Asian Development Bank (ADB) – RAM Sustainability Sdn Bhd (RAM Sustainability) Regional Webinar - Scaling up Sustainable Finance in ASEAN: The Malaysian Journey
3 May 2021  |   By Datuk Zainal Izlan Zainal Abidin, Deputy Chief Executive, Securities Commission Malaysia
Asian Development Bank (ADB) – RAM Sustainability Sdn Bhd (RAM Sustainability) Regional Webinar
Scaling up Sustainable Finance in ASEAN: The Malaysian Journey

3 May 2021

Keynote Address
Datuk Zainal Izlan Zainal Abidin
Deputy Chief Executive, Securities Commission Malaysia

Introduction

Assalamualaikum and a very good morning,

Ladies and gentlemen.

1.

It gives me great pleasure to be able to join all of you for this regional webinar. Firstly, I would like to thank the organisers, the Asian Development Bank (ADB) and RAM Sustainability, for inviting me to share my thoughts and views this morning. I wish to commend the Asian Development Bank for its continuous support in the development of sustainable finance particularly within ASEAN, including capacity building initiatives such as today’s webinar.

2.

I would also like to recognize RAM Sustainability for its role in enhancing the sustainable finance ecosystem, including its range of service offerings in this area1. In addition, RAM Sustainability is a strong supporter of the regulators’ initiatives in the development of sustainable finance in Malaysia and ASEAN, with its involvement in various industry working groups.

Global policy shifts on sustainable development

Ladies and gentlemen,

3. The global agendas addressing sustainable development and climate change such as the Sustainable Development Goals (SDGs), the Paris Agreement on Climate Change and more recently the commitments towards Net Zero Carbon Emissions, are recognized as imperatives that will further shape how countries and companies behave. Conversations on sustainability and climate change have taken centre stage as there is fast-growing awareness that the systemic impacts arising from poor management of sustainability and climate change will likely be very devastating.
4. Today, while progress is being made towards achieving the sustainability and climate objectives, much more needs to be done as we are not yet advancing at the speed or scale required. This is further exacerbated by the COVID-19 pandemic which has set back the progress towards achieving the SDGs and the climate targets.
5. COVID-19’s impact on SDG financing needs in developing countries is expected to increase the financing gap by 70%, to USD 4.2 trillion per annum post-pandemic. However, to put this substantial figure into context, plugging the financing gap would require the reallocation of only 1.1% of the global financial assets held by banks, institutional investors and asset managers, which amount to USD 379 trillion, into SDG-aligned economic activities2.
6. In relation to Malaysia, a report on SDG investment by Standard Chartered highlighted that USD 3.9 billion of investments are required in clean water and sanitation; USD 14.7 billion in maintaining digital access; and USD 73.7 billion in transport infrastructure, by 20303 .
7. Given the huge financing needs, reliance on public funding alone is not sufficient and no longer sustainable (pun intended). This is where the capital market can play a greater role in the reorientation of capital for sustainability purposes. The issuance of market-based financing instruments such as green, social and sustainability bonds and sukuk can be a solution in meeting the financing needs; and at the same time, cater for investors’ quest for sustainable asset class as the demand for sustainable products is also expected to increase.

Development of sustainable finance in Malaysia and ASEAN

Ladies and gentlemen,

8.

Since 2014, the Securities Commission Malaysia (SC) has introduced a number of Sustainable and Responsible Investment (SRI) initiatives for the Malaysian capital market. Guided by the 5i-Strategy, which is an overarching strategy that encompasses (i) SRI instruments; (ii) investors; (iii) issuers; (iv) internal governance culture; and (v) information architecture, the SC is undertaking a holistic approach in the development of a facilitative SRI ecosystem in Malaysia.

9. Our journey in pursuing the SRI agenda emanated from our periodic assessment on the strategic development of Malaysia’s Islamic Capital Market – given the similarities in the values espoused by Islamic finance and SRI, we recognized then that there were opportunities that could be unlocked. One of the earliest initiatives introduced was the SRI Sukuk Framework in 2014, which led to the creation of an innovative Shariah-compliant SRI instrument to facilitate the financing of projects that would benefit the environment and society. As at December 2020, a total of RM 5.39 billion4 (USD 1.28 billion) of SRI sukuk had been issued under the Framework since its introduction, including the issuance of the world’s first green sukuk in 2017.
10. Within the fund management space, the SC introduced the Guidelines on SRI Funds in December 2017, to encourage the development of the SRI fund management industry in Malaysia. As at March 2021, 17 qualified SRI funds have been approved by the SC5 , including a fund that focuses on investing in ESG sukuk.
11. To elevate the SRI agenda further, the SC developed and released its SRI Roadmap in 2019, with 20 recommendations aimed at strengthening Malaysia’s position as a regional SRI centre.
12. Several early outcomes following the release of the SRI Roadmap include the revision of the SRI Sukuk Framework in 2019, to encourage greater alignment with globally accepted principles and expand the range of eligible projects and issuers; and the creation of a dedicated SRI centre, a microsite within the Bond and Sukuk Information Exchange (BIX) platform in 2020, as a centralised database on SRI sukuk and bonds, aimed at enhancing the transparency of and access to information.
13. The SC also plays a key role in the development of sustainable finance in the region, through the ASEAN Capital Markets Forum (ACMF), which is a high-level grouping of capital market regulators in ASEAN, as well as the ASEAN Working Committee on Capital Market Development (WC-CMD), which is a wider group comprising representatives from ministries of finance, central banks and capital market regulators.
14. Within the ACMF, the SC co-chairs the Sustainable Finance Working Group together with the Philippines’s Securities and Exchange Commission. One of the ACMF’s earliest initiatives was the introduction of the suite of ASEAN Green, Social and Sustainability Bond Standards in 2017 and 2018, which are aligned to the International Capital Market Association’s respective principles and guidelines.
15.

To-date, Malaysia makes up the third largest issuances under the ASEAN Standards6. And just last week, the Government of Malaysia kicked off the offering of Malaysia’s first sovereign sustainability sukuk amounting to USD 1.3 billion, an issuance that is aligned with the ASEAN Sustainability Bond Standards. This issuance is also recognised as the world’s first US dollar sustainability sukuk issued by a sovereign, where proceeds will be used for eligible social and green projects aligned to the SDGs.

16. In 2020, two key blueprints to develop sustainable finance in the region were published, namely the ACMF’s Roadmap for ASEAN Sustainable Capital Markets, and WC-CMD’s Report on Promoting Sustainable Finance in ASEAN.The ACMF and WC-CMD, which have been working closely to consolidate and accelerate the development of sustainable finance in the region, are currently developing an ASEAN Taxonomy for Sustainable Finance, which seeks to identify economic activities that are sustainable and help direct investment and funding towards a sustainable ASEAN.

Deepening and broadening the SRI sukuk and bond market in Malaysia

Ladies and gentlemen,
17.

The Malaysian Journey towards Scaling up Sustainable Finance in ASEAN continues with ongoing efforts to implement the recommendations in the strategy documents, and at the same time, enhance the existing initiatives and expand the market segments. In this regard, the SRI sukuk and bond market in Malaysia will continue to be deepened and broadened. This will further grow the market, encourage greater innovation and attract more issuers and investors. Allow me to outline the key factors that the SC believes will be essential in deepening and broadening the SRI sukuk and bond market further.

18.

First – widening the access to the SRI sukuk and bond market to a more diversified issuer base. Currently, 65% of SRI sukuk (by issuance amount) have been raised for the financing of renewable energy projects in Malaysia. To broaden the range of issuances, capital market intermediaries and external review service providers can play their role in identifying pipeline of issuances for other environmentally-friendly and socially-responsible projects.

19. To encourage more issuances, several incentives have been put in place. These include the tax deduction on the issuance costs of SRI Sukuk - available until 2023. In January this year, the SC has also expanded the scope of its Green SRI Sukuk Grant Scheme, established in 2018, to include all sukuk issued under the SRI Sukuk Framework and now bonds issued under the ASEAN Standards. Eligible issuers can claim the grant to offset part of the costs of the external review services7 .
20. The grant scheme is now known as the SRI Sukuk and Bond Grant Scheme, and income tax exemption is also provided for the recipients of this grant until 2025. With the expansion of the SRI Sukuk and Bond Grant Scheme and the availability of the tax deduction, issuers can benefit from the reduction of overall issuance costs.
21. In addition, the SC recently launched its NaviGate: Capital Market Green Financing series, which aims to connect companies to capital market financing. The first programme, held in February, was targeted at micro, small and medium size enterprises for alternative capital market financing such as Equity Crowdfunding and Peer-to-Peer financing. The next programme will focus on companies that require larger scale financing through the issuance of SRI sukuk and bonds.
22. The second factor – tapping into new classes of investors that are becoming more sustainability-conscious. Traditionally, the bonds and sukuk market in Malaysia is predominantly an institutional market. However, the growing middle income segment and mass affluent investors present a new pool of investors that could be tapped into to further broaden the SRI investor base. Based on a global report issued in 2020, 98% of affluent investors are interested in sustainable investing and are generally willing to consider allocating funds towards sustainable investments8.
23. Furthermore, the issuance of the Malaysian Government’s Sukuk Prihatin in 2020 which raised RM 666 million to finance the Government’s COVID-19 recovery initiatives, attracted significant participation from the retail segment. This could pave the way for more issuances of similar social sukuk or bonds for retail investors in the future.
24. The third factor – the multilateral development banks (MDBs) can play an instrumental role in the SRI sukuk and bond market. Globally, MDBs are the pioneers in the issuances of green and social bonds. Given their main objective in encouraging economic development by promoting investment activity, the MDBs can continue to play diverse roles in the SRI sukuk and bonds ecosystem – as issuers, guarantee providers, investors as well as intermediaries to bridge public and private sector capital towards financing sustainable development needs.
25. Given the expertise and track record of MDBs in the bond market, industry players are encouraged to explore potential collaborations with the MDBs in the SRI sukuk and bond market. Today’s webinar which is co-hosted by the ADB and RAM Sustainability demonstrates another aspect of MDB and industry collaboration, through capacity building initiatives.
26. This brings me to the fourth factor, which is – building and enhancing capabilities of the market participants. With more knowledge and greater expertise, the market intermediaries will be able to offer financing solutions through the introduction of innovative SRI sukuk and bond structures. In this regard, the SC holds regular technical workshops with the intermediaries and external review service providers to enhance their knowledge on the SRI sukuk and bonds regulatory framework and the issuance process.
27. To further drive capacity building, the SC, through its affiliate, Capital Markets Malaysia (CMM), has established three Centres of Excellence (COE) to fast track the industry’s SRI capability developments. The first COE, Centre for Sustainable Corporations (CSC) provides a platform to develop expertise and positioning of Malaysian corporates as sustainable companies. The second COE, the Malaysian Sustainable Finance Initiative (MSFI), facilitates capacity building, awareness and thought leadership for the financial market intermediaries. The third COE, the Sustainable Investment Platform (SIP), was jointly launched by CMM and the Institutional Investors Council on 19 April, to support institutional investors and fund managers build depth in SRI strategies.
28. The last factor, but certainly not the least, is – the role of ancillary service providers in building credibility and market confidence. As the sustainable finance segment continues to grow, investors and issuers are demanding for more ESG-related services. The ESG data market is estimated to increase to USD 1 billion in 2021, given the increasing demand and offerings from the service providers9.
29. With the increasing disclosures of ESG information, investors are placing more value on quality and verifiable information. Thus, the role of external review service providers in the green, social and sustainability bond market, is becoming more important. Although it is a voluntary requirement, it is now regarded as an integral part of the issuance process as it adds credibility to the issuances and potentially mitigates risk of green washing.
30. In this regard, there are opportunities for various types of ESG services to be developed and offered by the ancillary service providers. This will add to the breadth and depth of ESG services available in the market and facilitate the issuances of more innovative sustainable finance instruments.
31. One of the latest sustainable finance instruments that will further accelerate sustainable development and the management of climate change is transition bond. This is definitely an area that the regulator is closely looking at in Malaysia, given the importance of facilitating the transition to a low carbon economy; as well as in ensuring continuous alignment with the rapid developments surrounding this area that are happening at the global and regional stage. In addition, the ACMF is currently exploring the development of ASEAN sustainability-linked bond standards to facilitate bond issuance for sustainability-related goals. This will complement the suite of bond standards that ACMF has already introduced for green, social and sustainability bonds.

Closing

Ladies and gentlemen,

32. While the SC has put in place various policies and framework for the development of a facilitative SRI ecosystem in the capital market, all stakeholders must play their part too in growing this segment further and contributing to the overall sustainability agenda.
33. As we are now in the Decade of Action, more proactive measures need to be done and concrete actions to be taken - individually and collectively, locally and regionally, as we shift towards a low carbon and green economy.
34. I hope the thoughts that I have shared have provided you with some perspectives that can be deliberated further during this webinar. With that, I wish you all the best and a highly productive discussion ahead.
 

Thank you.


1

The ESG service offerings provided by RAM Sustainability includes second party opinion on issuers’ sustainability framework, sustainability ratings and sustainability reporting for corporates

2

OECD, 2020, Global Outlook on Financing for Sustainable Development 2021: A New Way to Invest for People and Planet.

3

Standard Chartered, 2020, Opportunity 2030 The Standard Chartered SDG Investment Map.

4

Through 16 issuances were made by 13 issuers

5

Cumulative from 2018

6

Thailand – 38%, Philippines – 35% and Malaysia – 24%.

7

Eligible issuers can claim up to 90% of the external review costs incurred subject to a maximum of RM300,000 per issuance.

8

Standard Chartered Sustainable Investing Review 2020.
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