Keynote Address at the International ESG Conference - Shaping Today for Tomorrow - "Advocating the ESG Agenda and helping SMEs and Businesses to adapt and adopt"

Speaker: Kamarudin Hashim, Managing Director, Securities Commission Malaysia
Location: International ESG Conference - Shaping Today for Tomorrow at ShangRi-La Hotel, Kuala Lumpur
Delivered: 15 August 2023

Full Speech:

YB Tuan Nik Nazmi bin Nik Ahmad, Minister of Natural Resources, Environment and Climate Change of Malaysia,

Y.Bhg. Tan Sri Mohd. Nor Yusof, Chairman of AmBank Group,

Y.Bhg. Dato’ Sulaiman Mohd Tahir, Group CEO of AmBank Group

Distinguished guests, speakers, ladies and gentlemen,

Assalamu’alaikum and good morning,

First and foremost, I would like to thank AmBank for inviting me to deliver an address this morning on a matter that is of great and growing importance, –“Advocating the ESG agenda and helping SMEs and businesses to adapt and adopt’.
SMEs are faced with growing pressure to measure and manage their ESG risks. Being integral parts of the supply chains, there is growing demand for SMEs to demonstrate greater environmental stewardship and social responsibility from both customers and supplier particularly those seeking to secure contracts with large companies. The business case for sustainable operations is much stronger than ever and will become even more intense over time.
In the recent announcement of the Ekonomi Madani, our Prime Minister mentioned the need to internationalise local startups and SMEs. In internationalising our SMEs, the incorporation of ESG into their business will be of utmost importance. In the same announcement, the Prime Minister also urged the banking system and capital markets to act quickly to meet business financing needs.
Further, the recent launch by the Government of the National Energy Transition Roadmap (NETR) to accelerate the country’s energy transition will also undoubtedly require the capital market to respond accordingly where investment as well funding solutions are expected to be immense.

Ladies and Gentlemen,
In prioritising the sustainability agenda, the capital market can play an important role in financing businesses to transition towards more sustainable practices, by broadening the array of capital market instruments to serve this need.
The SC have started to pave the way for the development of ESG in this country back in 2011, when Sustainable and Responsible Investment (SRI) was embedded in the Capital Market Masterplan 2 (covering the period 2011-2020) as a key growth strategy. As a global leader in Islamic finance and given similarities between the values espoused by Islamic finance and sustainable finance, it is a natural move for Malaysia to develop the SRI segment.
Subsequently, under the Capital Market Masterplan 3 (or CMP3) which covers the period 2021 to 2025, the strategic initiatives undertaken by SC include –
Enabling funding for competitive businesses of all sizes and across every stage of their development; and
Enabling greater capital mobilisation to businesses that create value for (various) stakeholders of the economy.
These two initiatives alongside others identified in the CMP3 will provide a conducive landscape and opportunity for SMEs to transition. These strategic initiatives build on from the earlier efforts and the execution of the SC’s “5i strategy” of building a critical mass of issuers and investors, promoting the development of financing instruments, instilling a robust internal governance culture and transparent information architecture.
Market response have thus far been encouraging. For example since the launch of the SRI Sukuk Framework in 2014, the cumulative issuances of SRI sukuk stands at RM18.9 billion as at end of 2022. We have also seen more SRI sukuk issuances this year related to renewable energy projects and green building.
As for the SRI funds segment, since the release of the Guidelines on SRI Funds in 2017, the SRI funds market in Malaysia has grown to RM7.1 billion Net Asset Value (NAV) with a total of 58 SRI funds, as of December 2022.
In facilitating companies, especially in the hard to abate sectors to transition, the SC had also launched the SRI-linked Sukuk Framework last year to bring companies further along the sustainable journey by facilitating fundraising to address sustainability concerns, with features that relate to the issuer’s sustainability KPIs.

Ladies and gentlemen,
SMEs are the backbone of any economy and the bedrock of entrepreneurship in the country. Here in Malaysia, SMEs comprise of more than 97% of all business establishments, contributing to over 38% to our GDP and employing over 48.2% of the workforce, and now, it is one of the main piece in realising the nation’s sustainability agenda. As these SMEs form the majority of businesses in our nation, their collective actions hold immense potential to shape our economic trajectory, and to contribute to job creation and overall societal well-being.
So how do we support SMEs to adapt and adopt? The cost of inaction is extremely high as large companies race against the clock to achieve their net zero carbon ambitions. Suppliers that do not support their emissions reduction target, risk being replaced by those able to aid their transition.
Conversely, suppliers which are proactive and prioritising sustainability will remain on the right side of their clients, partners, regulators and other stakeholders. We have seen how some companies in Malaysia have come under greater scrutiny by global investors due to human rights issue which has led to some being cut out from the supply chain.
To ‘sync instead of swim’, SMEs will require multistakeholder effort and ecosystem wide enablers, from deepening awareness and understanding of sustainability risks and opportunities, to enabling access to financing and supporting capacity building.

Access to financing
Today, green and social projects in Malaysia are largely funded through bank loans and bonds or sukuk, including those issued under the SRI Sukuk Framework and the ASEAN Green Bond Standards. However in practice, not many SMEs are able to raise financing with these instruments, and the use of alternative channels or private markets may be required.
Alternative fundraising platforms such as the equity crowdfunding (ECF) and peer-to-peer (P2P) financing platforms have enabled SMEs to gain access to traditionally untapped pools of investors through cheaper, faster, and more convenient delivery channels. The ECF and P2P can also be used to attract more investors to finance MSMEs, as targeted under the Ekonomi Madani announcement.
Since inception, the ECF and P2P financing have been on a continued rise, with a growing number of MSMEs turning to digital platforms to secure capital. In total and up to June this year, ECF and P2P financing had facilitated 9,415 MSMEs to raise more than RM5.4 billion for their businesses. Over the years we have seen MSMEs involved in green business successfully raised financing on ECF platforms.
Under the Joint Committee on Climate Change (JC3) a few initial green pilot projects and several capital market initiatives are underway to expand sustainable and transition finance. The projects and initiatives also focus on greening the supply chains. The Greening Value Chain (GVC) Programme that was launched last year aims to assist Malaysian SMEs in implementing impactful, long-term change to green their operations. The GVC programme employs a blended approach of facilitation, comprising technical training and on-site diagnosis.
Although SMEs may generally not be subject to mandatory sustainability reporting, many will be affected indirectly via participation in value chains of large companies which have to report on the sustainability performance of their entire value chain and through financial institutions that have to report on the environmental performance of their financed portfolios.
We understand that the topic of reporting and data might seem overwhelming, especially for SMEs, as they may have resources constraint. To provide guidance for SMEs in making the relevant information available, Capital Markets Malaysia (CMM) recently released a Simplified ESG Disclosure Guide (SEDG) for SMEs for public consultation.
The aim of the SEDG is to support SMEs in their adoption and reporting of sustainability by providing guidance on the data requirements of their journey. The SEDG also target to provide SMEs with a simplified and standardised set of ESG disclosures that align with selected global and local frameworks. In relation to this, the SC welcome your feedback on the SEDG during the public consultation period which will end on 25th of August 2023

Ladies and gentlemen,

Capacity building
Based on a report by Alliance Bank Malaysia Berhad in collaboration with UN Global Compact Network Malaysia and Brunei, as well as SME Corporation Malaysia , 60% of SMEs believe that strengthening ESG practices can increase business opportunities and create long-term value. However, only 28% of SMEs have adopted some elements of ESG practices in their businesses. More will need to be done in creating the awareness.
As part of our capacity building efforts, the SC, in collaboration with CMM, launched the NaviGate series in 2021. This has been done to promote greater awareness on capital market financing opportunities for sustainability-related purposes, and create greater connectivity between businesses and the capital market. A total of nine NaviGate programmes have been organised so far, including three this year. Through the NaviGate series and other events, the SC and CMM had reached out to more than 1,000 SMEs.
The SC has also incorporated sustainability into our InvestSmart events – which is our comprehensive investment awareness and literacy campaign to provide the public with investment information presented in an easily understood format, leveraging on technology and multimedia platforms, to supplement our existing investor education channels.
In addition, a dedicated SME Focus Group has recently been established under the umbrella of JC3, with the first meeting taking place last week. The immediate target of the focus group is to raise awareness among SMEs, assisting on the relevant certifications and facilitating disclosures. The formation of the SME Focus Group will enable JC3 to take a more focused and targeted approach in addressing the specific issues and challenges facing SMEs.

Conclusion

Ladies and gentlemen,
In conclusion, the ecosystem is in place and is being continuously strengthened and refined to support our ambitions of a just and sustainable transition. We are irreversibly orienting towards a more sustainable approach to business, consumption, and growth, and no market nor business is immune to this change. SMEs continued participation in value chains, access to finance and competitiveness will increasingly depend on businesses’ ability to measure, report, and improve their sustainability performance.
On that note, I would like to congratulate AmBank on the organisation of this conference which I am sure will attempt to address many critical issues and I wish all the participants a productive discussion ahead.

Thank you.