Sustainability reporting has become increasingly important in Malaysia as businesses face growing pressure from regulators, investors, and stakeholders to demonstrate stronger environmental, social, and governance (ESG) accountability. However, concerns regarding greenwashing, inconsistent disclosures, and weak verification processes have increased the importance of sustainability auditing in ensuring the credibility of ESG reports (Ribeiro & Oliveira, 2023).

A recent study by Hikal et al. (2025) titled “Sustainability Auditing and Reporting in Malaysia: Strengthening Transparency, Accountability, and Corporate Responsibility” examined how sustainability auditing improves transparency, environmental sustainability, and institutional accountability within Malaysian organizations. The study also explored the effectiveness of audit frequency and audit quality in supporting ESG governance and sustainability reporting practices.

Sustainability Reporting and ESG Governance in Malaysia

Sustainability has evolved from a voluntary corporate initiative into a key strategic component of modern business operations. Organizations are increasingly expected to disclose transparent ESG information to demonstrate ethical accountability and long-term sustainability commitments. According to Janicka and Sajnóg (2022), ESG reporting has become an essential mechanism for improving corporate transparency and investor confidence.

In Malaysia, sustainability reporting practices have accelerated following the introduction of the Malaysian Code on Corporate Governance (MCCG) and Bursa Malaysias Sustainability Reporting Guidelines. These frameworks encourage companies to disclose material ESG information while aligning with international standards such as the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) (Jamil et al., 2021).

Nevertheless, many organizations still treat sustainability reporting primarily as a compliance exercise rather than a genuine sustainability commitment. The absence of mandatory and standardized sustainability audit procedures continues to undermine the reliability and comparability of ESG disclosures (Hikal et al., 2025).

Research Objectives and Study Gap

The study aimed to evaluate:

1. The current state of sustainability auditing and reporting in Malaysia.
2. The impact of sustainability audits on environmental sustainability.
3. The influence of sustainability audits on institutional transparency.
4. The relationship between audit quality, audit frequency, and ESG accountability.

Hikal et al. (2025) identified a significant research gap, noting that although previous studies examined sustainability reporting practices in Malaysia, few studies critically evaluated the effectiveness of sustainability auditing in ensuring the credibility of sustainability reports. Existing literature mainly focused on disclosure quantity rather than audit assurance quality and enforcement mechanisms.

Challenges in Sustainability Auditing

Lack of Standardized ESG Audit Frameworks

One of the major challenges highlighted in the study is the absence of standardized sustainability auditing frameworks. Different reporting frameworks such as GRI, TCFD, and SASB often result in inconsistent auditing criteria and varying disclosure quality across industries. Deegan and Unerman (2011) argued that inconsistent reporting standards contribute to significant variations in sustainability disclosure practices.

Limited ESG Expertise

Sustainability auditing requires knowledge beyond traditional financial auditing, including expertise in environmental management, social responsibility, governance systems, and non-financial ESG metrics. Pflugrath, Roebuck, and Simnett (2011) emphasized that auditors with ESG-specific training produce more reliable sustainability assurance outcomes. However, Malaysia currently faces a shortage of qualified sustainability auditors.

Greenwashing and Weak Enforcement

The study also highlighted the ongoing issue of greenwashing, where companies publish sustainability reports primarily for reputational purposes without meaningful sustainability implementation. Weak regulatory enforcement and limited assurance requirements further increase the risk of misleading ESG disclosures (Ahmad & Gow, 2020).

High Costs for SMEs

Small and medium-sized enterprises (SMEs) often struggle to obtain independent sustainability assurance due to high costs, limited technical expertise, and inadequate access to ESG auditing resources. Tombolesi (2023) noted that financial incentives and regulatory support are necessary to encourage wider ESG adoption among SMEs.

Technology and Sustainability Auditing

The study emphasized the growing role of technology in improving sustainability auditing processes.

Artificial Intelligence (AI)

AI technologies can help auditors:

• Detect ESG reporting inconsistencies
• Identify greenwashing patterns
• Analyze large ESG datasets
• Improve risk assessment efficiency

Blockchain Technology

Blockchain technology improves ESG reporting reliability by creating immutable records that strengthen transparency and reduce opportunities for data manipulation or fraud. Appelbaum, Kogan, and Vasarhelyi (2017) argued that big data analytics and AI significantly enhance audit effectiveness and audit reliability.

The study suggested that integrating AI and blockchain into sustainability auditing could strengthen Malaysias ESG governance framework and improve audit efficiency.

Research Methodology

The study adopted a quantitative explanatory research design using Structural Equation Modeling (SEM) through Smart PLS software. Data were collected from 200 participants involved in environmental management and auditing within Malaysian public institutions. Participants included:

• Decision-makers
• Environmental auditors
• Operational staff

A structured questionnaire measured several key constructs, including:

• Frequency of environmental audits
• Quality of environmental audits
• Institutional transparency
• Environmental sustainability

The study reported strong reliability and validity results, with Cronbachs Alpha values exceeding the recommended threshold of 0.70 for all constructs (Hikal et al., 2025).

Key Findings

Frequent Sustainability Audits Improve Environmental Sustainability

The findings revealed that frequent sustainability audits have a strong positive impact on environmental sustainability, with a path coefficient of 0.770 (p = 0.001).

Frequent audits were found to:

• Improve waste reduction practices
• Enhance resource efficiency
• Strengthen emissions control
• Promote ecosystem conservation
• Improve environmental risk identification

These findings support previous research by Gong, Gao, and Li (2024), which emphasized the importance of regular environmental audits in improving environmental governance effectiveness.

Sustainability Audits Enhance Institutional Transparency

The study also found that the frequency of sustainability audits significantly improves institutional transparency, with a path coefficient of 0.529 (p = 0.001).

Regular audits improve:

• Public access to sustainability information
• Stakeholder confidence
• Internal accountability
• Institutional legitimacy

These findings align with Stakeholder Theory, which argues that organizations must satisfy stakeholder expectations to maintain long-term legitimacy and trust (Freeman, 1984).

Unexpected Findings on Audit Quality

Interestingly, the study identified a negative relationship between audit quality and environmental sustainability, with a path coefficient of -0.333 (p = 0.001).

The researchers suggested that highly technical and complex audit procedures may create operational challenges that slow sustainability implementation or reduce practical effectiveness. This finding indicates that technical audit quality alone may not guarantee better sustainability outcomes without effective implementation strategies.

Audit Quality and Institutional Transparency

Although audit quality showed a positive relationship with institutional transparency, the relationship was not statistically significant (0.258, p = 0.109).

This suggests that stakeholders may prioritize the visibility and frequency of sustainability audits over technical audit sophistication when evaluating institutional transparency.

Theoretical Foundations

Stakeholder Theory

The study adopted Stakeholder Theory as one of its theoretical foundations. Freeman (1984) argued that organizations must address the expectations of multiple stakeholder groups, including investors, regulators, employees, and the public. Sustainability audits help reduce information asymmetry and improve trust between organizations and stakeholders.

Legitimacy Theory

Legitimacy Theory was also used to explain how organizations conduct sustainability audits and ESG reporting to align with societal expectations and regulatory pressures. According to Suchman (1995), organizations seek legitimacy by conforming to social norms and governance expectations.

In the Malaysian context, companies face increasing pressure from Bursa Malaysia, MCCG, and international ESG frameworks to maintain transparent sustainability reporting practices.

Recommendations

The study proposed several recommendations to strengthen sustainability auditing practices in Malaysia.

Regulators and Government

• Introduce mandatory sustainability auditing requirements for large corporations.
• Standardize ESG assurance frameworks across industries.
• Strengthen enforcement against misleading sustainability disclosures.
• Provide tax incentives and subsidies for sustainability audits.

Companies

• Integrate sustainability auditing into risk management systems.
• Improve board oversight of ESG reporting.
• Strengthen stakeholder engagement through transparent ESG disclosures.

Professional Bodies and Universities

• Develop specialized ESG auditing training programs.
• Enhance auditor competency in sustainability assurance.
• Integrate ESG auditing into accounting and auditing curricula.

Technology Adoption

• Utilize AI and blockchain technologies to improve ESG audit quality and efficiency.
• Develop real-time ESG monitoring systems for continuous sustainability assessment.

Conclusion

The study by Hikal et al. (2025) demonstrates that sustainability auditing plays a significant role in improving environmental sustainability, institutional transparency, and corporate accountability in Malaysia. Frequent sustainability audits were found to substantially enhance both environmental performance and organizational transparency, highlighting the importance of continuous ESG monitoring and assurance practices.

However, challenges such as inconsistent standards, limited ESG expertise, high assurance costs, and greenwashing risks continue to hinder the effectiveness of sustainability auditing practices. The study also emphasized the growing importance of technology-driven auditing solutions, including artificial intelligence and blockchain, in strengthening ESG reporting reliability and audit efficiency.

As Malaysia continues advancing its sustainability agenda, stronger collaboration between regulators, businesses, professional bodies, and educational institutions will be essential in building a more transparent, accountable, and sustainable corporate environment.

References

Ahmad, R. N., & Gow, J. (2020). Mandatory ESG assurance and corporate sustainability: Evidence from Malaysia. Kuala Lumpur, Malaysia: University of Malaya Press.

Appelbaum, D., Kogan, A., & Vasarhelyi, M. A. (2017). Big data and analytics in the modern audit engagement: Research needs. Auditing: A Journal of Practice & Theory, 36(4), 1–27.

Deegan, C., & Unerman, J. (2011). Financial accounting theory (2nd ed.). London, UK: McGraw-Hill Education.

Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston, MA: Pitman.

Hikal, H. M. M., Abubakr, A. A. M., Musa, A. M. H., Abdelraheem, A. A. E., & Adam, M. I. A. B. (2025). Sustainability auditing and reporting in Malaysia: Strengthening transparency, accountability, and corporate responsibility. International Journal of Innovative Research and Scientific Studies, 8(4), 1068–1078.

Jamil, C. Z. M., Alwi, N. M., & Mohamed, R. (2021). Regulatory frameworks and sustainability disclosures: Evidence from Malaysia. Kuala Lumpur, Malaysia: Universiti Teknologi MARA Press.

Pflugrath, G., Roebuck, P., & Simnett, R. (2011). Impact of assurance and assurers professional affiliation on financial analysts assessment of credibility of corporate social responsibility information. Auditing: A Journal of Practice & Theory, 30(3), 239–254.

Ribeiro, M. D. C., & Oliveira, J. (2023). Auditing and sustainability. In Encyclopedia of sustainable management. Cham: Springer International Publishing.

Suchman, M. C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610.

Tombolesi, R. (2023). Sustainability performance and ESG factors: A new challenge for small and medium-sized enterprises (SMEs). In The impact of organizations. London, UK: Routledge.