By Datuk Syed Zaid Albar
As the second decade of the 21st century drew to a close, we saw even greater calls for action and policies to address climate change and pressing societal challenges. As the 2030 deadline draws near, collective efforts to meet the United Nations’ Sustainable Development Goals (SDGs) have to be intensified for the well-being of the current and future generations.
The reality is that climate change is a microcosm — let us call it the public face, or poster child, of a larger trend — the move towards better, more sustainable and responsible practices.
Businesses today are being asked to consider their impact on their surrounding communities and to ensure sustainability of their supply chains. Think of global brands such as Nike and Adidas.
Closer to home, local plantation companies are certifying the sustainability, as well as ensuring traceability, of their palm oil products. The irony for corporate leaders is that non-financial factors are becoming important to their bottom lines, given that such factors can positively influence profitability.
Accountability and responsibility are terms synonymous to the financial and capital markets, although we are reminded from time to time that this trust must continuously be earned.
Sustainability is, however, a concept that appears alien to a global financial system that is notorious for its excesses. Nevertheless, in recent times, global policymakers including the Securities Commission Malaysia (SC) have signalled that sustainability, accountability and a responsible financial system must go together. So, how have regulators driven this agenda?
Five years ago, the Financial Stability Board, an international body that monitors the global financial system, established the Task Force on Climate-related Financial Disclosures to provide recommendations and guidance for companies on climate-related financial information.
More recently, the European Commission published a “taxonomy for sustainable activities”, which created three categories of sustainable investments to help markets and investors judge the green credentials of financial products. Within emerging markets, securities regulators have been at the forefront in promoting sustainable investments.
China Securities Regulatory Commission, People’s Bank of China and other Chinese government agencies jointly issued Guidelines for Establishing the Green Financial System in 2016. The Securities and Exchange Board of India introduced mandatory requirements for its top 500 companies to publish Business Responsibility Reports (on environmental protection) within their annual reports.
In Asean, regional regulators have supported the development of this emerging asset class through the introduction of Asean standards for green, social and sustainability bonds.
The SC has long recognised the merits of sustainable finance and investments, given Malaysia’s leadership in Islamic finance. The country is home to 50.4% of the world’s total sukuk outstanding of US$427 billion (RM1,765 billion) and has the largest market share of global Islamic assets under management at 37.2% as at end-2018, according to a report Malaysia International Islamic Financial Centre.
The principles embodied sustainable and responsible investing (SRI) share similar values that underpin shariah financial instruments. Having recognised the potential synergies, we started developing the necessary foundations for the SRI segment to thrive in Malaysia over the past decade.
Among the early initiatives was the SRI Sukuk Framework, introduced in 2014 to facilitate the financing of projects beneficial to the environment and broader society. The intention was to bring scale, market discipline and commercial accountability to green, social and community-based ventures.
As at end-October 2019, a total of 10 SRI sukuk have been issued in Malaysia, raising RM4.3 billion in funding. Monies raised went towards the world’s first green sukuk, as well as funded the development of trust schools in Malaysia, among others.
Another significant development is the introduction of the Guidelines on Sustainable and Responsible Investment Funds in 2017 to facilitate and encourage greater growth of such funds domestically.
The guidelines stipulate requirements for SRI funds to adopt sustainability considerations, such as the UN Global Compact Principles, the SDGs and other environmental, social and governance (ESG) factors, in their investment policies and strategies. The aim is not only to build an effective ecosystem for SRI and impact investing but also to attract investors to this asset class.
The Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market is a fairly recent initiative. The roadmap was launched in November 2019 to provide strategic direction for the SRI segment, with 20 recommendations to accelerate its growth domestically and regionally.
These recommendations, created in collaboration with the industry, embodies the 5i — which stand for instrument, issuer, investor, internal governance, information architecture — strategy undertaken the SC for SRI.
Ultimately, the success of the SRI agenda in the Malaysian capital market rests not with the SC alone but also through the concerted efforts of all stakeholders — the issuers, public-listed companies (PLCs), investors, government and many others. The depth and breadth of SRI products and level of innovation rely on, first and foremost, the market’s driving its own development in a responsible manner.
Take, for example, the global gap in sustainable financing. With an estimated US$5 trillion to US$7 trillion required annually to fund the SDGs, the capital market is best placed to ensure efficient mobilisation of private-sector investments to complement public funding. There are vast opportunities available for market intermediaries in providing the necessary financing for SDG projects.
As for PLCs, Bursa Malaysia introduced a Sustainability Reporting Framework requiring listed issuers to disclose a narrative statement of the management of material economic, environmental and social risks and opportunities in their annual reports.
A Sustainability Reporting Guide and Toolkit was also issued to steer companies’ sustainability disclosures and practices. However, for sustainability practices to be meaningful, PLC boards and management themselves must see the benefits of doing what is right rather than what is required.
Moving forward, Malaysia’s aspiration to be a regional centre for shariah-compliant SRI will depend on impact investors and funds that are attracted to our value proposition, and their cooperation in growing a supportive ecosystem for SRI investments to flourish.
Much of the current work on climate mitigation and sustainability has focused on financing instruments, building up general awareness and the investor base. A more significant challenge in taking this agenda forward will be to find the appropriate risk-mitigation tools to ensure resilience of the SRI ecosystem. The development of climate and sustainability-related risk instruments the capital market will be crucial for the SRI segment’s future.
Given that the past decade was spent moderating the excesses present at the beginning of the 21st century, the focus of the next decade must turn to the sustainability of economic development and business growth. Sustainability must be the raison d’être of our next decade.
Source The Edge Markets