Sustainable and Responsible Investments

Malaysia Striving for Sustainable Development

Extreme environmental degradation and depleting natural resources have undoubtedly contributed to climate change and numerous natural catastrophes. We witness almost daily on television and social media that the unnecessary, and in some cases unethical use of non-renewable resources globally has reached an unhealthy 'over dependent' level. Sustainable development has become a necessity and the investment community are becoming increasingly aware of the societal needs for sustainable investments.

Sustainable development is about using better ways to satisfy the demands of the population. It should be seen as meeting the needs of the current generation without compromising the needs for future generations. However, it requires accelerated innovation and appropriate diffusion of technology from the current generation. This is because sustainable development is broader than just the environment as it takes into account the social wellbeing of communities and ensures equal opportunities.

Sustainable Development

Source: Adapted from The Future of Sustainability; Re-thinking Environment and Development in the Twenty-first Century, Adam, W.M.

Malaysia is committed to the United Nation's (UN) Sustainable Development Goals (SDGs) with 17 goals that are integrated and indivisible and balance the three dimensions of sustainable development: economic, social and environment. Malaysia is also a signatory to the Paris Agreement on Climate Change that was signed in April 2016 with its goal to limit global warming to below 2°C per year.

Sustainable and Responsible Investing in Malaysia

Sustainable and Responsible Investment (SRI) is the concept of making investment decisions that take into account not only financial returns but also the impact it has on the environment and social development. Hence, the SRI approach considers three criteria; ESG criteria commonly known as (1) Environmental, (2) Social and (3) Governance factors. Portfolio selection and management of investments would therefore incorporate the ESG criteria.

ESG Criteria and its Examples

Note: The examples are not limited to those mentioned above

While investors and issuers define and categorise sustainable investment in different ways, approaches mentioned by the Global Sustainable Investment Alliance (GSIA) in the Global Sustainable Investment Review 2016 have emerged as the industry standard.

The Global Standards of Classification for Sustainable Investment

Extracted from Global Sustainable Investment Review 2016

SRI in Malaysia - Islamic Finance and its Commonalities with SRI

Islamic funds are a major contributor to sustainable investment assets in the region, particularly in Malaysia where the government has actively supported the development of the Islamic Capital Market (ICM). Islamic funds that have led to Malaysia's positioning as a leader in the global ICM adopt exclusion/negative screening and make up a majority proportion of total sustainable investment assets in Malaysia.

As the principles of Islamic finance share significant commonalities with SRI, there is also tremendous opportunity for Islamic finance to develop instruments and funding solutions that support the global demand for green projects.

According to the Global Sustainable Investment Review 2016, the data collected for Asia's responsible investments review include assets managed consistently with Islamic law or Sharia principles. Of the total sustainable investment assets in 2016, 34 per cent of the assets (US$17.9 billion) are Shariah compliant.

In August 2014, Securities Commission Malaysia (SC) launched the Sustainable and Responsible Investment (SRI) Sukuk framework to facilitate the financing of SRI initiatives, which expands the sukuk framework by including terms on the utilisation of proceeds, eligibility, and disclosure/reporting requirements.

Khazanah Nasional Berhad announced a RM1 bllion Sukuk Ihsan Programme which was the first of its kind to be approved under SC's SRI Sukuk framework. Following this, they also recently announced a second tranche of RM100 million SRI Sukuk that will fund Yayasan AMIR's Trust Schools Programme to at least 20 schools as part of efforts to promote and improve innovation for developments in Islamic finance since the activities are linked for the advancement of the local community. Yayasan AMIR is a not-for-profit foundation established by Khazanah for the enhancement of accessibility of quality education in Malaysian government schools through a Public-Private-Partnership with the Ministry of Education.

Further initiatives to enhance the SRI framework in Malaysia include the introduction of the Environmental, Social and Governance (ESG) index in December 2014 by Bursa Malaysia Bhd. The FTSE4Good Bursa Malaysia Index was developed in collaboration with FTSE as part of the globally benchmarked FTSE4Good Index Series and was aligned with other leading global ESG frameworks such as the Global Reporting Initiative and the Carbon Disclosure Project.

Constituents of the FTSE4Good Bursa Malaysia Index are eligible companies demonstrating strong ESG factors. Companies need to achieve the set specified threshold of FTSE ESG Rating for index inclusion as well as satisfying other criteria.

Sustainable Responsible Investing driving Green Finance forward

With SRI gaining recognition in the market, green finance has also made its way into the market. Green finance covers the financing of investments that would generate environmental benefits as part of their project strategies to achieve sustainable development for the future. These environmental benefits include reducing all types of pollution, reducing greenhouse gas emission, improving energy efficiency such as wind energy and taking measures in order to mitigate climate change.

In 2016, the G20 economies' heads of state for the first time recognised the importance and the critical need for green financing and many countries have since included a green agenda in to their financial systems to encourage green funding for both public and private financing needs.

The characteristics of green bonds or the structure on how they are formed are similar to conventional or standard bonds. The key difference in feature is that a green bond looks at the impact it brings to the environment particularly if it brings any negative impact on climate change.

There are several bodies that have contributed to ensuring that green finance has proper standard measures in order to avoid various ways of structuring green bonds. Introduction of the Green Bond Principles (GBP) by International Capital Market Association (ICMA) in 2010 has driven more issuances of certified green bonds. GBP promotes the integrity in the green bond market through guidelines that recommends transparency, disclosure and reporting and aims to support issuers in transitioning their businesses towards greater environmental sustainability.

SC's SRI Sukuk Framework is compatible with the GBP and can finance eligible green projects in the natural resources, renewable energy and energy efficiency sectors.

Credit rating agencies also have included green finance to their mandate and developed certain methodologies or criteria to identify how 'green' a green bond is.

ASEAN Green Bond Standards

The ASEAN Capital Markets Forum (ACMF) comprises ASEAN capital market regulators who have a primary assignment of promoting greater integration of the region's capital markets.

In November 2017, ACMF launched the ASEAN Green Bond Standards (GBS) based on the International Capital Market Association (ICMA)'s widely accepted Green Bond Principles (GBP). These standards are part of ACMF's initiatives to promote the development of green assets and green financing particularly in improving infrastructure projects in the ASEAN region.

ASEAN Green Bonds Standards

Malaysia: World's First Green Sukuk Issuer and World's Largest Green Sukuk Issuer

World's First Green Sukuk

In July 2017, Malaysia made its stand on green financing and the global sukuk market with the issuance of the world's first green sukuk by Tadau Energy Sdn Bhd under SC's SRI Sukuk Framework. It is the result of collaboration between SC, Bank Negara Malaysia (BNM) and the World Bank in their efforts to facilitate growth of green sukuk and bring more awareness to this segment of the market.

Tadau Energy Sdn Bhd is a renewable energy and sustainable technology investment firm. With the goal of conserving the environment by providing an environmentally friendly, clean and sustainable power supply. The Green SRI Sukuk Tadau is rated long term AA3 by RAM Rating Services Bhd.

CICERO has also rated this RM250 million green sukuk recognising the significance of Tadau's projects with their long-term vision of a low carbon and climate resilient future by giving a 'Dark Green' certification.

World's Largest Green Sukuk

Quantum Solar Park Malaysia has issued the world's largest green Sukuk worth RM1 billion to finance the construction of the largest solar power project of its kind in Southeast Asia. It is the second green sukuk issued under SC's SRI Sukuk framework.

The large-scale solar photovoltaic plants are to be built in three states of Malaysia – Kedah, Terengganu and Melaka.

Second opinion provider CICERO has rated this project and has given a 'Dark Green' rating based on the project type and the policies guiding the implementation of this project.

Islamic Finance and Sustainable Responsible Investment

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