Facilitating ESG Through the Capital Market - Strengthening the Sustainability and Competitiveness of the Capital Market

Facilitating ESG Through the Capital Market

SRI continues to be one of the key priorities for the development of the Malaysian capital market. In 2023, the SC introduced several initiatives to strengthen the development of a facilitative SRI ecosystem, including meeting the country’s transition finance needs.

As Malaysia transitions to a low-carbon economy, the capital market plays an instrumental role in intermediating private sector investment and bridging the gap in public sector financing for sustainability and transition purposes. From the sustainable fixed income segment, RM27.61 billion of SRI sukuk have been issued as of December 2023. Out of the total SRI sukuk issuances, RM25.27 billion were dually recognised under both the SRI Sukuk Framework and one of the ASEAN Green, Social and Sustainability Bond Standards.

Enhancing Clarity of SRI through the Development of the SRI Taxonomy Plus Standard
The rise of sustainable investments has led to the need for more clarity and guidance for market participants in identifying activities that would qualify as sustainable investments, as well as the need to mitigate the risks of greenwashing. Various jurisdictions, such as the European Union (EU), ASEAN, China, India, United Kingdom, Malaysia, Indonesia, Thailand, Singapore and Vietnam have issued or are developing sustainable finance-related taxonomies to further guide the development of sustainable finance and investments within their respective region and jurisdiction.

For the ASEAN region, the ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy), developed by the ASEAN Taxonomy Board (ATB), of which the SC is a member, will serve as an overarching taxonomy for the region. However, the ASEAN Taxonomy does not preclude the ASEAN member states from developing its own national taxonomy.

In line with the recommendation of the SC’s SRI Roadmap for the Malaysian Capital Market (SRI Roadmap), the Principles-Based SRI Taxonomy for the Malaysian Capital Market (SRI Taxonomy) was issued in December 2022. The SRI Taxonomy aims to enable a wide range of users to identify and classify economic activities in alignment with the environmental, social and sustainability objectives. Following the issuance of the SRI Taxonomy, the SC continues to engage with the relevant stakeholders to enhance understanding and encourage greater adoption of the SRI Taxonomy within the Malaysian capital market.

Moving forward, the SC will work on the next iteration of the SRI Taxonomy that will provide greater guidance to the industry. This includes future refinements of the SRI Taxonomy and development of more detailed guidance that is consistent with national policies.
Driving More Sustainable Finance and Investments to the Private Markets
In line with the recommendation of the SC’s SRI Roadmap on widening access to SRI through alternative funding avenues such as VC, PE, ECF and P2P financing platforms, the SRI Guide for Private Markets was issued in December 2023. The SRI Guide for Private Markets aims to provide voluntary guidance to venture capital management corporations (VCMCs), private equity management corporations (PEMCs), ECF and P2P financing platform operators on incorporating sustainability considerations in the investment process and due diligence process, as well as to facilitate VCMCs, PEMCs, ECF and P2P financing platform operators in assessing sustainability status of portfolio companies and fundraising campaigns.
The Joint Committee on Climate Change
The SC and BNM continue to collaborate in strengthening the financial sector’s response to climate change. As Malaysia transitions towards a low-carbon economy and a more sustainable future, it is critical that both companies and financial institutions play their part in facilitating this transition. The Joint Committee on Climate Change (JC3), through its initiatives, is actively exploring ways to assist companies to move towards a low-carbon economy in a just and orderly manner, while supporting financial institutions to accelerate capital allocation towards companies demonstrating credible climate transition pathways.

The year saw the progress of the initial green pilot projects and several capital market initiatives supported by JC3 that aim to expand sustainable and transition finance. The projects and initiatives focus on greening supply chains, scaling up green technology adoption in the agriculture sector and supporting the development of the sustainable sukuk and bond market.

The JC3 has established the SME Focus Group in 2023, focusing on enhancing awareness, facilitating green and sustainability certification, and facilitating better disclosures by SMEs. These efforts aim to ease the processes and reduce overall transition cost faced by SMEs. The establishment of the SME Focus Group is timely to ensure the backbone of the country’s economy is given special attention as their collective actions hold immense potential to shape our economic trajectory and to contribute to job creation and overall societal well-being.

Read more on media release ‘Joint Statement by Bank Negara Malaysia and Securities Commission Malaysia Updates at the 10th 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 11th Joint Committee on Climate Change (JC3) Meeting’.
Accelerating Growth of Sustainable Investments for the Capital Market
The SC issued a revised set of Guidelines on Sustainable and Responsible Investment Funds (Guidelines on SRI Funds) on 17 February 2023, which came into effect immediately upon its issuance. The revised Guidelines on SRI Funds enhances the disclosure and reporting requirements to mitigate greenwashing risk while ensuring alignment with the ASEAN Sustainable and Responsible Fund (ASEAN SRF) Standards that were issued in October 2022.

Under the revised Guidelines on SRI Funds, a qualified SRI fund or a fund seeking to qualify as an SRI fund may also seek to qualify as an ASEAN SRF if the issuer can ensure that the SRI fund complies with the ASEAN SRF Standards issued by the ASEAN Capital Markets Forum. The allignment between the Guidelines on SRI Funds and the ASEAN SRF Standards would also enable fund managers to tap into the regional pool of investors. As at December 2023, the size of SRI funds in Malaysia is RM7.7 billion NAV made out of a total of 68 SRI funds.
Promoting sustainable investment
The SC also supported the development of several initiatives under the Perkukuh Pelaburan Rakyat (PERKUKUH) programme under the MOF, focused on promoting good governance to facilitate sustainable growth, enhance socioeconomic inclusivity, and ensure environmental sustainability. The SC, as the lead of PERKUKUH #11 WG, supported MOF in spearheading the development of the Sustainable Investing Standards (SIS), which was released on 26 May 2023, and aims to enhance the role of government-linked investment companies (GLICs) in sustainable investments, by providing guidance in incorporating sustainability considerations into the investment process.
Availability of data on corporate bonds and sukuk issued under the SC’s SRI Sukuk Framework, and ASEAN Green, Social and Sustainability Bond Standards to the public
Making available enrivonmental, social and governance (ESG) data to the public remains crucial. The availability of such information aims to enhance information transparency as well as facilitate well-informed investment decisions. Towards this end, data on corporate bonds and sukuk issued under the SC’s SRI Sukuk Framework, and the ASEAN Green, Social and Sustainability Bond Standards has been made publicly accessible via the Bond + Sukuk Information Exchange (BIX) website.
Development of the National Sustainability Reporting Framework by the Advisory Committee on Sustainability Reporting
An inter-agency ACSR was established by the SC, with endorsement from the MOF to address the implementation of the IFRS Sustainability Disclosure Standards issued by the International Sustainability Standards Board (ISSB) in Malaysia. The ACSR is mandated to look into the implementation approach, timing, assurance framework as well as the required structure for regulatory oversight. All of which is encapsulated as Malaysia’s National Sustainability Reporting Framework (NSRF). The ISSB standards was issued on 26 June 2023, in a response to demands particularly from investors to improve the quality, reliability and comparability of sustainability information. Chaired by the SC, members of ACSR comprise representatives from the Audit Oversight Board, BNM, Companies Commission of Malaysia, Bursa Malaysia, and the Financial Reporting Foundation.

The ACSR also formed a Consultative Group with members comprising a cross-segment of stakeholders including listed companies, assurance providers, professional bodies, industry associations as well as midtier companies to solicit feedback on the proposed NSRF.

An offsite engagement was organised in November 2023 to support the feedback-gathering process. The committee also engaged the International Auditing and Assurance Standards Board on 9 October 2023 to discuss the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, and issues which the ACSR is deliberating on in relation to the assurance of sustainability information. The ACSR plans to undertake a broader consultation on NSRF in Q1 2024.
SME Governance Working Group
The SME Governance Working Group (Working Group) chaired by the SC continued with its efforts to develop a governance toolkit for SMEs. The Working Group convened earlier in the year and engaged Khazanah Research Institute and SME Bank Malaysia in order to obtain a macro view of issues relevant to the development of the toolkit. This includes the role of small businesses in the Malaysian economy, and governance in levelling up these businesses for the next phase of economic development.

The Working Group also provided comments on the draft simplified ESG Disclosure Guide for SMEs, which is developed by Capital Markets Malaysia (CMM), in particular the governance-related disclosures.

The Malaysian Institute of Corporate Governance, a member of the Working Group is leading the development of the toolkit, which is targeted for issuance within 1H 2024, after a public consultation in Q1 2024. The development of this toolkit is in line with a strategic goal under the Twelfth Malaysia Plan to strengthen the governance of SMEs.
Participation in the 45th and 46th Organisation for Economic Co-operation and Development Corporate Governance Committee Meetings
The SC represented Malaysia at the 45th and 46th Organisation for Economic Co-operation and Development (OECD) Corporate Governance Committee (CGC) meeting that was held from 14 to 15 March 2023 and 13 to 14 November 2023, respectively, at the OECD Headquarters in Paris. The meetings focused on finalising the draft revision to the G20/OECD Principles of Corporate Governance (Principles), the internationally accepted framework on corporate governance. The latest revisions include new and updated guidance on shareholder rights, the role of institutional investors, corporate disclosure and transparency, the responsibilities of boards, and, for the first time, on sustainability and resilience to help companies manage climate-related and other sustainability risks and opportunities. The Principles were subsequently issued by the OECD on 11 September 2023. At the 46th meeting, the CGC discussed the priorities and plans for implementation of the revised Principles.
Commencement of the mandatory onboarding programme on sustainability for directors of listed companies
The SC spearheaded the development of a new mandatory onboarding programme for directors of listed companies, the Leading for Impact Programme (LIP).Directors’ enrolment in LIP was made mandatory via amendments to the Bursa Malaysia Listing Requirements which came into effect on 1 August 2023.

First-time directors of listing and transfer applicants must complete the programme within 18 months from the date of appointment or admission, whereas existing directors must complete the LIP within 24 months from the effective date.

The development of LIP is in line with the SC’s Corporate Governance Strategic Priorities 2021-2023, aimed at strengthening the ability of boards to address sustainability effectively. The Institute of Corporate Directors Malaysia (ICDM) was appointed as the service provider for LIP. On 11 and 12 July 2023, ICDM conducted a two-day virtual pilot run for LIP with the board and senior management of the SC, Bursa Malaysia, ICDM as well as the Chairman of selected listed companies. The first LIP was conducted from 7 to 10 August 2023, with 14 more sessions conducted in 2023. More than 900 directors have attended the programme this year.
Biennial regional corporate governance assessment by the Asian Corporate Governance Association
The SC held its biennial engagement with the Asian Corporate Governance Association (ACGA) on 27 June 2023 for purposes of the Corporate Governance Watch (CG Watch) 2023 assessment. The CG Watch is a regional assessment that evaluates the macro corporate governance quality in 12 Asia-Pacific markets. The SC shared key measures that were implemented to drive good governance in the capital market since the last assessment on 13 July 2020.

In December 2023, the ACGA announced the outcomes of the 2023 assessment and Malaysia maintained its 5th position among the 12 Asia-Pacific markets, with improvements recorded in six out of the seven assessment categories. Malaysia was ranked 1st in the category of Auditors and audit regulators, and came in 2nd after Australia in the category of Listed Companies as well as Corporate Governance Rules which measures listed companies’ adoption of corporate governance practices and strength of corporate governance rules, respectively. The detailed individual country reports will be released by the ACGA in Q1 2024.
30% target achieved for women participation on boards of the top 100 listed companies
On 1 June 2023, the 30% target for women participation on the boards of the top 100 listed companies was achieved. This was following the introduction of the rule to require all boards of listed companies on Bursa Malaysia to comprise at least one-woman director in May 2022, which came into effect for large listed companies (those with market capitalisation of RM2 billion and above) on 1 September 2022 and for the remaining companies on 1 June 2023. Prior to the introduction of the rule, progress was recorded, but improvements were marginal between 2019 to 2021, which necessitated the introduction of the rule. The SC continues to encourage, through the Malaysian Code on Corporate Governance (MCCG) for listed companies to ensure that their boards comprise at least 30% women directors, and as of 1 December 2023, 30.7% of the top 100 listed companies have achieved that target.

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.