Keynote Address at Islamic Finance News (IFN) Forum: Green and Sustainable Finance “Opportunities for Islamic Finance and Investment”
3 December 2019  |   By: Datuk Zainal Izlan Zainal Abidin, Deputy Chief Executive, Securities Commission Malaysia
Keynote Address
Zainal Izlan Zainal Abidin
Deputy Chief Executive, Securities Commission Malaysia
Islamic Finance News (IFN) Forum: Green and Sustainable Finance
“Opportunities for Islamic Finance and Investment”
3 December 2019
Kuala Lumpur

Introduction
Distinguished speakers, ladies and gentlemen,

1. It gives me great pleasure to be here this morning. First, please allow me to thank RedMoney and its forum sponsors and partners for inviting me to say a few words on today's theme. I also wish to commend their continued commitment in gathering different stakeholder groups in forums such as this to discuss on areas that could shape future development of the Islamic finance industry.
2. The theme of today's forum "Green and Sustainable Finance" has gained significant traction across the global financial landscape in recent years and in turn has created an opportunity for Islamic finance to play a significant role in addressing some of the real environmental and social issues that are gravely affecting the world today and in the future.
Global policy on green and sustainable development
3. Conversations on climate change has taken centre stage, where scientists and NGOs are not the only ones demanding more actions, but also schoolchildren around the world who have become the voice of reason as they are the ones who will inherit the earth and its resources.
4. The impact of climate change such as the increasing frequency of extreme weather occurrences around the globe, ranging from rising water temperatures to severe droughts and floods have resulted in devastating impact on people, businesses and economies. According to the United Nations, the economic cost arising from weather-related disasters worldwide rose from 895 billion US dollars between 1978 and 1997, to 2.2 trillion US dollars between 1998 and 20171 . Given the severity of the impact from climate change, it is an issue that must be addressed – not today, but two decades ago! As we speak, the COP25 Summit has just commenced in Madrid yesterday with a warning by the UN Secretary General on the risk of the world "sleepwalking past the point of no return".
5. Around the world, policies have shifted towards addressing climate change and ensuring sustainable development. The Paris Agreement on Climate Change and the Sustainable Development Goals (SDGs) are two significant global agenda that are influencing policymakers, public sector, multilaterals and the private sector in initiating and executing policies to achieve economic prosperity underpinned by greater social inclusion, reduction of environmental degradation and preservation of the natural ecosystem.
6. However, substantial amount of funding is required to finance various initiatives to achieve these global goals. The United Nations estimated 5 to 7 trillion US dollars is required annually to fund the SDGs over the next 10 years2. In this regard, we have seen green and social bonds issued globally where the proceeds are channelled towards projects that have positive outcomes on the environment and society. The global green bond market has expanded at a compound annual growth rate of 46% from 37 billion US dollars issued in 2014 to 168 billion USD dollars issued in 20183. Although the first labelled social bond was only issued in 20174, it has shown encouraging traction, with 14.2 billion US dollars issued in 20175. However, these issuances only represent a fraction of the total global funding needs for sustainable development. Thus, there is significant potential for a wider range of financing options, including Islamic finance, to mobilise investments for the SDGs.
Role of Islamic finance in meeting green and sustainable development financing needs
7. The close alignment in the underlying principles of Islamic finance and sustainable finance places Islamic finance in a somewhat unique position to capitalize on the substantial funding requirements for initiatives towards the SDGs. Furthermore, its emphasis on shared responsibility to achieve equitable and sustainable outcomes makes Islamic finance well-suited to support social objectives. The concept of zakat (or almsgiving) and sadakah (or charitable giving) embodies the spirit of the SDGs in ensuring that no one is left behind. In addition, waqf (or Islamic endowment) captures the very essence of sustainability as it aims for the preservation of assets or resources, and only allows the benefits of the assets to be harvested. This ensures that the assets will not be depleted and remain productive. In this respect, Islamic finance has embedded sustainability well before the SDG agenda was introduced.
8. Given the importance of ensuring sustainable development and addressing the impact of climate change among its Member Countries, the Organization of Islamic Cooperation (OIC) had adopted the SDGs at its 13th Islamic Summit in 2016. The adoption is apt as it has been reported that conflicts and natural disasters are the main drivers that cause displacement and humanitarian crisis in the OIC countries with a gap of as much as 15.5 billion US dollars per annum to finance humanitarian assistance, mostly in the Muslim countries6. There is also a disproportionate share of the world's poor in Muslim countries. According to a 2017 report jointly published by the Islamic Development Bank Group and the United Nations Development Programme, OIC member countries accounted for 22% of world population but 40% of the world's poor.
9. In meeting the pressing financing needs towards basic amenities and humanitarian assistance, several Islamic finance solutions have been mobilised globally. For example, in 2014, 500 million US dollar sukuk was issued by The International Finance Facility for Immunisation Company (IFFIm), where the proceeds were used for children immunisation in some of the world's poorest countries.
10. A more recent sukuk innovation is the One WASH Sukuk, which is a collaboration between the International Federation of Red Cross and Red Crescent National Societies (IFRC) and the Islamic Development Bank (IsDB) to raise 150 million US dollars to end cholera by providing clean water, sanitation and hygiene to the target population in OIC countries.
11. Another example is a zakat arrangement between the state of Perlis (in northern Malaysia) and the IFRC, where the zakat funding was channelled towards drought assistance programme in Kenya. The goal of the funding was, among others, to provide the target community with access to water, food and health care.
12. Islamic capital market instruments have also been utilised to fund green initiatives. The world's first green sukuk was issued in Malaysia in 2017 for the financing of a solar power project.
Sustainable and Responsible Investment initiatives in the Malaysian capital market
13. Given our leadership in the Islamic capital market, Malaysia is well-positioned to pursue the Sustainable and Responsible Investment (or SRI) agenda with the aim of becoming a regional centre for SRI, especially Shariah-compliant SRI as articulated in the SC's Islamic Fund and Wealth Management Blueprint released in 2017.
14. The foundation for the sustainability agenda has been set in the Capital Market Masterplan 2 (CMP2), the 10-year strategy blueprint for the capital market covering the period from 2011 to 2020, which highlights the importance of sustainability not only for the growth but also for the governance of the capital market.
15. To ensure a holistic development of a facilitative SRI ecosystem in Malaysia, the SC introduced the 5i-Strategy in 2014, which encompasses (i) widening the range of SRI instruments; (ii) increasing SRI investor base; (iii) building a strong SRI issuer base; (iv) instilling strong internal governance culture; and (v) designing information architecture in the SRI ecosystem.
16. Among the developmental and regulatory initiatives undertaken since 2014 in supporting the growth of the SRI segment were the introduction of the SRI Sukuk Framework and the SRI Funds Guidelines, as well as ASEAN Standards for Green, Social and Sustainability Bonds.
Introduction of the SRI Roadmap to position Malaysia as the regional SRI centre
17. As some of you are aware, the SC has just launched the Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap) last week. The SRI Roadmap builds upon all the initiatives thus far and aims to provide the strategic direction for the development of a facilitative ecosystem to accelerate Malaysia's position as a regional SRI centre.
18. The SRI Roadmap identifies 20 recommendations which are based on the 5i-Strategy, which I mentioned earlier. Allow me to spend some time to highlight some of the recommendations of the SRI Roadmap.
19. The first set of recommendations is aimed at widening the range of SRI instruments. While we have seen the offerings of several SRI products in the capital market, more efforts are needed to expand the breadth and depth of SRI solutions in Malaysia. One of the immediate initiatives rolled out under the SRI Roadmap is the revision to the SC's SRI Sukuk Framework, concurrently released last week, to promote greater alignment to international standards. This is necessary to ensure that the SRI Sukuk Framework remains relevant, particularly to the international investor community.
20. Other recommendations include creation of a universal and consistent taxonomy on SRI which can provide better clarity and guidance to the industry and thereby facilitate the introduction of more innovative SRI products to finance the real needs of the economy, environment and society. These may include issuances of more social impact or thematic sukuk as well as SRI fund products such as green funds, Waqf funds and exchange-traded funds (ETFs) that are based on sustainability index.
21. With the rising global interest in the sustainable asset classes among both institutional and retail investors, more efforts will be needed to attract these investors into Malaysia's SRI market. Towards this end, the SRI Roadmap identifies several recommendations aimed at widening the range of SRI investors and these include enhancing the role of Government-linked Investment Companies (GLICs) and institutional investors in embracing SRI.
22. Several GLICs and institutional investors in Malaysia such as the Employees Provident Fund (EPF), Khazanah Nasional Berhad, and Retirement Fund (Incorporated) (KWAP) have become signatories to the Principles for Responsible Investment (PRI). To further drive SRI to a greater scale, more institutional investors are encouraged to incorporate sustainability into their investment mandates.
23. Findings from global surveys have shown that individuals, including the millennial generation, are becoming more interested in SRI and allocating their monies towards investments that are contributing towards positive outcome to the environment and society. Thus, by enhancing their SRI intermediation capabilities, fund managers will be able to offer suitable SRI fund products and attract retail investors into this segment.
24. Building a strong issuer base would further strengthen the ability to raise capital to meet sustainable development needs and address climate change. To-date, most of the SRI sukuk that have been issued are for the renewable energy sector. Capital market intermediaries can play a role in encouraging a more diversified issuer base, such as developers of affordable housing, providers of essential services such as healthcare as well as manufacturers of eco-efficient products, to also tap into the SRI sukuk market.
25. In addition, as the backbone of the economy, widening access to SRI for small and medium enterprises needs to be accelerated. This can be achieved by creating more awareness on the alternative funding avenues available such as the Equity Crowdfunding (ECF) and Peer-to-Peer (P2P) financing platforms, as well as through Venture Capital and Private Equity investments. I am pleased to highlight that there are already three green technology companies and one social-purpose company that have successfully raised financing through ECF platforms in Malaysia.
26. As these companies further grow and increase their scale, we need to have an enabling environment that can support green and social impact companies to tap into the Initial Public Offering (IPO) market, whether through LEAP Market, ACE Market or the Main Market of Bursa Malaysia. Just last week, Solarvest Holdings Bhd was the first pure solar photovoltaic company to be listed on the ACE Market.
27. As expectations on corporate responsibility increases, SRI should also be embedded within the governance culture of businesses in Malaysia. Corporates are now expected to strengthen their commitments to the sustainability agenda, in large part through their transparency and the ability to address material issues such as climate change. To instill strong internal governance culture, the SRI Roadmap have identified four recommendations and they include strengthening sustainability disclosures of public listed companies (PLCs), promoting the adoption of sustainable business practices among Small and Medium Enterprises (SMEs), enhancing board governance on sustainability and also enhancing better risk assessment and supervisory approach on sustainability related risks such as transitional risk.
28. Last but not least, our aspirations to be the leading SRI centre in the region would be enhanced with the support and development of SRI services and the appropriate information architecture within the ecosystem. This is crucial to enable greater visibility of sustainable asset classes, improve the awareness on the sustainability agenda and facilitate capital allocation towards sustainable development. Recommendations include measures to enhance the transparency of information on SRI products and accelerate the promotion and profiling of Malaysia as a regional SRI centre.
29. As interest towards SRI continues to grow, there will correspondingly be a rise in the demand for ancillary services such as ESG research and ratings, external reviews for issuances of green bonds and sukuk as well as investment screenings and analysis. As Shariah experts and advisors play a crucial role in supporting the development of Shariah-compliant SRI products, it is opportunistic for them to enhance their knowledge on SRI and provide SRI-related advice to their clients. This is one of the enablers that would support the development of a Shariah-compliant SRI market segment in Malaysia.
30.

To summarise the recommendations, some of the specific efforts to grow the Shariah-compliant SRI segment will include:

  • Expanding the breadth and depth of Islamic capital market instruments such as a more diverse range of sukuk and funds
  • Issuing products that comply or are aligned with international standards and taxonomy to increase level of acceptance
  • Introducing new products such as Waqf-based instruments and to enhance the governance of such instruments
  • Undertaking more Research & Development to drive greater product and service innovation
  • Encouraging Shariah advisers to enhance competency in SRI and be able to provide expert advice on both aspects
  • Utilizing technology to facilitate distribution and expand product range for greater inclusiveness
  • Attracting more institutional investors, for example Sovereign Wealth Funds of certain OIC member countries, to have dedicated allocation towards Shariah-compliant SRI
31. The implementation of the SRI Roadmap's recommendations, which will be carried out on a phased approach over the next five years, will require collective and concerted commitment and participation from various stakeholders to ensure effective and efficient operationalisation.
Closing remarks
32. Bob McDonald, former Chairman, President and CEO of Procter & Gamble, said and I quote, "companies must do well to do good and must do good to do well", unquote.
33. As we transition towards a carbon neutral and green economy, individuals and corporations globally are embracing more environmentally friendly and sustainable practices. In this regard, the role of Islamic finance as providers of responsible capital needs to be further harnessed to deliver its full potential.
34. We have had many forums and conferences to discuss the potential of Islamic finance in serving the funding needs for green and sustainable development, which have helped to raise greater awareness. Now, we also need to operationalise and put into practice the various ideas and recommendations that have been discussed in these forums in order to substantiate the value proposition. With that, I wish you all the best and a highly productive and impactful day ahead.
 
Thank you.
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