Sustainable development is a global imperative that Malaysia has fully embraced. As companies seek to align themselves with the United Nations’ Sustainable Development Goals (SDGs), a well-developed financial sector is essential to supporting their requirements. The Malaysian capital markets are uniquely poised to answer the call for sustainable finance in promoting long-term economic growth. The Securities Commission Malaysia (SC) has long been aware of the need to advocate and develop sustainable finance because it aligns closely with the underlying principles of Malaysia’s Islamic capital market, having established a facilitative regulatory framework to support sustainable and responsible investment (SRI) and green financing.
Sustainable finance refers to any form of financial process that underscores economic growth and incorporates environmental, social and governance (ESG) considerations to achieve sustainable development results. In the last few years, sustainable finance, especially green bonds and climate bonds, have been gaining traction as critical financial instruments in the transition to a low-carbon future. Sustainability-related considerations, also known as the ESG concept, are gathering momentum as investors begin integrating such factors into their investment decisions and channelling funds towards assets that yield measurable ESG benefits as well as long-term economic returns.
Through the ASEAN Capital Markets Forum (ACMF), the SC plays a significant role in the development of sustainable finance in the region, as the co-chair of the ACMF’s Sustainable Finance Working Group. In 2017, the ACMF introduced the ASEAN Green Bond Standards, followed by the ASEAN Social Bond Standards and the ASEAN Sustainability Bond Standards the following year. These aim to create a sustainable asset class, especially in meeting the region’s infrastructure and social development financing requirements. The ACMF standards are designed for ASEAN financing needs and developed based on the International Capital Market Association’s Green Bond Principles, Social Bond Principles and Sustainable Bond Guidelines. The inaugural ASEAN green bond, which was dually recognised as a green SRI sukuk, was issued in Malaysia in 2017 – to finance the construction of a green building.
Meanwhile, the SC is also supporting the management of climate-related risks in the financial sector, together with Bank Negara Malaysia. In September 2019, they established the Joint Committee on Climate Change (JC3), with representation from 20 industry players for cooperation in strengthening the Malaysian financial sector’s capacity to deal with climate-related risks. The JC3 will be guided by three key mandates: building capacity through the sharing of knowledge, expertise and best practices in assessing and managing climate-related risks; identifying the issues, challenges and priorities faced by the financial sector in managing the transition towards a low-carbon economy; and facilitating teamwork among stakeholders towards coordinated solutions for challenges and issues.
The ESG wave among local institutional funds is attributable to their joining the United Nations-supported Principles for Responsible Investment (PRI) network of investors. Khazanah Nasional Berhad signed on in 2017, followed by the Retirement Fund (Incorporated) (KWAP) in 2018 and the Employee Provident Fund (EPF) in 2019. Established in 2005, the PRI is a global investor group that is committed to a set of investment principles incorporating ESG issues into investment practices. It launched its six principles at the New York Stock Exchange in April 2006, and believes that the signatories which adopt them will contribute to a more sustainable global financial ecosystem.
Since the PRI’s launch, the number of investor signatories has grown from just 100 to almost 5,500 (in late March 2023), fuelled by accelerating awareness of and demand for SRI. As of 26 March 2023, the pool of 5,435 signatories constituted international investment managers (76%), asset owners (14%) and service providers (10%).
In November 2020, Malaysia became the 33rd member of the International Network of Financial Centres for Sustainability (FC4S) – a community of international financial centres working together to achieve the United Nations’ Sustainable Development Goals and the Paris Agreement. The objective of FC4S is to accelerate the expansion of sustainable finance by enabling financial centres to exchange experiences, drive convergence and take action on shared priorities. Its core mission is to empower financial centres to accelerate the shift to sustainable finance by providing the tools and insights to engage local institutions, inform and influence policy and ultimately catalyse market transformation
Development of SRI had been earmarked as a key growth area for the Malaysian capital markets under the Capital Market Masterplan (2001-2010). In 2014, the SC introduced the SRI Sukuk Framework – now recognised as a pioneering regulatory development that integrates the principles of Shariah with those of SRI. In 2017, the SC issued the Guidelines on Sustainable and Responsible Investment Funds (SRI Guidelines), to facilitate and encourage the growth of SRI funds in Malaysia.
The SRI Guidelines – which enable funds to be designated as SRI funds – will broaden the assortment of SRI products and attract more investors to the SRI arena. They will apply to both conventional and Shariah-compliant funds under the SC’s purview, e.g. unit trust funds, real estate investment trust funds (REITs), exchange-traded funds (ETFs), as well as private equity and venture capital funds. Eligible areas for SRI projects include natural resources, renewable energy, community and economic development and waqf (non-profit/charitable) properties/assets. The SRI Guidelines will also introduce additional disclosure and reporting requirements to enhance transparency in the investment policies and strategies of SRI funds. This is anticipated to reinforce Malaysia’s position as a regional SRI centre – a strategic thrust identified under the SC’s Islamic Fund and Wealth Management Blueprint (also launched in 2017).
The SC’s firm commitment to building a conducive ecosystem to spur the growth of SRI in Malaysia is also encapsulated in the Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap), launched in 2019. The five-year roadmap encompasses five overarching strategies, known as the 5i-Strategy, i.e. broadening the selection of SRI instruments, expanding the SRI investor base, establishing a strong SRI issuer base, instilling a robust internal governance culture, and designing information architecture in the SRI ecosystem. The 5i-Strategy contains 20 recommendations to position Malaysia as a regional SRI centre.
In December 2022, the SC launched the Principles-Based Sustainable and Responsible Investment Taxonomy for the Malaysian Capital Market (SRI Taxonomy), to help drive the country’s climate and sustainability agenda. The SRI Taxonomy presents universal guiding principles for the classification of economic activities that qualify for sustainable investment. It also aims to provide clarity vis-à-vis enabling proper and consistent identification and classification of assorted kinds of economic activities, along with the definition of sustainable investments. Additionally, it strives to address concerns about the need to alleviate and manage greenwashing risk. The SRI Taxonomy adopts a principles-based approach in a bid to enhance the standardisation and comparability of sustainable investment assets.
The SC and Bursa Malaysia support the Task Force on Climate-related Financial Disclosures (TCFD), which aspires to provide voluntary and consistent climate-related financial risk disclosures for use by companies. Post-pandemic recovery plans focusing on nurturing a more resilient and sustainable economy represent a good opportunity to deploy SRI in the funding of revitalisation efforts, and also to advance climate mitigation and adaptation goals.
In addition, the Malaysian Code on Corporate Governance (MCCG) was introduced in 2000. It has been a significant tool for corporate governance reform and has exerted a positive influence on the corporate governance practices of companies as well as the SRI ecosystem in Malaysia. The MCCG reflects globally accepted principles of corporate governance beyond the minimum required by statute, regulations or those prescribed by Bursa Malaysia. The MCCG was reviewed in 2007, 2012, 2017 and 2021 – to ensure that it remains relevant and supports good corporate governance culture and practices.
CMM has collaborated with strategic partners to establish regional centres of excellence (COEs) to accelerate the capabilities of SRI industry players. The goal of the COEs is to encourage sustainable practices among private sector companies and ensure that their financing methods are sustainable. CMM will provide strategic support and seed funding for the COEs as part of its efforts to position Malaysia as a regional SRI centre. The COEs will in turn provide platforms to hone and showcase the expertise of Malaysian corporates as feasible SRI targets for investors seeking opportunities in emerging markets.
The first COE set up under this initiative had been the Malaysian Sustainable Finance Initiative (MSFI), was launched in July 2020. This initiative provides a digital platform for collaboration as well as the sharing of knowledge and expertise on new financing trends, products and services that prioritise sustainability and societal wellbeing while upholding good governance practices.
Another COE, the Centre for Sustainable Corporation (CSC) has been mandated to promote sustainable practices among public listed companies, and to ensure that they raise financing through sustainable means. The CSC’s capacity-building efforts include workshops that showcase companies’ best practices in sustainability, C-suite coaching sessions on reporting and engagement with institutional investors, an annual flagship event on sustainability and the role of corporate citizens, and programmes for companies to familiarise themselves with other countries’ best practices.
In the meantime, the Institutional Investors Council Malaysia (IIC) and CMM have collaborated to form the Sustainable Investment Platform (SIP), to support institutional investors and the fund management industry to build depth in SRI strategies that align financial returns with broader ESG priorities. The SIP will build on the foundation laid by the IIC to support Malaysia’s transition to an inclusive and climate-resilient economy, by championing the sustainable investment agenda. It will advocate sustainable investing practices among institutional investors and fund managers, thereby enabling the exchange of international best practices and positioning Malaysia’s leadership in the sustainable capital markets.