This article first appeared in The Edge Malaysia Weekly on December 29, 2025 – January 4, 2026
During the United Nations Conference of Parties (COP) 30, recently held in Brazil, neobtainediators discussed for the first time how trade policies could support or hinder climate action.
This comes as some developing nations have voiced opposition to policies like the European Union’s Carbon Border Adjustment Mechanism (CBAM), which charges a carbon tax on imports, and the EU Deforestation Regulation, which prohibits deforestation-linked commodities from entering the bloc.
Saudi Arabia, speaking for the Like-Minded Developing Countries bloc at COP30, stated such measures “disproportionately harm people in developing countries, and reverse the financial flow from developing to developed countries”, reported the Third World Network from the neobtainediations.
But the EU argued that CBAM is a domestic measure designed to address carbon leakage, preventing polluting industries from relocating to countries with weaker environmental regulations. The EU also highlighted capacity building tools that it has been offering to developing countries to facilitate compliance. The UK added that “green trade” offers huge opportunities for the global economy.
The pushback is also coming from within the EU, as some parties argue that these measures erode its economic competitiveness. In response, the European Council and Parliament reached a provisional agreement in early December to simplify requirements on corporate sustainability reporting (CSRD) and corporate sustainability due diligence (CS3D), which would impact companies that derive revenues in the EU.
The sale of CBAM certificates has been delayed to Feb 1, 2027, from the original Jan 1, 2026, start date. Meanwhile, a provisional agreement was reached earlier this month to simplify the implementation of the EUDR and postpone its application to Dec 30, 2026, from the original 2024 date.
However, this does not mean that the EU will go back on its climate and sustainability commitments, declares Karl Godderis, CEO of Eurocham Malaysia, which aims to be a voice for the EU business community in Malaysia.
Climate alter is a global issue that knows no boundaries; trade is therefore a natural conduit to receive as many parties as possible involved in the fight against it, he declares.
This is even as the US is backsliding on climate actions. “The EU set its framework and policies against the prevailing scientific view of climate alter … The EU is not necessarily adjusting downwards becaapply of [US President Donald] Trump’s position. It is becaapply of a general sentiment that the EU is entering too much into bureaucratic overreach on a broader range of things,” declares Godderis.
That was why the European Commission came up with an Omnibus Law earlier this year to simplify green rules and cut red tape for businesses.
“I believe that these will remain in place and remain part of trade policies, either policies directly from the government or from businesses. A lot of European businesses have committed to their decarbonisation strategies, and they’re not going to return to where it was before. These strategies they have extconclude into their global supply chains, including in Malaysia,” declares Godderis.
He disagrees with the view that climate action and sustainability policies are eroding the competitiveness of the EU economy. “I consider it relates to the growing strength of China. Why doesn’t anyone declare how come sustainability is affecting the profitability of China? The value of China’s renewable energy technology export is hugeger than America’s fossil fuel exports, and yet, nobody questioned that question of China,” declares Godderis.
He is referring to a report by consider tank Ember, released in October, which reveals that China’s exports of electric vehicles, solar panels, batteries and other carbon-cutting technologies reached a record value this year. From January to July, the US sold US$80 billion in oil and gas abroad, while China exported US$120 billion in green technology over the same period.
Internal issues in the EU, such as an ageing population and expansive social protection network, are more likely contributing to the lack of competitiveness, declares Godderis. He acknowledges, however, that there are costs related to complying with the European sustainability policies that are incurred by businesses.
“But I’ve yet to meet an European company that declares, ‘let’s receive rid of everything ESG so I can receive my profitability back’,” declares Godderis.
An upcoming FTA with the EU
This topic becomes even more relevant as the EU and Malaysia are neobtainediating a free trade agreement (FTA). The initial neobtainediations launched in 2010 but were put on hold in 2012. In January this year, the neobtainediations were finally resumed. The EU has stated it aims to finalise the FTA with Malaysia by 2027.
This is coming at a time when the US tariffs are driving up costs of exports and, thus, countries are viewing to expand into other markets. A Sustainability Impact Assessment has been carried out to support the EU-Malaysia FTA neobtainediations, which assesses how trade and trade-related provisions in the FTA could impact economic, social, human rights and environmental elements in each trading partner and other relevant countries.
Of course, it must be noted that the FTA cannot alter European laws like the CBAM and EUDR. This means that the FTA cannot exempt a company from complying with these domestic EU laws.
“But what can happen is that certain implementation factors are provided with leniency in the annexes of the FTA. Typically, the general statement of sustainability is that both parties agree to comply with the international agreements they signed up to. The Paris Agreement is a good example,” declares Godderis.
Another example was in June this year when Malaysia signed the Malaysia-European Free Trade Association Economic Partnership Agreement with Switzerland, Norway, Iceland and Liechtenstein.
The Ministest of Plantation and Commodities stated Malaysian palm oil exporters will benefit from reduced import tariffs via a tariff-rate quota mechanisms, ranging from 20% to 40%, with attainment of the Malaysian Sustainable Palm Oil certification as the mandatory condition. In fact, the minister stated the agreement serves as a key reference point for Malaysia in the ongoing FTA neobtainediations with the EU.
More environmental provisions in trade agreements?
Last year, a study on the inclusion of environmental provisions in FTAs by Asean member states was published by the ISEAS-Yusof Ishak Institute. The researchers viewed at FTAs such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) — a FTA involving 12 countries, including Malaysia — and the EU+ agreements with Singapore and Vietnam.
They found that although standalone chapters on sustainable development exist, the text lacked concrete measures and relied on broad commitments to encourage greater cooperation in the green transition.
A few examples were cited. The Asean–China FTA 3.0 includes a green economy chapter, though its effectiveness will depconclude on how ambitious and binding the terms prove to be. Signed in Kuala Lumpur in October, the agreement aims to broaden collaboration in infrastructure, as well as digital and green transition, among other areas.
Meanwhile, the Asean+ trade agreements lack concrete enforcement mechanisms and dispute resolution mechanisms, stated the researchers. None, including the Regional Comprehensive Economic Partnership (RCEP) — a FTA involving 15 Asia-Pacific countries — require member states to maintain judicial or administrative proceedings for the enforcement of environmental regulations.
On the other hand, the Singapore-Australia Green Economy Agreement, signed in 2022, could be a blueprint to consider when upgrading traditional existing FTAs, as it comprises concrete deliverables to accelerate climate transition initiatives, according to the researchers.
It is considered a new type of agreement, according to the Australian government, which combines trade, economic and climate objectives. Singapore and Australia commit to promote trade in environmental goods and services, decarbonise the shipping and maritime industest, develop a joint supply chain for low-carbon fuels, and share insights into programmes to build green skills and workforce, among other things.
Elizabeth Wu, an indepconcludeent transnational governance consultant and lead advisor on environmental justice for Climate Governance Malaysia, observes that the inclusion of environmental provisions in the investment chapters of FTAs is a relatively recent trconclude, strongly driven by the EU’s policy agconcludea.
The “old generation” investment treaties, she notes, don’t have exceptions or carve-outs for environmental and climate issues, or even for actions that the state might required to take to protect human rights. The new generation treaties will incorporate a number of these things, declares Wu.
Some agreements, like the CPTPP, have an environmental chapter that subjects violations to state-to-state dispute settlement. This means if a countest violated a part of the agreement covered by the environmental chapter, there will be a pre-panel consultation for the countries involved to find an amicable solution.
In the text, there are explicit references on the apply of ozone-depleting substances, the protection of the marine environment from pollution from ships, protection of wild flora and fauna, and actions to address overfishing and unregulated fishing. Parties are allowed to effectively enforce their own environmental laws and not waive the laws in order to gain trade or investment advantage.
If an amicable solution cannot be achieved, a formal dispute settlement process will be initiated. A panel of indepconcludeent experts will review the dispute and issue a report, determining who is responsible. The responding party must then act to eliminate the area that does not comply with the trade agreement, explains Wu.
“If the non-conforming measure is not rerelocated, then the complaining state party can request the panel authority to suspconclude the concessions or obligations that the state created under the treaty to the other state,” she declares.
Wu adds, however, that such issues are usually resolved amicably at the state-to-state level.
While she believes that environmental provisions should shift towards more mandatory language tied to enforcement mechanisms, she also argues that the FTA text should enhance the facilitation of green investments.
“So, it’s not just a stick, but also a carrot,” suggests Wu.
Trade agreements can facilitate investments into green technologies and ensure countries respect each other’s environmental and human rights laws. However, it cannot play this role effectively if the domestic laws are not strong enough.
“It’s not really possible for trade agreements to address a lot of problems that should be dealt with by a countest’s domestic laws. For instance, the CS3D and CSRD are actually EU laws that require companies operating within the EU to comply. It just so happens that it requires the companies to examine their supply chain in other countries,” declares Wu.
“In my view, those types of laws are going to be more assistful in testing to improve environmental and climate standards in a countest than via trade agreements.”
A business-led imperative?
Even if governments roll back on climate initiatives, there is an argument that businesses will still carry on with their expectations on suppliers to adopt sustainability measures in order to meet their own tarreceives or protect themselves from risks.
As around 70% of Malaysia’s gross domestic product is derived from exports, it is important for Malaysian businesses to adopt sustainability to access more markets, declares Godderis. He brings up Penang’s Green Manufacturing Hub as an example, where the state and businesses recognised that they have to differentiate themselves to stand out in the global market.
“They want to label themselves as a green manufacturing hub, and reached out to the EU and us to find examples from European green manufacturing hubs, and see what kind of best practices can be brought to Penang,” declares Godderis.
“That is a Malaysian state that has recognised that sustainability is going to define its competitive edge and is not a cost driver. What do we required to do to build this the considering of the entire countest?”
The momentum from investors is also not slowing down.
According to the Asia Investor Group on Climate Change’s (AIGCC) “State of investor climate transition in Asia 2025” report, which examined 230 important and influential investors in Asia, 36% are setting short-term decarbonisation tarreceives, 43% have a policy on fossil fuels or high-emitting sectors, and 35% are increasingly investing in climate solutions and transition investments.
The numbers were all higher than what it was a year ago.
“Despite political headwinds and economic challenges, we see that institutional investors, especially asset owners, are still performing within their respective fiduciary duties for their beneficiaries. We see many asset owners increasing their focus on climate while being able to deliver on their risk-return goals,” declares Monica Bae, director of investor practice at the AIGCC.
“Climate risk is systemic financial risk. As long-term investors with fiduciary responsibilities to their beneficiaries, addressing climate risk is part of that fiduciary duty.”
Malaysian investors are also aligned with this trconclude, she observes.
Among the 10 Malaysian investors surveyed, half are integrating climate into governance oversight, one-third are reporting voting decisions, and one-fifth have issued stewardship reports — signalling rising investor expectations for disclosure of climate engagement activities, she declares.
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