Carbon Credit Series - Key Legal Lessons from the Sabah Nature Conservation Agreement

The growing interest in carbon markets in Malaysia has brought into sharp relief the need for legal clarity, governance oversight, and stakeholder alignment in carbon credit transactions. A case that underscores these complexities is the Sabah Nature Conservation Agreement (NCA), which attracted national and international attention due to its opacity, legal ambiguities, and stakeholder backlash.

Signed in 2021, the Sabah NCA involved a proposal to monetise carbon credits from more than two million hectares of forest reserves in Sabah through a 100-year agreement between the state government and Hoch Standard Pte Ltd, a little-known Singapore-based private company. The company was purportedly granted exclusive rights to develop and monetise nature conservation and carbon credit initiatives within the designated forest areas.[1]

The agreement was met with immediate controversy due to several reported flaws:

• Lack of transparency: The terms of the agreement were not publicly disclosed, nor were they tabled before the state legislative assembly. This created concerns about governance, public accountability, and regulatory compliance.[2]
• Questionable corporate profile: Hoch Standard Pte Ltd was described as having no prior track record in carbon markets or conservation work. It had minimal publicly available corporate history and an unclear funding structure, which raised red flags regarding its capacity to execute such a large-scale initiative.[3]    
• Failure to consult stakeholders: Indigenous communities and other key local stakeholders were reportedly not consulted in advance of the agreement. This raised concerns over Free, Prior and Informed Consent (FPIC) obligations, a cornerstone     principle in international environmental and human rights law.[4]    
• No clear benefit-sharing framework: Critics highlighted that the agreement lacked transparent mechanisms for sharing financial benefits with local communities or reinvesting in forest conservation.[5]    
• Bypassing procurement norms: There was no evidence of an open bidding or selection process, raising issues of compliance with public procurement laws and principles of fair competition.[6]    
• Concerns over additionality: The forests involved were already gazetted as protected areas, casting doubt over the additionality of any claimed carbon benefits. This raised questions about the environmental integrity and legitimacy of the credits that could be generated under the agreement.[7]

These concerns culminated in a backlash from civil society, scrutiny from legal commentators, and calls for the agreement to be reviewed or annulled. The Sabah Attorney General ultimately suspended the agreement for further investigation.

Key Legal Considerations for Purchasers Demonstrated by the Sabah NCA

The Sabah NCA serves as a practical case study for carbon credit purchasers. The key legal takeaways include:

1. Legal provenance of carbon rights: Buyers must assess whether the entity offering credits has a clear and legitimate legal right to generate and sell them. This involves reviewing concession agreements, land titles, and the basis of carbon ownership under domestic law.
2. Regulatory compliance: Ensure that the transaction complies with national and subnational laws governing land use, conservation, and public procurement.
3. Stakeholder consultation: Purchasers should require proof that Indigenous and local communities have been consulted and that FPIC obligations have been fulfilled.
4. Due diligence on counterparty: Review the financial health, track record, and capacity of the project developer or intermediary. Lack of transparency or inexperience can expose buyers to reputational and contractual risk.
5. Verification vs. legal due diligence: Even where a project is verified by a voluntary standard (e.g., Verra or Gold Standard), legal advisors must still verify the enforceability of underlying rights and compliance with local law.
6. Benefit-sharing arrangements: Credibility and sustainability of carbon projects are bolstered by clear, fair, and documented benefit-sharing mechanisms with impacted communities.
7. Environmental integrity and additionality: Buyers should question whether the project meets genuine additionality. If the land is already protected, then carbon benefits may not be new or incremental, potentially affecting the credibility and market value of the credits.

The Sabah NCA highlight show legal risks in the origination of carbon credits can cascade to buyers, potentially undermining their ESG commitments and inviting scrutiny from investors, regulators, and civil society.

A well-advised transaction in the carbon market requires more than technical validation or registry-level certification. Legal counsel plays an essential role in evaluating the enforceability of carbon rights, ensuring alignment with local and international legal norms, and managing transaction risks across regulatory, contractual, and reputational dimensions. By conducting targeted legal due diligence and advising on structuring and compliance, lawyers help ensure that buyers enter the market with confidence, mitigating the very risks that surfaced in the Sabah NCA.

[1] The Edge Markets, “Cover Story: Getting Carbon Markets Right”, 22 September 2022. https://theedgemalaysia.com/article/cover-story-getting-carbon-markets-right

[2] Free Malaysia Today, “Sabah’s carbon credit deal: Why the secrecy?”, 5 November 2021. https://www.freemalaysiatoday.com/category/nation/2021/11/05/sabahs-carbon-credit-deal-why-the-secrecy/

[3] Eco-Business, “UN investigates contentious forest carbon pact in Malaysian Borneo”, 19 March 2024. https://www.eco-business.com/news/un-investigates-contentious-forest-carbon-pact-in-malaysian-borneo/

[4] Mongabay, “Sabah’s secretive carbon deal sparks alarm over Indigenous rights, forest protection”, 3 November 2021. https://news.mongabay.com/2021/11/sabahs-secretive-carbon-deal-sparks-alarm-over-indigenous-rights-forest-protection/

[5] Details emerge around closed-door carbon deal in Malaysian Borneo”, 24 November 2021. https://news.mongabay.com/2021/11/details-emerge-around-closed-door-carbon-deal-in-malaysian-borneo/

[6] Malaysiakini, “Questions mount over Sabah’s opaque forest carbon deal”, 3 November 2021. https://www.malaysiakini.com/news/598291

[7] Ibid note 1.

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