When Malaysia’s Finance Minister launched its national Sustainable and Responsible Roadmap last week, he did not mince his words.
“There can be no overstating the importance of the capital markets in mobilising private investment to fund Malaysia’s developmental and environmental commitments,” said Lim Guan Eng as he cut the ribbon on the set of recommendations for scaling up ESG on behalf of capital markets regulator, the Malaysian Securities Commission (SC).
Although the most comprehensive, the Roadmap is far from Malaysia’s first foray into sustainable finance.
Sustainable finance in Malaysia will reach “tipping point” in the next three years, predicts Promod Dass
The Government has already introduced tax breaks for SRI funds, green sukuk and renewable energy; seeded a national SDG fund with the UN; and integrated climate change, resource scarcity and income inequality into its economic plans, among other things.
Promod Dass, CEO of RAM Sustainability, part of Malaysian credit rating agency RAM Holdings, says ESG awareness has been growing over the past three years, driven by a realisation from companies that sustainability is different from traditional Corporate Social Responsibility, and is increasingly important to investors, banks and ratings agencies like RAM. He predicts that the next three years will see Malaysia’s market reach “tipping point”.
And that’s where the Roadmap comes in.
Devised by the SC, Lim hopes the report will “develop Malaysia as an investment destination, by providing industries with the guidelines and clarity they require to invest sustainably and responsibly,” urging “more institutional investors to allocate their investments towards SRI”.
Despite the growing awareness around ESG, so far, Malaysian asset owners have tended to focus their efforts on the ’G’ pillar, governance.
Two weeks ago, the Institutional Investors Council Malaysia (IIC) held the inaugural Governance Convention in partnership with the Securities Industry Development Corporation to discuss topics such as shareholder activism, board governance and stewardship.
"Firms that respond to this new environment through an ESG lens are more likely to meet existing needs without compromising future generations" – Khazanah
IIC’s board is chaired by the Deputy CEO of private-sector pension scheme Employees Provident Fund, Mohamad Nasir bin Abdul Latif, and comprises a slew of big hitters from the Malaysian investment world.
$34bn sovereign wealth fund Khazanah, also represented on the board, told RI that its interest in ESG is based on risk and returns:
“The world is rapidly changing, and with it comes a more complex and challenging operating environment. We believe that firms that respond to this new environment through an ESG lens in their business strategy are more likely to meet existing needs without compromising future generations and thus would be more stable investments in the long run.”
Also on the board of ICC is Syed Hamadah Othman, the CEO of public pension fund KWAP, which has been one of the country’s loudest voices on sustainability so far.
It has recently implemented an engagement programme that uses third-party ESG data to help identify investee companies that are weak on certain issues.
Last year, it worked with other members of the IIC to engage the glove manufacturer Top Glove, plantation giant FGV Holdings and Sapura Energy, mainly on governance issues.
Despite the focus on governance, though, the global preoccupation with environmental and social topics was also reflected in the Governance Convention’s agenda, with discussions about sustainable investment, ESG disclosure and disruptive technologies included.
And it’s hoped the SC’s new Roadmap will turbocharge this nascent interest.
Based on a strategy originally published in 2014, it’s a detailed set of proposals that will form the basis of the “concerted efforts [that] are required to accelerate the promotion and profiling Malaysia as a regional SRI centre”.
“This is essential,” the SC adds, “given that other financial centres are also focusing their priorities on this agenda.”
The Roadmap is peppered with references to Europe’s high-profile Action Plan on Sustainable Finance
Indeed, just weeks before the Roadmap was unveiled, the Monetary Authority of neighbouring Singapore launched an ambitious Green Finance Action Plan, including a $2bn pledge to green investments and a stronger supervisory focus on climate risk for investors, lenders and insurers.
Hong Kong, Taiwan and Korea are among others in the region to try and position themselves as the next big hub for sustainable finance.
The new Roadmap is also peppered with references to Europe’s high-profile Action Plan on Sustainable Finance, and mirrors a number of its efforts, recommending that ESG should be better integrated into financial advice and that regulators should incorporate ESG in risk assessments and consider climate stress tests.
Also like the EU, the report calls for firms to report using the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). Specifically, it asks the stock exchange Bursa Malaysia to push its listed companies to do so.
A green taxonomy
But perhaps the most intriguing parallel with Europe is the recent announcement that the SC and Malaysia’s central bank, Bank Negara Malaysia (BNM), are working with the World Bank to create a green taxonomy.
It’s the second country to propose a national equivalent to the EU’s flagship project, following closely behind Canada, and could become the first of its kind out of both Asia and an emerging market (although China has had a ‘green catalogue’ for many years now).
The SC and the central bank both declined to discuss the taxonomy with RI, but the Roadmap says it will be “a uniform and harmonised classification system that serves as a useful reference point for issuers, market practitioners, investors and other stakeholders, both domestic and international” and will prevent fragmentation and greenwashing.
A first draft is expected this month.
SRI products and Islamic finance
Through a recently-announced Joint Climate Change Committee, the SC and BNM are also working on risk management, disclosure, engagement and products and innovation.
On the latter, the SC notes that asset managers and product providers will have a key role in scaling up SRI in Malaysia, and urges asset owners to allocate more capital to dedicated SRI strategies that will spur on innovation.
Two years ago, the SC created guidelines on SRI funds, but so far there have only been seven products that qualify.
Given that Malaysia is the biggest market in the world for Islamic finance – playing host to almost half of all outstanding Sharia-compliant bonds, known as sukuk – it’s no surprise that Islamic finance is front-and-centre of Malaysia’s SRI strategy, with the first concrete output from the SC being a new SRI Sukuk Framework.
Like the Roadmap, the framework is also built on an existing version from 2014 and emphasises the need to meet global expectations on transparency, disclosure and project selection for use-of-proceeds instruments.
BNM also published an updated guide to Islamic finance last month called the Value-based Intermediation Financing and Investment Impact Assessment Framework, with input from the World Bank and WWF. Islamic Finance Institutions will have to realign their current risk assessment and management to the framework, which revises environmental and social impact requirements, in accordance with Sharia law.
The SC has pledged to create a dedicated SRI/sustainability segment on Malaysia’s Bond Information Exchange, BIX, to foster more deals and says that, “with a sufficient pool of SRI products, a dedicated SRI exchange may be introduced”.
There have so far been 10 SRI sukuk issued out of Malaysia, with a combined value of RM4.3bn. To scale up, the SC says new models like securitisation and pooled finance should be considered.
But the greatest potential currently lies in a widening of the use-of-proceeds, according to RAM’s Dass.
“Green bonds and sukuk in Malaysia are gaining ground fast,” he tells RI, claiming that since 2017, there have been 12 deals with a combined value of some RM6bn.
“But what is really interesting is that some issuers have also pioneered sustainability bonds.”
Last year, HSBC’s Malaysian Islamic finance arm issued the world’s first SDG-linked sukuk. In October this year, Malaysian banking giant CIMB followed suit with a $680m SDG bond.
This trend in bank issuance, as well as the widening of the types of projects being finances, offers major opportunities for growth in the labelled Sukuk and bond markets, says Dass. “The sound credit profiles of Malaysian banks, and their ability to utilise issuance proceeds to fund green projects make them ideal candidates as issuers of these kinds of bonds and sukuk,” he says.
A sovereign issuance
One of the most concrete recommendations from the SC is that the Malaysian Government wades in with its own SRI deal, to really kick things off.
“The issuance of sovereign green, social and sustainability bonds and sukuk by the government will provide greater signalling of the Malaysian government’s commitment towards the sustainable agenda,” the Roadmap says, adding that its new Sukuk framework could be used as the basis for a Sharia-compliant govvie.
The SC says it will allocate more resources to SRI and sustainable finance from now on, and wants a “multi-stakeholder entity to conduct business development initiatives” including investor and company engagement, capacity building and organising workshops.
In the meantime, a first draft of the green taxonomy is due any day now.
And with a growing focus on ESG from the nation’s biggest asset owners, regulators, government figures and central bank, 2020 looks set to be the year that Malaysia really enters the race.