Driving Greater Growth in Sustainable and Responsible Investment

Given the urgent need in meeting the sustainable development and climate goals, sustainable finance and investment continue to be on the growth trajectory globally. In line with the CMP3 and Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap), SRI continues to be one of the key priorities for the development of the Malaysian capital market. In 2022, the SC introduced several initiatives to support the development of a holistic SRI ecosystem, including facilitating a greater transition towards a low-carbon economy.

Shaping the Stakeholder Economy via the Capital Market

Enabling Greater Access to Facilitate Sustainable and Transition Finance

As Malaysia transitions to a low-carbon economy, the role of the capital market can be further harnessed to mobilise private investments in enabling greater access to sustainable and transition financing needs. Towards this end, the SC has released the Sustainable and Responsible Investment-linked (SRI-linked) Sukuk Framework to facilitate companies including those in hard-to-abate sectors to tap into the capital market. The SRI-Linked Sukuk Framework, which was released on 30 June 2022, aims to facilitate fundraising by companies, addressing their sustainability concerns such as climate change or social agenda, with features that relate to the issuer’s sustainability performance commitments. This will also cement further Malaysia’s ICM position in driving the sustainability agenda.

Read more on media release ‘SC Releases New Sukuk Framework to Facilitate Companies’ Transition to Net Zero’.

The SC led the development of the ASEAN SLBS which was introduced by the ACMF. The ASEAN SLBS aims to facilitate the role of sustainability-linked bonds in funding companies that contribute to sustainability.

SRI-Linked Sukuk Framework

The SC has further expanded the SRI Sukuk and Bond Grant Scheme (Grant) to include issuances under the SRI-Linked Sukuk Framework and the ASEAN SLBS accordingly. The Grant is aimed at lowering the cost of issuances as issuers are able to tap into the Grant to offset a portion of the external review costs incurred. The Grant, which was established in 2018, is also eligible for sukuk issued under the SRI Sukuk Framework and bonds issued under the ASEAN Standards.

SRI sukuk continues to play an important role in driving Malaysia’s sustainability journey by mobilising financing for eligible green, social and sustainable projects. As of 31 December 2022, RM10.58 billion SRI sukuk was issued in 2022, bringing the cumulative issuances of SRI sukuk to RM18.92 billion, since the introduction of the SRI Sukuk Framework in 2014. Out of the total SRI sukuk issuances, RM16.58 billion were dually recognised under both the SRI Sukuk Framework and the ASEAN Standards. Issuances from Malaysia accounted for 24% of total issuances labelled under the ASEAN Standards.

Read more on media release ‘Expansion of SRI Sukuk and Bond Grant Scheme to Facilitate Sustainable Finance’.

Accelerating growth of sustainable investments for the capital market
The SC led the development of the ASEAN SRFS, which aims to enhance transparency as well as provide minimum disclosure and reporting requirements to be applied to CIS which seek to qualify under the ASEAN SRFS. Following the introduction of the ASEAN SRFS, a review of the Guidelines on Sustainable and Responsible Investment Funds (Guidelines on SRI Funds) was undertaken to enhance the disclosure and reporting requirements for SRI funds, as well as to facilitate SRI Funds to qualify as an ASEAN Sustainable and Responsible Fund. As of 31 December 2022, a total of 58 SRI funds with RM7.05 billion NAV were offered in Malaysia.

To enhance SRI intermediation capabilities for foreign and local fund managers, the SC had issued a Guidance Note on Managing ESG Risks for Fund Management Companies (Guidance Note) on 30 June 2022. The Guidance Note aims to provide clarity and outlines the SC’s expectations on the development and implementation of practices, policies and procedures for effective analysis and management of material ESG risks and risk-related considerations that are present in the FMC’s investment portfolios.

The SC also supported the development of several initiatives under the Perkukuh Pelaburan Rakyat (PERKUKUH) programme under the Ministry of Finance (MOF), aimed at prioritising good governance that enables sustainable growth, strengthened socioeconomic inclusivity and environmental sustainability. The SC, as the lead of PERKUKUH #11 WG, spearheaded the development of the Sustainable Investment Standards initiative to enhance the role of GLICs in sustainable investments, by providing guidance in incorporating sustainability considerations into the investment process.

This is aligned with the role of GLICs towards creating long-term value and impact on the economy, as well as in supporting Malaysia’s commitments in meeting the global climate ambitions and sustainability agenda.
Broadening the spectrum of SRI through the introduction of SRI Taxonomy
In line with the recommendation of the SC’s SRI Roadmap, the SC developed the Principles-Based SRI Taxonomy for the Malaysian Capital Market (SRI Taxonomy). The SRI Taxonomy, which was released on 12 December 2022, is aimed at enabling capital market participants to identify economic activities that are aligned with environment, social and sustainability objectives, thus facilitating a more informed and efficient decision-making for fundraising and investment for sustainability. The development of the SRI Taxonomy was undertaken through an Industry Working Group comprising the World Bank Group Inclusive Growth and Sustainable Finance Hub in Malaysia (World Bank) as the lead technical expert, and representatives from the local stock exchange, asset and fund management companies, investment bank, asset owner and other sustainable finance specialists.

Read more on media release ‘SC Unveils Principles-based Sustainable and Responsible Investment Taxonomy for the Malaysian Capital Market’.

Principles-Based Sustainable and

Responsible Investment Taxonomy for the Malaysian Capital Market

Strengthening financial sector response to climate change
As Co-Chairs of the JC3, the SC and BNM continue to collaborate in strengthening the financial sector response to climate change.
The SC led the development of the JC3 Report on the Sustainable Finance Landscape in Malaysia (JC3 Report), given the SC’s role as the Chair of the JC3 Sub-committee 3 (SC3) (Product and Innovation). The JC3 Report was published on 27 April 2022 and captured key insights from the extensive outreach programmes and a survey on sustainability practices among financial institutions in Malaysia, which was undertaken by the JC3 SC3 in 2021. JC3 had also conducted a series of engagements with government ministries and various agencies to bring greater clarity on the national plans and initiatives that both the financial sector and government can pursue and collaborate.

Read more on media release ‘Joint Statement by Bank Negara Malaysia and Securities Commission Malaysia Accelerating the Financial Sector’s Response to Climate Risk’.
Read more on media release ‘Joint Statement by Bank Negara Malaysia and Securities Commission Malaysia Updates at the 8th Joint Committee on Climate Change (JC3) Meeting’.
Read more on media release ‘Joint Statement by Bank Negara Malaysia and Securities Commission Malaysia Updates at the 9th Joint Committee on Climate Change (JC3) Meeting’.
Building SRI awareness through capacitybuilding initiatives
In 2022, the SC organised various awareness and capacity-building initiatives as well as participated as speakers for several external engagements to further develop the knowledge and enhance the profiling of SRI. These initiatives are crucial to further accelerate the growth and development of a facilitative SRI ecosystem in Malaysia.

For more details on the initiatives, kindly refer to Part 4 – Strategic Engagements with Stakeholders.

Facilitating International and Regional Sustainable Finance Initiatives

IOSCO Sustainability Task Force
Following the establishment of the International Sustainability Standards Board (ISSB) at the 26th United Nations Climate Change Conference of the Parties (COP26), the IOSCO’s Sustainability Task Force (STF) has been focusing its efforts on reviewing the ISSB’s Exposure Draft standards to ensure that the proposed standards can serve as an effective global baseline of sustainability disclosures for capital markets.

As a member of the STF’s Climate Standards Working Group, the SC was involved in the review of the Exposure Draft on climate-related disclosure standards against a set of assessment criteria. Other areas the STF is focusing on include collaboration with international standard setters for audit and assurance, and capacity building as new reporting standards are emerging.
ACMF’s Sustainable Finance Working Group
The SC’s ASEAN-related work is primarily delivered through its membership of the ACMF. The ACMF is a high-level grouping of capital market regulators from all 10 ASEAN jurisdictions. Established in 2004 under the auspices of the ASEAN Finance Ministers, the primary responsibility of the ACMF is to develop a deep, liquid and integrated regional capital market.

In relation to the ACMF’s efforts on sustainable finance, the SC co-chairs the ACMF’s SFWG with the SEC Philippines. As Co-Chair of the SFWG, the SC led the development of the ASEAN SLBS, which were developed based on the internationally-recognised Sustainability-Linked Bond Principles (SLBP) published by the International Capital Market Association. The launch of the ASEAN SLBS completed ASEAN’s suite of bond standards, which began with the publication of the ASEAN Green Bond Standards in 2017, and the ASEAN Social and Sustainability Bond Standards in 2018.

The SC also led the development of the ASEAN SRFS, which was identified as a key recommendation under the ACMF Roadmap for ASEAN Sustainable Capital Markets in 2020. The ASEAN SRFS and the ASEAN SLBS were launched together at the ASEAN International Capital Markets Conference in Phnom Penh, Cambodia, on 28 October 2022.

In line with the focus on ASEAN sustainable finance, the SC is also a member of the ASEAN Taxonomy Board (ATB), which is working to develop the ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy) as a framework for classification of sustainable finance activities in the region. Following the launch of Version 1 of the ASEAN Taxonomy, which was used as a basis for stakeholder discussions, the SC was an active part of targeted stakeholder engagements, as well as engagements at various events throughout 2022, including at the ASEAN International Capital Markets Conference. These efforts will culminate in the publication of Version 2 of the ASEAN Taxonomy by the first quarter of 2023.

The SC is also a member of the ASEAN Working Committee on Capital Market Development (WC-CMD), a sectoral body which includes central banks and ministries of finance, in addition to capital market regulators. The SC chairs the WC-CMD’s Infrastructure Finance Working Group, which published the Sustainable Finance First for Sustainable Projects Conversation Pack in April 2022, which aims to spur discussions with governments, project owners, and promoters to consider using sustainable finance as the first choice of financing for sustainable projects.

Mitigating Systemic Risks And Promoting Financial Stability

Enhanced Risk Governance Framework

In 2021, the SC-wide risk governance framework was enhanced as part of an overall initiative to have an effective integrated and predictive risk surveillance to maintain regulatory agility.

The structured risk governance framework integrated the wider spectrum of risks such as technology, cyber and conduct risk at the SC’s Systemic Risk Oversight Committee (SROC) and Accounting, Market and Corporate Surveillance Committee (ACMS).

Intensified surveillance

The SC continued to intensify its surveillance of systemic risk to maintain market resilience and stability. Regular SROC engagements were held to deliberate concerns emanating from various segments across the capital market. Domestic equity and bond market, foreign fund flows and trade participation continued to be monitored closely for potential stress points.

In addition, measures and economic stimulus packages introduced by the government to weather the impact of COVID-19, market trading conduct and the financial position of listed companies were among the focus areas for discussion.

Thematic assessments

The SC also conducted thematic assessments covering investors’ fund flows, the position of firms, and policy decisions to ascertain the possible impact on the capital market. In 2021, the SC reviewed and enhanced its crisis indicators on potential emerging risks in the
capital market.

The enhanced crisis indicators provided a reference point for escalation to SROC when the identified indicators and triggers materialised and ensured prompt response to manage and prevent any issues of concern that might lead to a systemic crisis.

Joint regulatory discussions

In 2021, the SC conducted frequent joint regulatory discussions with other authorities such as Bank Negara Malaysia (BNM) and Labuan Financial Services Authority (Labuan FSA) to identify systemic risk concern areas within the financial and capital markets in Malaysia.

Monitoring of various components of the capital market

The SC continued its efforts to undertake a methodological and integrated approach to ensure any potential systemic risk was being monitored, mitigated, or managed. Figure 1 highlights the findings from the following risk assessments on the various components of the capital market.