CoreAdvocates

  • When the Grid Isn’t Ready: Managing Off-Taker Delays, SCOD Risks and Utility Liability in Malaysia’s Renewable Energy Sector

    The grid is the lifeblood of modern commerce. Without a reliable network to transmit power from generation source to end-user, no energy market can function.

    Malaysia has made commendable strides in shifting away from fossil fuels, backed by the National Energy Transition Roadmap (NETR) and an ambitious target of 70% renewable energy capacity by 2050.

    However, policy vision alone cannot generate a single kilowatt-hour.

    Today, the central hurdle in Malaysia’s renewable energy landscape isn’t policy or capital, it is execution. A growing grid interconnection bottleneck leaves fully commissioned power plants idle, creating a multi-million ringgit crisis at the intersection of infrastructure, commercial finance and energy law.

    The Structured Paradox: Grid-Owner Execution v Off-Taker Commercial Liability

    Under Part IV (Connection Code) of the Malaysian Grid Code, the statutory and regulatory duty to construct, test and energize the physical connection infrastructure rests exclusively with the Grid Owner and Grid System Operator (GSO), not the Off-taker.

    Under standard bilateral Power Purchase Agreement (PPA), however, the Off-taker (Single Buyer) assumes the commercial obligation to ensure interconnection and  power evacuation by the Scheduled Commercial Operation Date (SCOD). This commercial viability requirement creates a fundamental structural paradox: the Off-taker guarantees a physical delivery date over an infrastructure asset it neither constructs nor operationally control.

    When the Grid Owner fails to perform under the Grid Code, Off-takers routinely attempts to disclaim commercial PPA liability by invoking Section 17 of the Electricity Supply Act 1990. (“ESA 1990”).

    However, Section 17 was enacted as a narrow statutory shield to protect network licensees from tortious or statutory claims during operational network emergencies and system maintenance. it was never intended to operate as a commercial escape clause for the Off-taker seeking to avoid explicit contractual covenants under a PPA.

    The Imperative for Actionable Risk Management

    This legal friction leaves Independent Power Producers (IPPs) trapped in a commercial vacuum. While the utility operational and commercial divisions shift responsibility between statutory immunity and physical unreadiness, the developer’s financial docks continue to tick. Managing this exposure requires moving beyond flawed statutory defenses to examine the cascading commercial fallout across project financing and the proactive contractual mechanisms needed to reallocate SCOD risk.

    The Cascading Commercial Fallout: The IPP’s Triple Exposure

    When grid connection delays materialize without robust contractual indemnities, the financial damage spreads rapidly across the developer’s entire project structure:

    At the Engineering, Procurement and Construction (EPC) level, an IPP’s contractor operates under strict, time-sensitive milestones. When a plant achieves mechanical completion but sits idle awaiting grid energisation, the EPC contractor is legally entitled to issue substantial financial claims. These include daily idling costs for unutilised equipment and labor, extended site overheads and variation orders resulting from continuous equipment preservation regimes.

    At the financing level, financiers anchor debt service coverage ratio on the firm achievement of the Scheduled Commercial Operation Date (SCOD). Pushing an IPP past its SCOD window can trigger formal event-of-default warnings and penalty interest surcharges on credit facilities. Persistent SCOD breaches empower lender to freeze project accounts, initiate cash sweeps or accelerate loan repayment, demanding full principal redemption before the asset generates commercial revenue.

    At the concession level, project approvals governed by statutory renewable frameworks are tied to strict regulatory milestones. Missing these targets can lead to permanent tariff reduction penalties imposed by regulators or a direct shortening of the concession period. In fixed-term concessions, every month lost to grid unreadiness represents an unrecoverable month of top-line operational revenue, permanently eroding the project’s long-term equity yields.

    Testing Off-taker Defenses: Why Force Majeure & Section 17 Fall Short

    When an off-taker fails in its obligations to ensure grid readiness under a PPA, it often relies on force majeure clause in the agreement to disclaim liability. Force majeure clauses tend to be confined to Acts of God to cover only events that are beyond control of the off-taker such as flood and fire. Administrative delays, supply chain disruptions, land acquisition hitches and sub-contractor execution failures do not qualify as fore majeure events as they are foreseeable operational risk within the utility’s broader purview.

    Off-takers also frequently invoke the statutory immunity accorded under Section 17 of Electricity Supply Act 1990. While Section 17 protects the network operator from strict liability or tortious liability for unavoidable supply interruptions or grid stability actions (“reasonable requirements of the system”), it does not extend to the Off-taker in its commercial capacity. The Off-taker cannot hide behind the Grid Owner’s statutory shield to excuse its own breach of contractual obligations under a bilateral energy purchase agreement.

    Proactive Risk Mitigation: Contractual protection & SCOD Relief

    Risks surrounding power generation and distribution by off-takers and grid system operators can be mitigated in the PPAs entered with off-takers and in the Interconnection agreement with grid system operators.

    Where grid unreadiness is directly attributable to utility provider delay, the PPA must obligate the Off-taker to indemnity the developer for verified third-party liabilities. This includes EPC standby costs, land holding fees and financial default penalties. Placing these liabilities back on the Off-taker creates direct commercial accountability.

    Besides indemnity clause, IPPs may also structure the PPAs so that if the plant passes commissioning test but cannot export power due to grid unreadiness, the Off-taker must begin paying a Deemed Generation Rate where it effectively treats the energy as delivered. However, depending on the arrangement between the parties, Off-takers may pay only for metered energy which means the actual energy received and recorded in the meter instead of deemed generation rate.

    To neutralize the fatal cascading effects of a missed SCOD, PPAs must incorporate a Deemed Commercial Operation Date (DCOD) clause. Under this mechanism, if the IPP achieves mechanical completion and passes dry commissioning, but full commercial energisation is blocked by grid unreadiness, the plant is deemed to have achieved SCOD for all contractual and financial purposes. This relief mechanism automatically extends milestones, freezes EPC liquidated damages, prevents lender default triggers and initiates the payment of Deemed Generation tariffs or capacity charges, effectively insulating the developer from upstream network execution failures.

    Conclusion

    The success of Malaysia’s ambitious energy transition hinges on market certainty. As the sector moves toward market liberalization and Third-Party Access (TPA) frameworks under schemes like CRESS, the traditional blurring of lines between grid operators and commercial off-takers is no longer viable. Statutory immunity under Section 17 of the ESA 1990 cannot serve as a commercial shield against explicit contractual guarantees. Moving forward, robust risk allocation driven by strict SCOD relief mechanisms, Deemed Generation remedies and clear contractual unbundling will be essential to ensure that grid execution bottlenecks do not derail the commercial viability of Malaysia’s renewable energy future.

  • Turning ESG Commitments into Enforceable and Sustainable Supply Chain Obligations

    Case No. 1

    US Virginia-based Lumber Liquidators was fined over $13 million in 2013 for importing timber logged illegally in Russia, violating the US Lacey Act. Later, the same company (now LL Flooring) faced scrutiny for sourcing flooring material from China that emitted dangerously high levels of formaldehyde.

    Case No. 2

    Wilmar International, headquartered in Singapore, was criticized by non-government organizations for sourcing from plantations linked to deforestation and labor abuses. Though not prosecuted, reputational damage forced Wilmar to adopt its No Deforestation, No Peat, No Exploitation (NDPE) policy.

    Case No. 3

    In 2016, IOI Corporation Berhad, one of Malaysia’s largest palm oil producers, was suspended by the Roundtable on Sustainable Palm Oil (RSPO) after NGOs documented that supplier plantations linked to IOI were clearing peatlands and forests illegally. The suspension triggered boycotts by major buyers such as Unilever, Nestle and Kellogg’s causing reputational and commercial damage.

    Lesson: These cases relied on broad, aspirational codes of conduct that set values for ethical sourcing but lacked enforceability. Codes alone cannot protect boards when violations occur. True governance assurance require translating commitments into binding mechanisms, namely the standard operating procedures and contracts that make ESG obligations credible.

    Contracts as Governance Tools

    Contracts are often seen as transactional mechanics, as instruments to record commercial terms and allocate risk. But when ESG obligations, audit rights and termination triggers are embedded, they become governance overlays. In this role, contracts are not just paperwork; they are evidence of board oversight. Contracts must evolve beyond mechanics into enforceable governance instruments.

    Aspirational v Enforceable Clauses

    Contracts drafted in aspirational language often fail under scrutiny. For example, “Supplier shall strive to source ethically” sounds noble but risks being unenforceable under Section 30 of the Contracts Act 1950, which voids agreements lacking certainty. The High Court in Oh Kien Sing v Wheels Electronics (2022) illustrates this danger: a commission clause tied to an undefined ‘car model life’ was held void for uncertainty.

    By contrast, enforceable clauses anchor obligations to recognized frameworks. For instance, “Supplier shall comply with OECD Guidelines for Responsible Business Conduct, submit quarterly certifications covering six assessment areas (human rights, employment, environment, anti-corruption, consumer interests, disclosure) and permit independent audits.” This transforms ethical aspirations into operational duties that can be monitored and verified. Sustainability becomes the transaction, enforceability becomes the overlay.

    Distribution Stage & Incoterms

    Beyond ethical commitments, enforceability also applies to the mechanics of supply chain transactions. Risk allocation in distribution contracts is a prime example, where international trade rules provide clarity and prevent uncertainty.

    Incoterms 2020, established by the International Chamber of Commerce, define risk, costs and responsibilities in cross-border trade. For instance, under FOB (Free on board) Port Klang, the seller must clear goods for export and deliver them on board the vessel nominated by the distributor, with risk passing only once goods are loaded. By contrast, under FCA (Free Carriage), risk passes once goods are delivered at the named place before loading. These distinctions matter because they determine who bears responsibility for loss or damage at each stage.

    Incorporating Incoterms rules into contracts enable parties to avoid uncertainty and strengthen enforceability. More importantly, sustainability obligations can be layered into these terms, for example, requiring sellers to certify NDPE compliance under FOB arrangements. This shows how enforceability and sustainability can run together: Incoterms provide the legal clarity, while sustainability principles supply the substantive duties.

    Risk Allocation & Governance Assurance

    Enforceable contractual clauses form the backbone of risk allocation and ensure responsibilities for delivery, quality, insurance and liability are clearly defined and distributed across the supply chain. Embedding Incoterms references, indemnity provisions with sustainability obligations allows boards to demonstrate that risks have been anticipated and contractually managed. These clauses also serve as credible proof that sustainability commitments are not just aspirational statements but have been embedded into operational practice.

    When disputes arise, directors can point to these safeguards as evidence of due diligence. The presence of enforceable clauses shows that the company has taken proactive steps to mitigate exposure, protect shareholder value and align with global expectations for responsible business conduct. In this way, contracts evolve beyond transactional tools into governance instruments, acting as shields against regulatory scrutiny, stakeholder pressure and activism.

    Sustainability Principles as Transaction, Enforceability as Overlay

    Supply chain governance is strongest when enforceability and sustainability run together. Sustainability principles in supply chain, namely, OECD Guidelines for Responsible Business Conduct (OECD RBC), United Nations Guiding Principles on Business and Human Rights (UNGP) and EU’s Corporate Sustainability Due Diligence Directive (EU CSDDD) define the substantive duties: human rights, environmental protection, anti-corruption, consumer interests, and disclosure. Enforceability provides the legal architecture: reporting frequency, audit rights, indemnities and termination triggers. Both sustainability and enforceability transform contracts into governance instruments that are both ethically grounded and legally credible.

    For example, instead of vague language like “Supplier shall strive to source ethically”, contracts can specify: “Supplier shall comply with OECD RBC principles, submit quarterly reports covering six assessment areas and permit independent audit.” Boards can then demonstrate due diligence under global frameworks, showing that commitments are not aspirational but enforceable.

    Conclusion – Substance over Sound

    Supply chain governance is not about lofty statements of intent. It is about embedding enforceable duties that withstand challenge and provide clarity when disputes arise. Aspirational clauses collapse under pressure because they lack measurable standards. Enforceable clauses, by contrast, demonstrate that directors have anticipated risks and imposed obligations that can be tested and verified.

    Boards and committees must insist on enforceability in supply chain contracts. Demand clauses that allocate risk, impose compliance duties and provide audit rights, bearing in mind, directors can be personally liable for violations committed by organizations. In today’s environment of heightened stakeholder expectations, enforceability is not optional, it is the foundation of credible governance and when combined with sustainability principles, it transforms supply chain contracts into instruments of both legal assurance and responsible business conduct.

    #ESGCompliance #SupplyChain

  • Embedding Legal Enforceability in CCPT Loan Classification

    Introduction

    Malaysia’s commitment under the Paris Agreement 2015 to reduce greenhouse gas emissions is reinforced through domestic legal and regulatory frameworks. For financial institutions, compliance is not optional but a statutory and fiduciary responsibility. The Climate Change and Principle-based Taxonomy (CCPT) issued by Bank Negara Malaysia, provides the lens through which lending activities must be assessed. It is not merely a sustainability guideline but a compliance framework that requires banks to classify loans according to climate impact, embed environmental safeguards into loan terms and demonstrate accountability to regulators and stakeholders.

    Applying CCPT classifications, adopting JC3 questionnaires, and incorporating legal advisory ensures that every loan decision is credible under Malaysian law and aligned with international climate commitments. Most importantly, this approach protects banks from environmental, reputational and compliance risks.

    What is the CCPT framework

    The CCPT is a principle-based taxonomy developed by Bank Negara Malaysia to guide financial institutions in classifying borrowers under five guiding principles (GP1-GP5). These principles assess both the purpose of loan proceeds and the borrower’s overall operations. CCPT is part of the regulatory compliance regime and institutions that fail to adhere risk being queried by Bank Negara and required to justify their decisions.

    The Five Guiding Principles

    GP1 (Mitigation): Activities that reduce or prevent greenhouse gas emissions, such as renewable energy generation or energy efficient technologies..

    GP2 (Adaptation): Activities that increase resilience to climate impacts, such as drought resistant crops or flood resilient infrastructure.

    GP3 (No Significant Harm): Activities that prevent pollution, protect ecosystems and use resources sustainably.

    GP4 (Remedial Measures to Transition): Activities not yet aligned with climate objectives but supported by credible remedial steps, such as efficiency upgrades or biodiversity safeguards.

    GP5 (Prohibited Activities): Activities fundamentally harmful to the environment, such as coal-fired power generation or illegal deforestation, which banks must exclude entirely.

    Role of JC3

    The Joint Committee on Climate Change (JC3), a regulatory-industry platform established to pursue collaborative actions for building climate resilience within the Malaysia’s financial sector, supports financial institutions in applying CCPT, particularly in assessing GP3 and GP4. JCE questionnaires collect borrower data on legal compliance, statutory licenses and environmental safeguards, helping banks demonstrate accountability and credibility in their classifications.

    What the CCPT Classifications Means

    CCPT classification directly shapes credit risk management and regulatory credibility. Each loan must be assessed at both the transaction level (GP1/GP2) and the entity level (GP3-GP5). Banks cannot rely solely on a borrower’s overall profile; they must evaluate the purpose of loan proceeds and whether the financed activity contributes to climate mitigation or adaptation.

    For example, when a steel producer seeks financing to purchase an electric arc furnas, the loan purpose qualifies under GP1 because the furnace reduces emissions compared to blast furnaces. However, if the company’s overall operations reveal high emissions, classification depends on remedial measures. If credible, time-bound measures are in place, the exposure will be classified as C2 (Transitioning). If no remedial measures exists, it shifts to C4 (Watchlist). If the company engages in prohibited activities such as coal expansion, the exposure is excluded under GP5. This scenario illustrates that even climate supporting projects can be reclassified if the borrower’s overall operations fil to meet CCPT standards.

    The Legal Dimension: Shared Responsibility in CCPT Classification

    Embedding statutory interpretation and enforceability checks into the CCPT classification process safeguards credibility for both banks and borrowers. For banks, it ensures reporting withstands regulatory scrutiny, lending decisions are justified, and liability risks are minimized. For borrowers, even where loan or security terms are largely fixed, these checks provide assurance that their sustainability commitments are legally recognized and transparent.

    Consider a palm oil company applying for a loan to expand its plantation in Sabah. The company proposes installing a methane-capturing system to treat palm oil mill effluent (POME). Under CCPT, this activity could qualify as climate-aligned (GP1-Mitigation), but enforceability depends on statutory compliance. The borrower must demonstrate that its mill is licensed and compliant under the Environmental Quality (Prescribed Premises) (Crude Palm Oil) Regulations 1977 which govern effluent treatment and discharge standards for palm oil mills.

    Banks often rely on broad “catch-all” covenants requiring borrowers to comply with all laws. While technically sufficient, such as clauses may not demonstrate CCPT credibility. To demonstrate credibility of CCPT classification and to strengthen enforceability, banks should tighten relevant clauses instead of relying solely on broad catch-all provisions. Embedding specific statutory references into loan documentation is one example of such tightening. This can be achieved either within the loan agreement itself or through the letter of offer annexed to the loan agreement and expressly incorporated by reference. In Malaysian practice, this is a common way to preserve standard templates while still binding borrowers to sector-specific statutory requirements.

    This enables banks to demonstrate to regulators that enforceability of environmental safeguards has been embedded into financing terms while borrowers gain legitimacy because their commitments are explicitly tied to enforceable statutory requirements.

    Conclusion

    CCPT reporting is not just a compliance exercise for banks, nor simply a regulatory hurdle for borrowers. It is a shared framework that strengthens the integrity of financing relationships. Embedding statutory interpretation and enforceability checks enables banks to gain credibility against liability while borrowers gain confidence that their sustainability commitments are legally sound and transparent. When both sides uphold credibility, CCPT reporting becomes more than regulatory compliance. It becomes a foundation for trust, resilience and sustainable growth across the financial ecosystem.

    My ESG Service Line and Legal, Regulatory & Compliance supports banks and corporate borrowers in navigating evolving regulatory expectations in the financial sector. We advise banks on regulatory compliance in CCPT classifications and contractual enforceability and we guide corporate borrowers on the implications of CCPT classifications together with practical local solutions.

    Should your organization have any enquiry relating to financing, I would be pleased to assist. Please feel free to contact us at pohyee.tan@hhq.com.my.

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  • Carbon Pricing Meets Steel: Preparing for Malaysia’s Climate Change Bill

    “Carbon will no longer be invisible. With Malaysia’s Climate Change Bill on the horizon, steel producers face the certainty that emissions will soon carry a direct financial value. Carbon pricing is set to embed itself into law, forcing a rewiring of operations, financing, and competitiveness. Compliance will no longer be optional—it will be the baseline for survival in global supply chains.“

    Steel is about to face a new kind of cost pressure, not from scrap volatility or anti-dumping duties, but from carbon pricing under Malaysia’s proposed Climate Change Bill. For the first time, emissions will carry a direct financial value, reshaping how steelmakers finance, disclose and plan their operations.

    Why Steel is the Litmus Test

    Steel is one of the most emissions-intensive sectors. Traditional production relies on blast furnaces, where iron ore and coke undergo massive combustion to produce pig iron. This process emits significant volumes of carbon dioxide. The pig iron is then converted in basic oxygen furnaces (BOF) into long or flat steel, products that are traded widely by steel producers.

    Unlike many other heavy industries, steel is not only consumed domestically but also exported globally, including to the European Union. As a traded commodity, it is subject to dual regulatory pressures:

    1 – Trade defence under Malaysia’s Countervailing and Anti-Dumping Act, which protects local producers from unfair imports.

    2 – Sustainability regulation under the upcoming Steel Industry Bill, which will govern the lifecycle and environmental performance of the sector.

    At the same time, steel is classified as a transitioning sector. This means financing steel projects already attracts heightened scrutiny from financial institutions. Companies seeking project loans must demonstrate credible transition plans and meet stringent ESG requirements before approval is granted. Strong covenants are often imposed to ensure compliance and risk management.

    Now, another layer is emerging: Malaysia’s proposed Climate Change Bill. By introducing carbon pricing mechanisms whether through tax, trading or hybrid approaches, the Bill will directly impact steel producers. Carbon costs will no longer be abstract and there will be financial liabilities embedded into operations, financing and competitiveness.

    Taken together, these overlapping pressures explain why steel is the litmus test. It is the sector where trade defence, sustainability regulation, financing scrutiny and carbon pricing converge. All eyes will be on steel to see whether it can withstand these regulatory tests and set the precedent for how Malaysia balances competitiveness with compliance in the ESG era.

    Financing and Operational Pressures

    As scrutiny intensifies, financing becomes a critical pressure point. Financial institutions place extra caution for transitioning sectors due to the Climate Change Principal-Based Taxonomy (CCPT) framework, they will incorporate carbon pricing risk into loan underwriting, thus raising cost of capital for steel producers.

    The dual legal and financial scrutiny will force steelmakers to revise their operations. They must:

    1 – Diversify scrap supply to ensure consistency;

    2 – Integrate renewable energy into production to improve efficiency

    3 – Strengthen emissions reporting which is now non-negotiable

    4 – Develop credible transition plans with clear implementation pathways.

    Roadmap and Accountability

    According to Steel Industry Roadmap 2035, one guiding principle is to establish a level playing field for emissions accountability. Companies with higher emissions technologies must bear responsibility for their footprint. Policies will also target environmental arbitrage, preventing the dumping of high-emissions steel imports into Malaysia.

    This aligns with amendments to Malaysia’s Countervailing and Anti-Dumping Act and signals the likely introduction of carbon tax. The Climate Change Bill will legalize these frameworks, making high emitters including steel accountable for their carbon footprints. It is expected to provide clear guidance on climate governance, including carbon credits, trading and possibly taxation.

    The Roadmap sets the stage for accountability, but accountability alone is not enough. In a global economy where emissions performance increasingly determines market access, financing and investor confidence, compliance must evolve into competitiveness. Steelmakers that view carbon regulation as a burden risk being sidelined, while those that embrace it as a driver of efficiency, innovation and credibility can secure a stronger foothold in international supply chains.

    Compliance and Competitiveness

    The Climate Change Bill is not only about compliance, it establishes binding obligations that will redefine competitiveness. Once enacted, carbon pricing will carry the force of law, and steelmakers who fail to comply risk statutory penalties, exclusion from financing and exposure to trade remedies. Compliance therefore becomes the baseline; competitiveness arises from how companies go beyond minimum obligations to align with international regimes such as the EU’s Carbon Border Adjustment Mechanism.

    In legal terms, the Bill closes the gap between voluntary ESG commitments and enforceable duties. Steelmakers must treat transition plans and emissions reporting as legal instruments, not just corporate disclosures. Failure to do so risks regulatory sanctions and reputational damage that can impair market access. Conversely, those who embed compliance into their operational and financing structures will not only meet statutory requirements but also secure a competitive advantage in global supply chains.

    Conclusion

    Steel is Malaysia’s first industrial test case under carbon pricing. The Climate Change Bill will compel the sector to rethink both operations and financing, setting a precedent for other high-emission industries. Preparing now means avoiding cost shocks later, while failure to act risks exclusion from global markets and rising capital costs. The Bill is not merely a compliance exercise; it is a competitiveness strategy. The question remains: will Malaysia’s steel industry seize this opportunity to lead in low-carbon transition or will it struggle under the weight of new obligations?

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  • Malaysia’s Steel Sector: From Trade Defence to Green Transition

    Steel is more than just a commodity in Malaysia, it is the backbone of construction, infrastructure and manufacturing. Recognized by the Independent Steel Committee under the Ministry of Investment, Trade and Industry (MITI), the industry is both indispensable to economic growth and one of the most carbon-intensive globally. This dual identity places steel at the center of Malaysia’s sustainability challenge.

    Legal and Policy Shifts

    Trade Defence Reforms

    In 2025, Malaysia introduced significant amendments to the Countervailing and Anti-Dumping Duties Act. These reforms redefined dumping by shifting the benchmark from Malaysian domestic prices to the exporter’s home market value, aligning with Word Trade Organizations’ (WTO) standards and closing loopholes that previously allowed price manipulation. Additionally, sunset clauses were introduced that ensures duties lapse after five years unless expiry reviews justify their continuation. These changes aim to strengthen Malaysia’s trade defence mechanisms while maintaining compliance with international trade rules.

    Steel Roadmap 2035 and the proposed Steel Industry Bill

    The Steel Industry Roadmap 2035 embeds Environmental, Social and Governance (ESG) compliance and low-carbon transition strategies into sectoral regulation through the proposed Steel Industry Bill. This legislative framework positions the steel industry as a proving ground for aligning sustainability objectives with industrial policy, signaling Malaysia’s commitment to a greener industrial future.

    Dual Stress-Test for the Industry

    The steel sector faces a dual challenge. On one hand, trade defence reforms provide stronger tools to protect domestic producers from unfair imports. On the other hand, ESG regulations impose obligations to demonstrate sustainability, governance and supply-chain oversight. Together, these frameworks test steelmakers on both market fairness and sustainability credibility, requiring a balanced approach to compliance and competitiveness.

    Implications for Stakeholders

    The convergence of Malaysia’s amended trade defence law and the forthcoming Steel Industry Bill creates a layered regulatory environment that reshapes the steel sector in profound ways.

    For regulators, the task ahead is complex. Regulators must navigate the complex task of balancing WTO-aligned evidentiary standards with the integration of ESG data. This necessitates enhanced institutional capacity to interpret sustainability metrics credibly and enforce compliance effectively.

    For steelmakers, the reforms offer protection from unfair imports but also bring rising compliance costs. Injury claims now must reference both economic indicators and ESG performance, creating a more comprehensive assessment framework. This environment presents an opportunity for Malaysian steel producers to position themselves competitively as suppliers of ‘green steel’ and leveraging sustainability as a market differentiator.

    Importers and exporters face stricter documentation requirements and ESG-linked supply chain scrutiny. Exporters must defend their pricing practices under the new dumping definition while importers need to align sourcing strategies with both trade defence and sustainability standards thus ensuring compliance across the supply chain.

    Financers are compelled to factor in overlapping risks arising from duties and ESG obligations when making lending decisions. They must stress-test financing models against regulatory scrutiny and prioritize capital allocation to producers who leverage ESG compliance as a competitive advantage.

    Malaysia’s steel industry stands at the intersection of trade defence and ESG regulation. While compliance costs are rising, so too is the opportunity to compete globally as a credible supplier of green steel. Regulators, financiers and traders must integrate fairness and sustainability into a coherent industrial strategy. Ultimately, steel is not just Malaysia’s industrial backbone, it is the proving ground for reconciling economic competitiveness with environmental responsibility under global ESG scrutiny.

    I provide trade defence and carbon regulatory & compliance advisory to support corporations in navigating regulatory change and sustainability obligations. assist clients in strengthening compliance with evolving ESG standards and sector‑specific regulations, ensuring resilience in the transition toward a low‑carbon economy. I welcome enquiries and would be glad to assist on these issues. Please feel free to contact me at pohyee.tan@hhq.com.my.

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  • Financing an EAF Project: Managing Credit Risk Through Covenants

    When a RM200 mil electric arc furnace sits on the balance sheet, the loan is only as strong as the covenants that back it.

    Introduction

    Steel manufacturing is capital-intensive, cyclical, and increasingly shaped by environmental imperatives. Among the most significant investments a steel company can make today is the installation of an electric arc furnace (EAF). For banks, financing such a project is not just about underwriting a loan, it is about structuring covenants that can withstand market volatility, operational risks, and regulatory scrutiny. This article explores the relevance of EAF technology, the financing challenges faced by steel manufacturers, the credit risks banks must weigh, and how tailored covenants can mitigate those risks.

    EAFs can reduce carbon footprints by up to 80% compared to blast furnaces, making them attractive in a world of tightening ESG regulations. They allow steelmakers to recycle scrap, reducing reliance on raw materials and strengthen circular economy credentials. EAFs can be adjusted up or down more easily to align production with demand cycles.

    What is an EAF and Why It Matters in Steel Manufacturing

    An electric arc furnace is a steelmaking technology that uses electrical energy to melt scrap steel or direct reduced iron (DRI). Unlike traditional blast furnaces, which is primarily an ironmaking technology that reduces iron ore with coke to produce pig iron, the EAF bypasses that stage by relying on recycled or pre-reduced feedstock. In the traditional route, pig iron from the blast furnace is transferred into a basic oxygen furnace where it is refined into steel. The EAF eliminates the need for pig iron altogether, offering a more flexible and less carbon-intensive pathway to steel production.

    For steel companies, investing in an EAF is both a technological upgrade and a strategic positioning move. For banks, it represents a financing opportunity tied to ESG-linked lending frameworks, but also a concentration risk given the sheer size of the investment.

    Financing Challenges for Steel Manufacturers

    Steel manufacturers face several hurdles when seeking financing for EAF projects. A RM200 million furnace is a balance sheet-heavy asset and for large-scale operations even that figure may be insufficient. Few companies can finance such investments internally, making bank loans essential.

    Market volatility compounds the challenge. Steel overcapacity in Malaysia and globally has led to price instability, while scrap availability which is the lifeblood of EAFs remains uncertain. These factors affect both profitability and debt service capacity.

    Banks are also increasingly tying financing to sustainability risk as frameworks such as the Climate Change and Principle-based Taxonomy (CCPT). Steelmakers in the “transitioning” category must demonstrate compliance with emission targets and disclosure requirements. Financing is therefore not just about securing capital, it is about structuring terms that reassure lenders while giving steelmakers operational breathing room.

    Credit Risks Banks Must Consider

    From a bank’s perspective, financing an EAF project involves several layers of risk and we pick some to discuss here.

    Operationally, EAFs depend on scrap supply, and any disruption can impair production. Banks must be assured that borrowers have reliable and diversified supply chains.

    Financially, steel price volatility and global oversupply can erode margins thereby weakening debt service capacity.

    Regulatorily, under the CCPT framework, steelmakers are typically classified as “transitioning” sectors, which means banks must ensure that financing is tied to credible transition plans and compliance with emissions disclosure requirements. This adds a regulatory dimension to credit risk: if borrowers to meet CCPT criteria, such as providing transparent emissions data and demonstrating progress toward decarbonisation targets, banks themselves risk supervisory scrutiny for weak due diligence.

    Banks must therefore assess not only the borrower’s financials but also the broader industry context, supply chain resilience, and regulatory landscape.

    Managing Risk Through Financing Covenants

    Covenants are the backbone of risk management in project financing. For EAF projects, they must be tailored to address both financial and operational realities, some of which are discussed below.

    • Financial Covenants

    When banks finance an electric arc furnace project, one of the most critical financial covenants they usually impose is a cap on the debt-equity ratio. This covenant is designed to ensure that the borrower does not over-leverage its balance sheet in pursuit of a capital-intensive upgrade. If the borrower funds too much of the project with debt, the risk of default rises sharply, particularly in a sector as volatile as steel where margins are constantly exposed to price swings and scrap feedstock fluctuations. Imposing a reasonable debt-equity ratio on the borrower enables the borrower to retain sufficient reserves. In market shocks, equity becomes the buffer that absorbs shock steelmakers, therefore, such covenant ensures the bank is not left carrying disproportionate risk.

    Another cornerstone of covenant structuring in EAF financing is the debt service coverage ratio (DSCR). This covenant is designed to protect banks against cash flow shortfalls by requiring borrowers to maintain a minimum level of operating cash relative to its debt obligations. A ratio above one signals that the company generates enough cash to service its debt while a ratio below one indicates vulnerability. A minimum DSCR ensures banks that borrowers cannot drift into a position where debt service depends on optimistic forecasts or unsustainable cash reserves and if the covenant is breached, remedies such as cash sweeps or restrictions on further borrowing can be triggered, thus giving banks early warning and control before the situation deteriorates into default.

    • Operational Covenants

    For an electric arc furnaces project, banks often require borrowers to secure long-term scrap supply contracts as an operational covenant because the furnace depends almost entirely on scrap steel or direct reduced iron, thereby making feedstock disruption a direct threat to debt service capacity.

    These contracts must demonstrate reliable tonnage, diversified suppliers, enforceable delivery schedules and quality standards with lenders sometimes insisting on assignment rights to step in if the borrower breaches the covenant. This is a necessary covenant to ensure operational continuity against volatile scrap markets.

    • ESG Covenants

    In the context of financing an electric arc furnace project, an ESG covenant on emissions reporting is one of the most powerful tools a bank can use to align borrower behaviour with sustainability commitments. This covenant requires the borrower to provide regular, verifiable data on its greenhouse gas emissions and other pollutants associated with steelmaking. The reporting obligation is typically structured around internationally recognised standards such as the Greenhouse Gas Protocol, ISO 14064 or local regulatory frameworks under the Environmental Quality Act to ensure that disclosures are consistent and comparable. For the bank, the covenant serves two purposes: it provides transparency into whether the borrower is genuinely progressing on its transition plan and it protects the lender from accusations of greenwashing by demonstrating that financing is tied to measurable outcomes.

    A useful illustration of these risks can be seen in the financing of Malaysia Steel Works (KL) Berhad’s electric arc furnace project in 2024. AmBank approved a facility of RM84 million to support the investment, which was highlighted in the company’s press release. For the bank, the transaction demonstrates both opportunity and exposure: the EAF positions the borrower within a lower-carbon steelmaking pathway, but it also concentrates risk in a single, capital-heavy asset.

    The case highlights why lenders must go beyond standard financial ratios. If the borrower fails to meet emission reduction commitments or struggles with scrap supply volatility, the bank faces reputational and regulatory scrutiny under ESG frameworks such as the CCPT framework. Covenants tied to emissions reporting, debt service coverage and scrap supply contracts therefore become essential tools to align borrower behaviour with lender protections.

    Strategic structuring of covenants helps banks to transform a high-risk loan into a defensible financing arrangement, thereby helping high risk industries transition to low-carbon industry.

    Conclusion

    Financing an electric arc furnace project is not a routine transaction. It is a complex interplay of technology, sustainability, market cycles, and credit risk. For steel manufacturers, the challenge lies in securing financing without suffocating operational flexibility while meeting regulatory requirements. For banks, the challenge is to underwrite loans that are resilient against volatility and regulatory change.

    The RM200 million EAF on the balance sheet is more than just an asset, it is a test of how well covenants can align borrower incentives with lender protections. Done right, covenant structuring can turn a risky bet into a sustainable partnership and ensure that both steelmakers and banks emerge stronger in a world where ESG compliance and operational resilience are non-negotiable.

    I provide advisory services to clients across a wide spectrum of sustainable finance and credit risk management and work with corporations across sectors to support their transition journey toward a low-carbon economy. I ensure that financing structures, covenants and compliance frameworks are resilient against both market volatility and regulatory change.

    Should your organization require assistance in strengthening credit risk governance, I am glad to assist. Please feel free to contact me at pohyee.tan@hhq.com.my or at ooifi@hotmail.com.

    #SustainableFinance #CreditRisk #ESG

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  • The Role of GHG Inventories in Meeting IFRS S2 Climate Disclosure Requirements

    Greenhouse gas (GHG) inventories have become foundational tools in corporate climate reporting. With the introduction of IFRS S2, namely the heightened climate-related disclosures, organizations face an imperative to disclose consistent, comparable emissions data. At the heart of these disclosures lies the GHG Protocol Corporate Accounting and Reporting Standard, the global benchmark for quantifying and managing emissions. This article explores why a robust GHG inventory is the first critical step toward IFRS S2 compliance, outlines a practical roadmap for building that inventory and embedding GHG inventory into corporate strategy.

    Why GHG Inventories Matter for IFRS S2

    A GHG inventory transforms scattered data points into a coherent narrative of an organization’s climate footprint. Under IFRS S2, issuers must disclose:

    • Absolute gross emissions for Scope 1 and Scope 2
    • Material Scope 3 emissions, explained by category
    • The organizational boundary and whether reporting based on equity share or control

    Without a standardized inventory, these disclosures lack integrity, comparability, and transparency. Anchoring disclosures in the GHG Protocol Corporate Accounting and Reporting Standard ensures that data are reliable and aligned with peers, laying the groundwork for credible year-on-year reporting and meaningful benchmarking.

    Aligning with the GHG Protocol Standard

    The GHG Protocol establishes five core quality principles, namely, relevance, completeness, consistency, transparency and accuracy to guide every inventory decision. If offers two accounting approaches: equity-share, which allocates emissions based on ownership percentage in joint ventures and control, which attributes 100 percent of emissions from operations over which the company holds financial or operational authority.

    Selecting the appropriate approach and categorizing emissions into Scope 1, Scope 2 and Scope 3 would enable organizations to create a clear, defensible framework that satisfies both the Protocol’s standards and IFRS S2 requirements.

    Building a GHG Inventory: A Practical Roadmap

    The first step in building an inventory is establishing the organizational boundary. This involves mapping every business unit, site and partnership to define which emissions must be accounted for, using either the equity-share or control appraoch.

    Next, companies design a data collection system that assigns ownership for each data stream such as fuel usage logs, utility bills, vendor/supplier reports and implements calculations to convert activity data into carbon-dioxide equivalents using the emission factors and global warming potentials (GWP) calculation.

    Selecting a base year with reliable, verifiable data provides a benchmark for future comparison and documenting recalculation procedures ensures consistency when organizational changes or methodological updates occur.

    Finally, external assurance by an accredited third party assurance providers under standards such as ISAE 3000 confirms the integrity of the inventory and reinforces investor confidence.

    Looking Ahead: Embedding the Inventory into Strategy

    Rather than treating the GHG inventory as a one-time compliance exercise, forward-thinking organizations weave it into everyday decision-making. Establishing clear science-based targets, such as a 20 percent reduction in Scope 1 emissions over five years and breaking these goals into annual action plans maintains momentum and accountability.

    Scenario analysis further strengthens strategic thinking by simulating “what if” questions, like how a 10 percent headcount increase might affect emissions. This dynamic approach ensures that the inventory informs budgeting, capital allocation and risk management, making climate considerations an integral part of corporate strategy.

    Breaking down emissions by source and location in a GHG inventory would enable an organization to identify its biggest carbon hotspots, whether that is an aging boiler that guzzles fuel, an overly lit factory floor or a trucking route that east up diesel. Once an organization knows exactly where most their emissions are coming from, they can target upgrades to optimise delivery and production. In this way, the inventory guides organizations to the most cost-effective fixes and leading to a more efficient operations.

    Conclusion

    If an organization’s ambition is to conquer IFRS S2 reporting with confidence, building a GHG inventory in strict accordance with the GHG Protocol is non-negotiable. It lays the groundwork for credible disclosures, illuminates decarbonization priorities, and unlocks a wealth of strategic insights. Moving forward, GHG inventory will evolve from a compliance checklist into a linchpin of climate strategy by guiding science-based targets, informing operational improvements, and strengthening stakeholder trust.

    #greenhousegasinventory

    #GHGProtocol

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  • As I read the recent Court of Appeal decision of Obata-Ambak Holdings Sdn Bhd v Prema Bonanza Sdn Bhd & another appeal delivered on Mar 16, 2022, the decision raised more questions than answers.

    This was a case where the housing developer had obtained extension of time (EOT) for 54 months in July 2012 for delivery of vacant possession of a housing project. The relevant clauses in the sale and purchase agreement were amended to reflect the extended period of delivery of vacant possession of the property. Both the purchaser and the housing developer agreed that the time for delivery of vacant possession was 54 months.

    After taking delivery of vacant possession of its property from the housing developer, the purchaser filed the suit in year 2020 against the housing developer claiming for liquidated ascertained damages dating back to 36 months from SPA following the decision of Ang Ming Lee in 2020.

    The housing developer raised the defence of limitation against the purchaser’s claim, saying that the purchaser was already out of time when it filed the action in 2020. Why? Because if the EOT was invalid as per the decision of Ang Ming Lee, it would have had breached the terms of SPA at the time of signing. The cause of action would have run from date of signing of SPA in July 2012 and 6 years had lapsed in July 2018. Therefore, the purchaser’s action filed in 2020 was barred by limitation.

    I would agree with decision of Ang Ming Lee that the EOT obtained was invalid as it was not obtained in accordance with the law. However, one must be very careful to apply Ang Ming Lee’s case. In Ang Ming Lee, the SPA was signed providing for 36 months to deliver vacant possession as per Schedule H of Housing Development Regulations 1989. When the EOT was obtained later and subsequently ruled as invalid by the courts, the purchasers were still able to go back to the original 36 months as provided in the SPA to claim for liquidated ascertained damages.

    Here, the SPA was already amended to 54 months at the time of signing. And now with the EOT obtained being invalid, can the parties now rely on the 36 months as provided under Schedule H even though it was never in the SPA in the first place? Or will the relevant clause on delivery of vacant possession in the SPA be rendered null and void?

    This was the difference between the facts of this case and the facts in Ang Ming Lee which will bring us to different line of questions. I hope there will be another Federal Court decision ruling for the effect of EOT on SPA where the clauses were already amended at the time of signing. This will settle a lot of conflicting decisions post Ang Ming Lee.

  • Introduction to Mindfulness Techniques

    Later in this book, we tell you more about how, why and for how long people have been using calming techniques like meditation and yoga to improve their lives. These techniques are sprinkled throughout this book, and in Chapter 8 we review the history and development of mindfulness, as well as some of the many mindfulness techniques you might find useful. Here we give you a taste.

    Why be mindful?

    Being mindful and practicing simple mindfulness techniques, even in small doses, can strengthen your intellect, improve your resolve, and improve your interpersonal skills. Mindfulness techniques can also help you relieve stress. Although being an attorney is not an easy job, it can be very rewarding.

    The difficulties of the job are part of what make the work of an attorney meaningful. As Tal Ben-Shahar explains in his book, Happier, we are happiest when we work in jobs that combine our strengths with what we find pleasurable and meaningful. We also grow deeply and steadily through adversity. As Ben-Shahar explains, “we are designed for the climb…”

  • Balancing the scale of social legislation

    Just finished reading the grounds of judgment of PJD Regency Sdn Bhd v Tribunal Tuntutan Pembeli Rumah & Ng Chee Kuan Civil Appeal No. 01(f)-29-10/2019(W) delivered on January 19, 2021 and immediately the following thoughts came to mind.

    This case involved 7 appeals where it was grouped to 3 groups of appeal involving 3 different development projects and heard before the same panel of Federal Court judges.

    The developer of all the 3 projects where the housebuyers bought their units of property have failed to deliver vacant possession of the property within the time frame as stipulated in the sale and purchase agreement (“the agreement”).

    The agreement stipulates that vacant possession of the property is to be delivered to the housebuyers within 36 or 24 months from the date of agreement (“the completion date”) in accordance with Schedule H or Schedule G prescribed respectively under Housing Developer (Control & Licensing) Regulations 1989.

    The problem is when does the completion run from? 36 months from the date when the housebuyer paid the booking fee or 36 months from the date when the sale and purchase agreement was signed?

    The housebuyer insisted that the 36 months should run from the date he paid the booking fee, while on the other hand, the developers argued that 36 months should run from the date when the agreement was signed.

    The Federal Court ruled in favor of the housebuyers, in that the 36 months should run from the date the housebuyer paid the booking fee, on the grounds of that the Housing Developers (Control & Licensing) Act 1966 is a social legislation which was meant to protect housebuyers and the doctrine of stare decisis following two previous decisions in Hoo See Sen & Anor v Public Bank Berhad (1988) 2 MLJ 170 and Faber Union Sdn Bhd v Chew Nyat Shong & Anor [1995] 2 MLJ 597.

    I have come across this social legislation concept ever since handling employment matters that deals with the Industrial Relations Act 1967, another piece of social legislation.

    However, question came to mind, what was the reason that there being a gap between the date of payment of booking fee and the date of signing of the agreement? We are talking about the agreement for purchase of property under project development.

    I understand that the nature of business of construction of project development is not the same as the business of food and beverage or any other business. In food business, you go in a food court, you order a plate of nasi lemak and make payment at the counter. Upon payment, the vendor will be preparing your nasi lemak and serve it to you accordingly.

    The nature of the business of construction is not the same. Construction work may or may not have started when the developer receives booking fees from housebuyers but for some reason, the constructions may be disrupted. Reasons for delay may vary from the developers being stuck with the authorities or a court order. Sadly, the reasons for the gap between the date of payment of booking fee and the date of signing of the agreement was nowhere mentioned in the grounds of judgment in High Court and Federal Court. In practice, some gaps can be as long as 6 months or 1 to 2 years.

    If developers have a valid and practical reason for explaining the gap between the date of payment of booking fee and the date of signing of the agreement, they should have a representative before the courts either as an intervener or as an amicus curiae in watching briefs to provide the courts with an authoritative insight representing the developers, notwithstanding the express prohibited of collection of booking fee under the Housing Developers (Control & Licensing) Regulations 1989.

    The principle of looking at the objective of social legislation to protect housebuyers must also be balanced with the practicality of doing business. The court’s effort to level the playing field between developers and housebuyers must have the effect of balancing a scale.

    Notwithstanding that, whatever is the reason for the delay in signing the agreement, that will if anbe an issue to be settled between developers and the parties / authorities who are causing that delay. As far as the housebuyer is concerned, time has already run from the date when he paid his booking fee or deposit. It is for the developers to sort out any issues that is causing the delay in getting the agreement signed. If the problem involves the law, then push for reform of the law.

    Not siding with any sides but just considering from the viewpoint of a housebuyer and a developer.

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