Advancing ESG through the Capital Market - Strengthening the Sustainability and Competitiveness of the Capital Market

Advancing ESG through the Capital Market

Over the decade, the SC has championed various initiatives and frameworks in promoting responsible investment and enhancing environmental, social and governance practices to encourage sustainable finance. This includes green bonds and sukuk, which facilitate funding for environmentally friendly projects. As the SRI segment in Malaysia’s capital market continues to evolve, the SC continues to support multi-prong national sustainability initiatives and frameworks as the country advances its sustainability agenda with a goal of achieving Net Zero by 2050.

SRI through the Development of the SRI Taxonomy Plus-Standards

Since the issuance of the Principles-Based SRI Taxonomy for the Malaysian Capital Market (Principles-Based SRI Taxonomy), the SC has engaged with relevant stakeholders to deepen understanding and encourage the adoption of the Principles-Based SRI Taxonomy across the Malaysian capital market. This Principles- Based SRI Taxonomy which was issued in December 2022 in line with the recommendations from the SC’s Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap) provides a framework to assist a wide range of users in identifying and classifying economic activities that align with environmental, social, and sustainability objectives.

The first of such adoption was by reNIKOLA Holdings Sdn Bhd (reNIKOLA), a renewable energy producer whose Green Financing Framework was reviewed and deemed in alignment to the Principles-Based SRI Taxonomy. Subsequently reNIKOLA via its whollyowned subsidiary, reNIKOLA Solar II Sdn Bhd (reNIKOLA Solar II, issued its RM390.0 million ASEAN Green SRI Sukuk (reNIKOLA II Green Sukuk) on 29 September 2023, which was aligned with the Principles-Based SRI Taxonomy.

As the SRI segment in Malaysia’s capital market continues to evolve, there is a growing need for more detailed guidance on thresholds and metrics for key economic sectors. To address this, the SC is developing the SRI Taxonomy Plus-Standards, which outlines additional guidance on thresholds and metrics for key economic sectors through the development of technical screening criteria (TSC). The SRI Taxonomy Plus-Standards aligns with national policies and targets, while also considering the ASEAN Taxonomy, where applicable.

Recognising the substantial effort required for this initiative, the SC is undertaking a multi-phased, multi-year approach to ensure thorough and focused development of the TSC for each key economic sector. To obtain feedback for the development of the relevant components of the taxonomy, the SC conducted several stakeholder consultations throughout 2024, engaging ministries, government agencies, institutional investors, and key stakeholders in the energy sector.

These sessions facilitated in-depth discussions on the components of the SRI Taxonomy Version 2, with a particular focus on its application to the Malaysian energy sector and capital market. An internal reference document on the SRI Taxonomy Plus-Standards for the Energy Sector has been developed to serve as a guiding document to further support the advancement of national taxonomy development in Malaysia.

Advancing Malaysia’s Sustainability Agenda and Facilitating Development of a Holistic Carbon Market Ecosystem

The Twelfth Malaysia Plan sets out the country’s aim to achieve Net Zero by 2050, with an announcement shortly thereafter that a feasibility study on carbon pricing, which includes carbon tax and emissions trading system will be conducted.

A feasibility study on carbon pricing implementation is being conducted by MOF through the Malaysia Partnership for Market Implementation (PMI) programme with the World Bank. This study, which is expected to be completed in 2025 will provide suitable recommendations for implementation of carbon pricing in Malaysia. The SC is a member of the PMI Carbon Pricing Implementation (CPI) Steering Committee as well as the PMI CPI Technical Working Group to provide input and feedback to MOF and World Bank on the feasibility study on the potential implementation of carbon pricing instruments in Malaysia. This includes on findings and interim reports prepared by World Bank.

In addition to the PMI CPI study, the SC also supports the Ministry of Natural Resources and Environmental Sustainability (NRES) in developing the National Climate Change Bill (Rang Undang-Undang Perubahan Iklim Negara)(RUUPIN) and the National Carbon Market Policy (Dasar Pasaran Karbon Kebangsaan, DPKK). Together, these policies will help mobilise and guide government agencies, industry, communities, and other stakeholders in addressing the challenges of climate change and carbon emissions in a holistic manner. The SC is a member of both the RUUPIN and DPKK Technical Working Committees, working closely with NRES and other members, including ministries, government agencies, state governments, and organisations, to provide input and feedback on the development of RUUPIN and DPKK, with the aim of finalising these regulations and policies. The RUUPIN aims to strengthen institutional arrangements on data and information disclosure as well as emissions reduction mechanisms to thrive and prosper while marching towards a low carbon and resilient economy in Malaysia. Additionally, the DPKK aims to support the adoption of both compliance and voluntary carbon market mechanisms in Malaysia. The SC also supported NRES in facilitating stakeholder consultation sessions with the financial sector on RUUPIN and DPKK through the Joint Committee on Climate Change (JC3).

As these policies take shape at the national level, in December 2022 Bursa Malaysia launched the Bursa Carbon Exchange (BCX), Malaysia’s voluntary carbon market exchange (VCM), the world’s first Shariahcompliant carbon exchange, as domestic demand for carbon credits grow. The launch of the VCM is seen as a critical step in catalysing the domestic carbon market as this will establish local capabilities in developing carbon projects and monitoring, reporting and verification (MRV) services, while crowding in funding required for the various carbon projects.

Following the launch of the BCX in 2022, BCX hosted the first domestically generated carbon credits auction from the Kuamut Conservation Project in July 2024, highlighting Malaysia’s ability to produce highintegrity carbon credits. In tandem, as clean energy becomes central to Malaysia’s decarbonisation journey, BCX carried out its inaugural auction of renewable energy certificates (RECs) generated from the Murum Hydroelectric Plant in Sarawak, the first large scale sustainable energy project.

The year also saw the establishment of the Malaysia Carbon Market Association, launched in August 2024 to facilitate and accelerate the development of the Malaysian carbon market. The non-profit organisation is represented by a consortium of players from both private and public sectors.

In addition to developing Malaysia’s carbon market, the SC continues to support the development of other national sustainability-related government policies and initiatives including the Nationally Determined Contribution Roadmap and Action Plan (NDC Roadmap) and Long-Term Low Emission Development Strategies (LT-LEDS). The SC participated in an engagement session on the development of the NDC Roadmap and Long- LT-LEDS organised by NRES to share its sustainable finance initiatives.

The SC is also a member of the REDD Plus Finance Framework Advisory Committee (RFFAC) Technical Working Group on Forest Carbon Offset (FCO). The REDD Plus Finance Framework (RFF) was developed as a finance mechanism to incentivise activities to enable forest preservation. The technical working group is a platform to exchange views and provide inputs as the protocols and guidelines for the FCO currently being developed by the Malaysia Forest Fund (MFF). The REDD Plus Finance Framework (RFF) was developed by MFF which was formed on the initiative of NRES as a finance mechanism to incentivise activities that help keep forests standing. It is designed to use funds for non-carbon benefits as well as for carbon credits.

Special Feature 4

National Sustainability Reporting Framework

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.