Keynote Address
By
Datuk Zainal Izlan Zainal Abidin
Deputy Chief Executive, Securities Commission Malaysia
at
the Asia Asset Management: 10th Annual Malaysia Roundtable
Sustainability Investing: From Aspirational to Attainable
26 July 2022
Mandarin Oriental Kuala Lumpur
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Introduction Assalamualaikum and a very good morning, Distinguished speakers, Ladies and gentlemen, |
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| 1. |
It gives me great pleasure to be able to join all of you at the Asia Asset Management’s 10th Annual Malaysia Roundtable this morning. Firstly, I would like to thank the organiser for inviting me to share some of my thoughts on this very important subject. Today’s roundtable with the theme Sustainable Investing: From Aspirational to Attainable, is timely, as we are now in the Decade of Action towards achieving the sustainable development and climate goals. |
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Urgent call to action towards meeting sustainable development and climate goals |
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| 2. |
As we all know, climate change is already impacting every corner of the globe, and with increased severity – in recent weeks and months, these include extreme heat and devastating floods across different continents. |
| 3. | Today, 3.3 billion to 3.6 billion people live in countries that are highly vulnerable to climate impacts, including Asia1. In the next decade alone, climate change will drive 32 million to 132 million more people into extreme poverty,2 and could lead to the loss of 80 million jobs by 2030.3 Additional 350 million people will experience water scarcity by 20304; and and as much as 14 percent of terrestrial species will face high risks of extinction5 |
| 4. | As Asia has more people in coastal cities than the rest of the world combined, it is not surprising that Asia is more vulnerable to climate change risks than other regions6 . As many as 15 million people and almost 2,000 square kilometres of land in seven Asian cities could be affected by extreme sea-level rise and coastal flooding by 20307, resulting in loss of income, displacement of communities as well as rising health concerns. |
| 5. | Malaysia is also not spared from the effects of climate change. The floods in late December and early January have resulted in overall losses of RM 6.1 billion8. Given the significant physical and economic damage, the Government is undertaking further measures to tackle climate change issues, including flood mitigation, through the National Adaptation Plan, as announced by the Malaysia Climate Change Action Council (MyCAC) recently. |
| 6. | Currently, global warming is already having large impacts on ecosystems, human health and agriculture; and as a result, reaching goals to eradicate poverty and hunger, and to protect life on land, are made more challenging9. These severe impacts show that climate change and sustainable developments are inseparable and need to be addressed concurrently and urgently. |
| 7. | Based on the Sustainable Development Goals (SDG) Index scores which track the progress of the SDGs, over the period of 2015 to 2019 (before the COVID-19 pandemic), the world was progressing on the SDGs at an annualised growth rate of 0.5 points per year to 66.0 points (out of 100.0 points on the SDG Index), with poorer countries making greater gains than rich countries10.While the improvement was too slow to meet the 2030 targets, some of the progress made included reducing poverty (SDG 1).11 |
| 8. | However, the pandemic has derailed the progress towards achieving sustainable development and climate targets. From 2019 to 2021, SDG Index scores had declined slightly by 0.01 points per year on average, and overall, progress on the SDG Index had stagnated across all income groups12. The pandemic also impacted SDG financing needs in developing countries, where the financing gap is expected to increase by 70 percent, to USD 4.2 trillion per annum post-pandemic13. In addition, climate change adaptation financing needs for just the developing countries will reach USD 127 billion and USD 295 billion per year by 2030 and 2050, respectively14. |
| 9. |
Given the massive financing needs, public finance alone will not be sufficient. Thus, private investments need to be mobilised towards achieving sustainable development and climate goals. The capital market therefore has significant potential and role to play in contributing towards filling the financing gap for the SDGs. |
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Roles of the asset management industry in driving sustainable investments Ladies and gentlemen, |
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| 10. | With growing recognition of the urgency of the sustainability agenda and therefore the need to plug the financing gap, the industry’s commitment towards sustainable investment continues to increase in recent years as more capital is channelled towards economic activities and projects that are aligned with sustainable development and climate objectives. Globally, the size of sustainable funds amounted to USD 2.7 trillion in 2021, representing a CAGR of 27% from only USD 195 billion in 2010. Over the same period, the total number of sustainable funds grew by a CAGR of 15%, from 1,304 in 2010 to 5,932 in 202115. |
| 11. | As at March 2021, 3,404 investors16have become signatories to the Principles for Responsible Investment (PRI), representing an increase of 26 percent over the previous year17 ,thereby committing over USD 121 trillion of assets under management to investments that integrate Environmental, Social and Governance (ESG) criteria. |
| 12. |
In Malaysia, while the sustainable funds segment is still relatively nascent, the growth trend is encouraging. Since the introduction of the SC’s Guidelines on Sustainable and Responsible Investment (or SRI) Funds about four years ago, 34 SRI funds have been launched as at 2021, with total net asset value (NAV) of RM 5.07 billion, thereby offering investors – both wholesale and retail – the opportunity to invest in conventional and Shariah-compliant ESG-focused funds. |
| 13. |
Both asset managers and asset owners can play a leadership role in driving sustainability given their position of strengths as stewards of investments. Indeed, many asset owners and managers have been integrating sustainability as a primary factor in their capital allocation decision, including undertaking active engagements with investee companies in improving their sustainability practices. Actions and decisions by the asset managers and owners can shape and influence the desired behaviour and instil greater urgency among the investee companies to transition towards low carbon activities and better sustainability practices. |
| 14. | In this regard, asset managers that invest in businesses at relatively early stages – such as venture capital firms – have an added opportunity to provide guidance and advice to such businesses to incorporate the “sustainability culture” and put them on the sustainability pathway early in their lifecycle. This will help broaden and deepen the pool of companies that will more readily attract SRI-based investors and potentially garner better valuations. |
| 15. |
In recent years, asset owners in Malaysia have been demonstrating greater commitment towards sustainable investment including some of our large institutions that have launched their sustainable investment frameworks. This presents greater opportunities for the asset management industry to align their product and service offerings as well as expertise in intermediating sustainable investments, with the strategy and demand of their clients. The increasing awareness among individual investors as they become more conscious on sustainability and climate change issues is also expected to increase the demand for sustainable investments. |
| 16. | The global sustainable investment industry is projected to grow to USD 160 trillion by 203618. The asset and fund management industry in Malaysia must ride on the wave of these trends and ramp up efforts in offering wider range of sustainable investment choices for investors. This includes the introduction of more innovative sustainable funds, focusing on thematic ESG themes, that resonate with investors’ interests and demand. |
| 17. |
While there are opportunities, we recognise that the industry is also facing a number of challenges. Therefore, the SC has, since 2014, introduced various initiatives to develop a facilitative ecosystem for SRI in Malaysia, to enable the capital market to be part of the solution in plugging the financing gap to meet sustainable development and climate change objectives. |
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Initiatives in the Malaysian capital market to further accelerate the growth of sustainable investment Ladies and gentlemen, |
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| 18. |
Allow me to share some of the key sustainability initiatives – completed and ongoing – in building the SRI ecosystem for the capital market, that would also help to address the challenges faced by the asset and fund management industry in Malaysia in further growing sustainable investment. These are bucketed into four main areas: |
| 19. |
First, to accelerate sustainable investment, the range of investible universe must be wide enough for asset and fund managers to invest in to cater for the diverse needs and objectives of investors. In this regard, having launched the SRI Sukuk Framework in 2014 to develop sukuk as an SRI asset class and facilitate companies to raise financing for their green, social and sustainability projects, the SC recently introduced the SRI-linked Sukuk Framework. This Framework aims to facilitate companies including those in hard-to-abate sectors to tap into the capital market to meet their transition finance needs, thus enabling them to speed up their transition towards low-carbon emission activities. This initiative is in line with the Capital Market Masterplan 3 (CMP3), which identified transition finance as a key priority. |
| 20. |
In addition, the ASEAN Capital Markets Forum (ACMF) is developing the ASEAN Sustainability-linked Bond Standards to facilitate transition finance for the region. This initiative will complement the suite of ASEAN Green, Social and Sustainability Bond Standards. It will widen the range of sustainable debt asset class for the region and present more investment choices for investors. |
| 21. | For the equity market, increased visibility of the FTSE4Good Bursa Malaysia Index (launched in 2014), arising from the shifting investor preference, will encourage public listed companies (PLCs) to accelerate their sustainability journey, therefore providing investors with a wider investible universe, comprising companies that have good ESG practices. To date, there are 87 companies listed on this index and 65 companies listed on the FTSE4Good Bursa Malaysia Shariah Index, introduced in 2021 to provide investors with Shariah and ESG compliant investment choices19. |
| 22. |
Second, the availability of high-quality, consistent, and comparable sustainability disclosures is important to drive sustainable investments. The establishment of the International Sustainability Standards Board to deliver a comprehensive global baseline of sustainability-related disclosure standards is a step closer towards this. The development of these standards with the goal for consistent and comparable disclosure, could not have come at a more pertinent time when markets and asset managers are seeking to accelerate capital allocation toward companies demonstrating credible climate transition pathways. On the domestic front, Bursa Malaysia is currently enhancing the sustainability reporting framework for listed issuers, and the enhancements will be designed to align with the global direction on sustainability reporting. |
| 23. |
In addition, the Joint Committee on Climate Change (JC3), co-chaired by the SC and Bank Negara Malaysia (BNM), recently released the Task Force on Climate-related Financial Disclosures (TCFD) Application Guide for Malaysian Financial Institutions. The Guide, developed by the industry for the industry, provides practical references to facilitate the adoption of the TCFD recommendations and the transition towards the global baseline reporting standards. |
| 24. |
This brings me to the third area – the need for a common language to identify and classify economic activities that can meet the environmental, social and sustainability objectives. In line with this, the SC is currently developing the Principles-based SRI Taxonomy for the capital market, which is targeted to be released by end of the year. The SRI Taxonomy will provide more clarity and guidance for the market in identifying sustainable investment assets or activities. |
| 25. |
On a regional level, to provide a common language across ASEAN for financing sustainable economic activities, the ASEAN Taxonomy for Sustainable Finance (Version 1) was released in November 2021 by the ASEAN Taxonomy Board, which the SC is a part of. |
| 26. | The fourth and certainly a very important area is addressing ESG risks. As SRI becomes mainstream, investors will increasingly expect asset managers to consider ESG risks within their portfolios and to actively manage such risks. Allegations of greenwashing are becoming more frequent globally. For example, an airline was sued by environmentalists due to false impressions on its sustainability measures and plans; and a bank in Germany was investigated by the regulator on greenwashing accusations. Therefore, to assist fund managers in establishing responsible investment framework and effective ESG risk management, the SC recently issued the Guidance Note on Managing ESG Risks for Fund Management Companies. |
| 27. |
Governance will also remain fundamental as it provides the mechanism for oversight, strategic challenge and direction, performance monitoring, transparency and accountability. In December last year, to strengthen the governance policies and practices of intermediaries and support better conduct and business resilience, the SC issued the Guidelines on Corporate Governance for Capital Market Intermediaries. The Guidelines requires among others that boards of intermediaries ensure their strategic plans support long-term value creation and consider material sustainability risks and opportunities. |
| 28. |
Cross-cutting these four areas of focus is the acute issue of data. Availability and accessibility of sustainability data is a global challenge that needs to be given a priority given its importance to other sustainability initiatives such as disclosure, taxonomy, risk management and others. For Malaysia, steps are being taken to identify and address critical data gaps in climate and environmental risks-related information, including through the JC3. |
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Charting the future of sustainable investments Ladies and gentlemen, |
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| 29. |
Building further upon these initiatives that have collectively created a firm foundation for the SRI ecosystem, we will continue to focus on positioning Malaysia as a regional SRI centre as envisioned in the SC’s SRI Roadmap. Our aspirations to scale up sustainable finance is also outlined in the CMP3. Through the SRI and Islamic Capital Market pillars, the CMP3 aims to shape a stakeholder economy by mobilising more capital towards sustainable businesses. This will pave the way for a wider population to participate in the nation’s growth by enabling more inclusive and accessible investment products and distribution channels, including for SRI products. |
| 30. |
However, in spurring greater participation, there is a need to ensure sufficient investor awareness and understanding as SRI becomes more mainstream. Access to professional investment advice is thus crucial in supporting Malaysians with varying levels of financial and investment literacy. In this regard, the CMP3 also aims to empower investors for a better future with accessible and quality investment advice and greater diversity for emerging needs, through a digitally inclusive ecosystem. |
| 31. | In charting the future of sustainable investment, intermediaries and service providers must be responsive to the changing needs of businesses and investors, in order to tailor the appropriate market solutions for them to prosper and grow. More centrally, given the important role of sustainable investment towards meeting the global sustainable development and climate goals, all stakeholders must play our part in contributing to the realisation of the SDGs and the 45% emission reduction under the Paris Agreement by 2030, as well as the longer-term targets for 2050. |
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Closing Ladies and gentlemen, |
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| 32. |
As we continue to approach the year 2030, the window of opportunity is closing in on us. Nevertheless, the fact that we are gathered here today shows that we want to be part of the solution. We need to act now, to drive sustainability from purpose to action, from aspirational to attainable. |
| 33. |
With that, I wish everyone a highly productive roundtable ahead. Thank you. |
1Intergovernmental Panel on Climate Change (IPCC), 2022 report.
2 World Bank Group, Climate Change Group & Global Facility for Disaster Reduction and Recovery, 2020.
3Projections by the UN International Labour Organization.
4 IPCC 2022 report.
5 IPCC 2022 report.
6World Ocean Review, 2010.
7Greenpeace East Asia, 2021, The Projected Economic Impact of Extreme Sea-Level Rise in Seven Asian Cities in 2030.
8Department of Statistics Malaysia.
9Keynote speech by IPCC Chair at UN Headquarters in New York, on 16 July 2019.
10Sustainable Development Report, 2022, Bertelsmann Stiftung, Sustainable Development Solutions Network and Cambridge University Press.
11The Sustainable Development Goals Report 2020, United Nations.
12Sustainable Development Report, 2022, Bertelsmann Stiftung, Sustainable Development Solutions Network and Cambridge University Press.
13OECD UNDP, 2020 report.
14IPCC 2022 report.
15UNCTAD World Investment Report 2022, International tax reforms and sustainable investment.
16As of 31 March 2021, 3,826 PRI signatories (3404 investors and 422 service providers).
17PRI Annual Report 2021 – Enhance our global footprint.
18International Institute for Sustainable Development, 2020.
19FTSE4GOOD Bursa Malaysia Semi-Annual Review, June 2022.
