG programmes, but SMEs lack formal governance. Establishing ESG teams can improve strategy integration, compliance, and reporting accuracy.

ESG compliance should be introduced in phases to ease the burden on SMEs. A step-by-step approach will help businesses transition without disrupting operations.

Many SMEs lack ESG knowledge. Training programmes, workshops, and partnerships with universities can help businesses understand and implement sustainable practices.

Collaboration with employees, investors, and communities is key. Industry associations and online platforms can help SMEs share best practices and strengthen ESG efforts.

Current ESG measurement tools are too complex for SMEs. Developing localised tools will help businesses track progress in areas like carbon footprint, diversity, and governance compliance.

References