International Advocacy and Developments - Strengthening the Sustainability and Competitiveness of the Capital Market

International Advocacy and Developments

Apart from developing the domestic capital market, the SC continues to demonstrate its commitment to global regulatory policymaking and international standardsetting.

As a member of the IOSCO Board, the governing and standard-setting body of IOSCO, the SC is at the forefront of global regulatory discussions and policymaking and is able to gain relevant insights into emerging regulatory issues impacting global capital markets. In addition, the SC’s continuous contributions in the regional initiatives have resulted in the development and enhancement of the ASEAN Taxonomy for Sustainable Finance.

IOSCO APRC SME Financing through Regional Capital Markets
The SC is also an active member of the IOSCO’s Asia Pacific Regional Committee (APRC). The APRC is one of four regional committees of IOSCO which focuses on regional issues relating to securities regulation in the Asia-Pacific region.

In 2023, the APRC agreed to undertake work on SME financing through regional capital markets. An APRC SME Working Group led by the SC was subsequently established, where other members include the Australian Securities and Investments Commission (ASIC), Indonesian Financial Services Authority (OJK), Monetary Authority of Singapore (MAS), Securities and Exchange Commission of Thailand (SEC Thailand), State Securities Commission of Vietnam (SSC Vietnam). As significant drivers of Asia Pacific’s economic growth, employment and innovation, SMEs face significant challenges in gaining access to financing. The work will lead to the development of a report in Q1 2024 to enhance APRC members’ understanding of the current landscape of SME financing within the region, challenges related to SMEs’ access to capital market financing, as well as policy measures and innovative market-based financing solutions to unlock sources of capital for SMEs through capital markets. This work is also expected to help inform the SC’s efforts in strengthening its fundraising ecosystem for SMEs within the Malaysian capital market.
The ASEAN Taxonomy for Sustainable Finance
The SC continued to contribute towards the formulation of sustainable finance initiatives within the ASEAN region. This includes development of the ASEAN Taxonomy for Sustainable Finance (ASEAN Taxonomy) Version 2, which was launched in March 2023. Version 2 built on an earlier version of the ASEAN Taxonomy was published in November 2021.

Among the elements introduced in Version 2 were a third Essential Criteria (EC3) – Social Aspects, the completion of the Foundation Framework with a set of decision trees and guiding questions, and the introduction of the technical screening criteria (TSC) for the electricity, gas, steam, and air conditioning supply (Energy) focus sector under the Plus Standard.

The TSC released outline thresholds for the Green tier (aligned with the EU Taxonomy), as well as the Amber 2 and 3 tiers. These TSC will be adjusted over time, in line with new technological developments. This is particularly the case for Amber Tiers 2 and 3, which will become more stringent and will ultimately be settled. TSC for carbon capture, utilisation, and storage (CCUS) as an enabling sector was also developed.

Furthermore, a unique feature introduced in Version 2 is criteria governing the early retirement of coal-fired power plants, also known as coal phase-out- a first for a regional taxonomy. The coal phase-out criteria will serve to facilitate energy transition in a region that is still largely powered by coal. This signifies a groundbreaking step by the ASEAN community, highlighting its commitment to sustainable practices and the transition to cleaner energy sources. However, this classification comes with a rigorous evaluation process, subjecting coal phase-out projects to stringent assessment criteria.

The ASEAN Taxonomy has also generated significant global interest, not only as the first regional transition taxonomy to be published globally but also for its specific treatment of important aspects of transition such as coal phase-out. It also provides an important signal of the region’s collective commitment towards a sustainable ASEAN and models an example of an inclusive yet credible classification system for sustainable activities that will help equalise climate outcomes across the AMS. This, in turn, will be key to attracting international investments and financial flows into sustainable projects in the region.

The SC has been working closely with fellow regulators in the region, as well as BNM to ensure the ASEAN Taxonomy is aligned with other guidelines and standards already in existence, including the SRI Taxonomy issued by the SC, and the Climate Change and Principle-based Taxonomy (CCPT) issued by BNM.

Version 2 of the ASEAN Taxonomy has undergone a stakeholder consultation process in the second half of 2023, which was led by the SC as chair of the ATB’s Working Group on Market Facing and Resourcing. More than 1,300 stakeholders from more than 250 organisations domestically, regionally and internationally were engaged as part of this process.

The ASEAN Taxonomy has always been intended as a living document, frequently revised to account for technological, scientific, and economic developments. In that vein, TSCs for the remaining five focus sectors and two enabling sectors are currently in development and will be rolled out in phases over the next few years. The ASEAN Capital Markets Forum released the ASEAN Transition Finance Guidance (ATFG) Version 1 on 17 October 2023 that addresses how an entity may assess and/or demonstrate a credible transition. Entities looking to be considered as credibly transitioning should demonstrate two main elements: climate ambition and robustness of ability to deliver on the said ambition. Entities should also select a science-based decarbonisation pathway aligned with the objectives of the Paris Agreement or a credible ASEAN-adjusted scenario, if necessary.

The ATFG sets out three tiers of transition finance plans:

Top two tiers “Aligned and Aligning” with a 1.5C trajectory and well-below 2C trajectory under the Paris Agreement, respectively.
The third tier, where ambition fails to meet either of the two “Aligned and Aligning” tiers yet is accompanied by essential elements of a credible plan, is categorised as “Progressing”.
Thought Leadership on the Global Stage
The SC has consistently strived to put Malaysia’s ICM on the global stage through its thought leadership initiatives.

In 2023, the SC continued the 14th installment of the SC and the Oxford Centre for Islamic Studies (SC-OCIS) Roundtable, themed ‘Investing Towards the Common Good: Impact, Stewardship, and Ethical Considerations’. This platform brought together industry experts locally and globally in Islamic finance, sustainability, and impact investing, fostering in-depth discussions on the potential of Islamic finance and the ICM to harness the benefits of impact investing.

Stemming from the collaboration of the SC-OCIS Roundtable, the SC and OCIS jointly introduced a visiting fellowship in Islamic finance at the OCIS in 2012. For the academic year 2020/2021, the SC-OCIS visiting fellow under the Scholar in Residence programme published a report in September 2023, which adds to the literature and research on the topic of public policy, insolvency and the application of maqasid al-Shariah for evaluating secular policy initiatives.

Alongside the strategic collaboration with OCIS, the SC and World Bank reconvened its annual conference in November 2023 following a three-year hiatus due to the pandemic. The collaboration between the SC and World Bank stemmed from a shared objective to foster the growth of Islamic finance and ICM.

Since 2017, conferences under the flagship name SCWorld Bank Conference focuses on themes revolving on public-private partnerships, sustainability and green finance, and social impact investment through financial innovation. The collaboration with the World Bank has solidified the commitment to advance the development of ICM and strengthened Malaysia as one of the leading jurisdictions in championing the sustainability and impact agenda.

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.