Sustainable and Responsible Investment (SRI)
Sustainable development is a global imperative that Malaysia has fully embraced. As companies seekto align themselves with theUnited Nations’ Sustainable Development Goals(SDGs), a well-developed financial sector is essential to supporting their requirements. The Malaysian capitalmarkets are uniquely poised to answer the call for sustainable finance in promoting long-termeconomic growth. The Securities Commission Malaysia (SC) has long been aware of the need toadvocate and develop sustainable finance because it aligns closely with the underlying principles ofMalaysia’s Islamic capital market, having established a facilitative regulatory framework to supportsustainable and responsible investment (SRI)and green financing.
Sustainable finance refers to any form of financial process that underscores economic growthand incorporatesenvironmental, social and governance(ESG) considerations to achieve sustainabledevelopment results. In the last few years, sustainable finance, especially green bonds and climatebonds, have been gaining traction as critical financial instruments in the transition to a low-carbonfuture. Sustainability-related considerations, also known as the ESG concept, are gatheringmomentum as investors begin integrating such factors into their investment decisions and channellingfunds towards assets that yield measurable ESG benefits as well as long-term economic returns.
Regional Collaboration
Through theASEAN Capital Markets Forum(ACMF), the SC plays a significant role in thedevelopment of sustainable finance in the region, as the co-chair of the ACMF’s Sustainable FinanceWorking Group. In 2017, the ACMF introduced theASEAN Green Bond Standards, followed by theASEAN Social Bond Standards and the ASEAN Sustainability Bond Standardsthe following year.These aim to create a sustainable asset class, especially in meeting the region’s infrastructure andsocial development financing requirements. The ACMF standards are designed for ASEAN financingneeds 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, whichwas dually recognised as a green SRI sukuk, was issued in Malaysia in 2017 – to finance theconstruction of a green building.
Meanwhile, the SC is also supporting the management of climate-related risks in the financialsector, together with Bank Negara Malaysia. In September 2019, they established theJointCommittee on Climate Change(JC3), with representation from 20 industry players forcooperation in strengthening the Malaysian financial sector’s capacity to deal with climate-relatedrisks. The JC3 will be guided by three key mandates: building capacity through the sharing ofknowledge, expertise and best practices in assessing and managing climate-related risks; identifying the issues, challenges and priorities faced by the financial sector in managing thetransition towards a low-carbon economy; and facilitating teamwork among stakeholders towardscoordinated solutions for challenges and issues.
International Champion
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 Berhadsigned on in 2017, followed by theRetirement Fund (Incorporated)(KWAP) in 2018 and theEmployee 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 theInternational Network of FinancialCentres for Sustainability(FC4S) – a community of international financial centres working together toachieve the United Nations’ Sustainable Development Goals and the Paris Agreement. The objectiveof FC4S is to accelerate the expansion of sustainable finance by enabling financial centres toexchange experiences, drive convergence and take action on shared priorities. Its core mission is toempower financial centres to accelerate the shift to sustainable finance by providing the tools andinsights to engage local institutions, inform and influence policy and ultimately catalyse markettransformation
Supportive Regulatory Landscape
Development of SRIhad been earmarked as a key growth area for the Malaysian capital marketsunder the Capital Market Masterplan (2001-2010). In 2014, the SC introduced theSRI SukukFramework– now recognised as a pioneering regulatory development that integrates the principles ofShariah with those of SRI. In 2017, the SC issued theGuidelines on Sustainable and ResponsibleInvestment Funds(SRI Guidelines), to facilitate and encourage the growth of SRI funds inMalaysia.
The SRI Guidelines – which enable funds to be designated as SRI funds – will broaden theassortment of SRI products and attract more investors to the SRI arena. They will apply to bothconventional and Shariah-compliant funds under the SC’s purview, e.g. unit trust funds, real estateinvestment trust funds (REITs), exchange-traded funds (ETFs), as well as private equity andventure capital funds. Eligible areas for SRI projects include natural resources, renewable energy, community and economic development and waqf (non-profit/charitable) properties/assets. The SRIGuidelines will also introduce additional disclosure and reporting requirements to enhancetransparency in the investment policies and strategies of SRI funds. This is anticipated to reinforceMalaysia’s position as a regional SRI centre – a strategic thrust identified under the SC’sIslamic Fundand 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 isalso encapsulated in theSustainable and Responsible Investment Roadmapfor the Malaysian CapitalMarket (SRI Roadmap), launched in 2019. The five-year roadmap encompasses five overarchingstrategies, known as the 5i-Strategy, i.e. broadening the selection of SRI instruments, expanding theSRI investor base, establishing a strong SRI issuer base, instilling a robust internal governanceculture, and designing information architecture in the SRI ecosystem. The 5i-Strategy contains 20recommendations to position Malaysia as a regional SRI centre.
In December 2022, the SC launched thePrinciples-Based Sustainable and Responsible InvestmentTaxonomy for the Malaysian Capital Market(SRI Taxonomy), to help drive the country’s climate andsustainability agenda. The SRI Taxonomy presents universal guiding principles for the classification ofeconomic activities that qualify for sustainable investment. It also aims to provide clarity vis-à-visenabling proper and consistent identification and classification of assorted kinds of economicactivities, along with the definition of sustainable investments. Additionally, it strives to addressconcerns about the need to alleviate and manage greenwashing risk. The SRI Taxonomy adopts aprinciples-based approach in a bid to enhance the standardisation and comparability of sustainable investment assets.
National-Level Initiatives
The SC andBursa Malaysiasupport theTask Force on Climate-related Financial Disclosures(TCFD),which aspires to provide voluntary and consistent climate-related financial risk disclosures for use bycompanies. Post-pandemic recovery plans focusing on nurturing a more resilient and sustainableeconomy represent a good opportunity to deploy SRI in the funding of revitalisation efforts, and alsoto advance climate mitigation and adaptation goals.
In addition, theMalaysian Code on Corporate Governance(MCCG) was introduced in 2000. It hasbeen a significant tool for corporate governance reform and has exerted a positive influence on thecorporate governance practices of companies as well as the SRI ecosystem in Malaysia. The MCCGreflects globally accepted principles of corporate governance beyond the minimum required bystatute, 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 cultureand practices.
CMM has collaborated with strategic partners to establish regional centres of excellence (COEs) toaccelerate the capabilities of SRI industry players. The goal of the COEs is to encourage sustainablepractices 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 positionMalaysia as a regional SRI centre. The COEs will in turn provide platforms to hone and showcase theexpertise of Malaysian corporates as feasible SRI targets for investors seeking opportunities inemerging markets.
The first COE set up under this initiative had been theMalaysian Sustainable Finance Initiative(MSFI), was launched in July 2020. This initiative provides a digital platform for collaboration as wellas the sharing of knowledge and expertise on new financing trends, products and services thatprioritise sustainability and societal wellbeing while upholding good governance practices.
Another COE, theCentre for Sustainable Corporation(CSC) has been mandated to promotesustainable practices among public listed companies, and to ensure that they raise financing throughsustainable means. The CSC’s capacity-building efforts include workshops that showcase companies’best practices in sustainability, C-suite coaching sessions on reporting and engagement withinstitutional investors, an annual flagship event on sustainability and the role of corporate citizens, andprogrammes for companies to familiarise themselves with other countries’ best practices.
In the meantime, theInstitutional Investors Council Malaysia(IIC) and CMM have collaborated to formtheSustainable Investment Platform(SIP), to support institutional investors and the fundmanagement industry to build depth in SRI strategies that align financial returns with broader ESGpriorities. The SIP will build on the foundation laid by the IIC to support Malaysia’s transition to aninclusive and climate-resilient economy, by championing the sustainable investment agenda. It willadvocate sustainable investing practices among institutional investors and fund managers, therebyenabling the exchange of international best practices and positioning Malaysia’s leadership in thesustainable capital markets.
