The Importance of ESG in Industrial Land Development
Introduction
In recent years, the global emphasis on Environmental, Social, and Governance (ESG) principles has transformed industrial development, making ESG integration essential for industrial land projects. For Malaysia, a country striving to balance economic progress with sustainable development, is integrating ESG principles into industrial land development as a fundamental approach. According to the 2024 KPMG Survey of Sustainability Reporting, 96% of the world’s top 250 companies by revenue reported on sustainability or ESG.[1] Investors now prioritize ESG factors when making investment decisions, recognizing that companies with strong ESG performance are more resilient and better positioned for long-term success.
Under Section 117 of the National Land Code (NLC), land categorized as “industry” must be used strictly for industrial purposes, including manufacturing, smelting, production or distribution of power, and the assembling, processing, storage, transport, or distribution of goods, or other commodities with additional uses prescribed by the State Authority. Industrial operations must commence within three years, and all buildings or installations must be properly maintained. Any demolition, alteration, or extension requires prior written consent from the appropriate authority. However, exceptions exist for buildings used for educational, medical, sanitary, or welfare facilities for workers, as well as other purposes authorized by the State Authority.[2]
Legislative Influence on Industrial Land Development
The significance of ESG in industrial land development is further underscored by legislative changes, such as the Environmental Quality (Amendment) Bill 2023, which was passed on 25 March 2024 in the Dewan Rakyat[3]. This amendment to the Environmental Quality Act 1974 introduces more rigorous measures to combat pollution, reflecting the Malaysian government’s commitment to environmental sustainability. As a result, ESG principles are now central to business strategies, transforming the landscape of sustainable real estate development.[4]
Securing Investments and Funding
For real estate developers, the implications of this regulatory shift are significant and multifaceted. Adhering to ESG standards has also become critical for securing funding. These initiatives not only protect the environment but also enhance corporate reputations, making projects more attractive to environmentally conscious investors and stakeholders who value sustainability.[5] Moreover, investors increasingly favor companies with a proven commitment to ESG principles. Consequently, developers who integrate ESG into their projects are better positioned to attract investment and gain a competitive edge in the market.[6]
Environmental Aspects: Sustainable and Green Practices
The environmental aspect of ESG emphasizes reducing the negative impact of industrial development on the environment. In Malaysia, the Environmental Impact Assessment (EIA) process is a key regulatory framework addressing the environmental impact of land development, governed by the Environmental Quality Act 1974. Under Section 34A of the Act, any person intending to carry out a prescribed activity must submit a report to the Director General, assessing the environmental impact of the proposed activity and outlining measures to prevent or mitigate adverse effects.[7] Prescribed activities related to industrial land development, such as forestry and land reclamation are specified in the Environmental Quality (Prescribed Activities) (Environmental Impact Assessment) Order 2015, as detailed in the table below.[8]
Further, the Malaysian Green Building Index (GBI) is a voluntary certification designed to encourage developers to adopt sustainable practices in their projects, such as energy efficiency, water conservation, and the use of renewable energy. Recognized as Malaysia’s leading green rating tool, the GBI promotes sustainability in the built environment while raising awareness among developers, architects, engineers, planners, designers, contractors, and the public about environmental issues and shared responsibility to future generations.[9]
According to the Green Building Index (GBI) fact sheet, “A green building focuses on enhancing the efficiency of resource use – energy, water, and materials while reducing building impact on human health and the environment during the building’s lifecycle, through better sitting, design, construction, operation, maintenance, and removal”.[10] As a result, the Malaysian GBI rating system was created to provide the building industry such as developer, a common and verifiable mechanism to benchmark green property development which will allow them to undertake development in a more environment-friendly way.[11]
Social Aspects: Ensuring Inclusive and Equitable Development
The social aspect of ESG focuses on ensuring that industrial land development benefits local communities, promotes equitable opportunities, and prioritizes the well-being of workers and residents. This includes community engagement, labor rights, and public health.
When considering social factors, developers must prioritize health and safety standards for workers. The Occupational Safety and Health Act 1994 requires developers to create safe work environments, uphold labor rights, and provide adequate protective measures for workers involved in industrial construction. Under Section 15(1) of the Act, every employer and self-employed person is obligated, as far as practicable, to ensure the safety, health, and welfare of all employees at work.[12]
Social equity is vital in industrial development, ensuring projects benefit the entire community. This includes providing affordable housing, public amenities, and transportation to prevent economic inequality. Affordable housing supports social, economic, and cultural growth, especially amid challenges like rising rents, gentrification, and population growth. Developers should create affordable housing that is cost-effective, livable, attractive, and fosters diverse communities, enhancing neighborhood cohesion.[13] The Asia-Pacific region, with its high population density, faces challenges like climate change, policy issues, and financial constraints. However, the growing demand for sustainable and affordable housing presents opportunities. Singapore sets a strong example of successful implementation, serving as a model for other countries.[14]
Governance Aspects: Ensuring Transparency and Accountability
The governance aspect of ESG is vital for ensuring that industrial land development projects are managed ethically, transparently, and with accountability. Strong governance practices play a key role in mitigating risks such as corruption, mismanagement, and unethical business conduct, thereby building trust among stakeholders.
In Malaysia, corporate governance is guided by the Malaysian Code on Corporate Governance (MCCG). This code provides guidelines for listed companies, including real estate and land developers, emphasizing clear decision-making, responsible management, and good risk management, especially for ESG issues. Although mainly for public companies, the MCCG also encourages all developers to adopt these practices. Guidance G4.1 notes that many institutional investors consider ESG factors when making investment decisions and use their voting power to ensure that boards and senior management are held accountable for sustainability.[15]
According to Board Responsibilities under MCCG, effective board leadership and oversight require the integration of sustainability considerations into corporate strategy, governance and decision-making. To build up resilience, boards must adopt a holistic approach to business operations. This includes implementing proactive measures to anticipate and address material ESG risks and opportunities.[16]
Additionally, the Bursa Malaysia Sustainability Reporting Framework requires publicly listed companies to disclose their ESG activities, risks, and strategies. For industrial land developers, these disclosures ensure that stakeholders, including investors and the public, are well-informed about the company’s commitment to ESG practices. The Listing Requirements require the company to include sustainability-related disclosures in their annual reports. The table below provides an overview of the sustainability-related disclosure obligations as prescribed by the Listing Requirements.
Malaysia’s i-ESG Framework
Malaysia’s new National Industry Environmental, Social, and Governance (i-ESG) framework, officially introduced on 2 October 2023, is a significant step in the nation’s commitment to promoting ESG principles. This initiative aligns with global efforts to address environmental, social, and governance challenges and fosters sustainable development among manufacturing companies. The policy framework underscores Malaysia’s dedication to reducing greenhouse gas emissions by 45% by 2030 and achieving carbon neutrality by 2050.[17] Therefore, all land developers are encouraged to incorporate sustainability criteria into their planned developments to achieve this goal.
Conclusion
The integration of Environmental, Social, and Governance (ESG) principles into industrial land development is essential for ensuring compliance with regulatory frameworks and promoting sustainable growth in Malaysia. The Environmental Impact Assessment (EIA) process, mandated under the Environmental Quality Act 1974, plays a critical role in assessing and mitigating environmental risks associated with industrial land use. Industrial land development, governed by the National Land Code 1965, must adhere to specific usage conditions while integrating ESG principles to align with Malaysia’s broader sustainability agenda.
On the social front, the Occupational Safety and Health Act 1994 (OSHA) requires developers to prioritize worker health, safety, and overall well-being, ensuring safe industrial operations. Meanwhile, strong governance practices, as outlined in the Malaysian Code on Corporate Governance (MCCG), emphasize transparency, accountability, and ethical business conduct. Publicly listed companies are explicitly required to comply with the MCCG and Bursa Malaysia’s Sustainability Reporting Framework, which mandates ESG disclosures in their annual reports. However, non-listed companies are not legally bound by the MCCG but are encouraged to voluntarily adopt ESG best practices to enhance credibility, attract investors, and meet stakeholder expectations.
Furthermore, the National Industrial Environmental, Social, and Governance (i-ESG) Framework underscores Malaysia’s commitment to reducing greenhouse gas emissions and achieving carbon neutrality by 2050. While listed companies face structured reporting obligations, non-listed companies involved in industrial land development are still expected to align with national sustainability policies, particularly when seeking regulatory approvals, funding, or participation in government-driven green initiatives.
As ESG compliance becomes a crucial factor in industrial land development, businesses that integrate these principles will gain a competitive advantage, ensure regulatory adherence, and contribute meaningfully to Malaysia’s sustainable future.
Corporate Communications, Azmi & Associates - 12 March 2025