Discussion Paper on Climate Change and Principle-Based Taxonomy

In December 2019, Bank Negara Malaysia (BNM) issued the discussion paper on climate change and principle-based taxonomy. The discussion paper on climate change and principle-based taxonomy aims to provide an overview of climate change and its impact on the financial system and act as a guide to facilitate financial institutions in identifying and classifying their economic activities. Through this document, financial institutions can;

  • Increase awareness and actively respond to climate change;
  • Identify economic activities that contribute to climate change objectives; and
  • Prepare and build capabilities in managing the financial risks from climate change.

The document is applicable to Institutions supervised by BNM, including:

  • Licensed banks
  • Licensed investment banks
  • Licensed international Islamic banks
  • Licensed Islamic banks
  • Licensed insurers/ reinsurers
  • Licensed takaful/ retakaful operators
  • Prescribed development financial institutions

The paper is separated into four (4) part; Part A: Introduction, Part B: Assessment of Economic Activities, Part C: Classification of Economic Activities, Part D: Next steps.

Green Technology Financing Scheme (GTFS)

The GTFS is a special financing scheme introduced by the Government to support the development of green technology in Malaysia. In March 2019, MOF approved an extension of GTFS, known as GTFS 2.0, with an allocation of RM2.0 billion from January 2019 until the end of 2020.

GTFS is a soft loan supported by the Government. The funds are available to finance green technology in the following sectors (click for details on eligibility criteria):

A summary of the salient terms (effective 1 January 2019) of the Scheme are as follows:

How to apply?
Details of the application process is available on the GTFS website. The Scheme will be opened until 31 December 2020 or upon approval of financing/funding issuance up to RM2.0 billion, whichever is earlier or any subsequent extension on the availability date.

SRI Sukuk Framework and Grant

The interest towards SRI Sukuk has been increasing, and according to World Bank, the growing trend towards SRI Sukuk is mainly due to the natural progression of the Sukuk market, the increasing awareness of investors towards ethically and socially responsible investment and the stricter capital requirements for the bank to finance infrastructural projects.

What is SRI Sukuk?

Sukuk is an Islamic bond that can generate returns to investors without contravening Islamic Shariah law, which prohibits interest. A Sukuk sells a certificate, with proceeds used to purchase an asset that is mutually owned by both buyer and seller. The SRI Sukuk is where the Sukuk proceeds will be applied exclusively for funding of any activities or transactions relating to the eligible SRI projects.

The SRI Sukuk Framework has been developed in accordance with international standards. In Malaysia, the ASEAN GBS, ASEAN SBS and ASEAN SUS are implemented through the relevant regulatory frameworks for corporate bonds and Sukuk (Guidelines on Issuance of Corporate Bonds and Sukuk to Retail Investors, and Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework).

Why SRI Sukuk?

The SRI Sukuk framework which facilitates financing needs for projects that are aligned with the United Nation’s Sustainable Development Goals may promote investor diversification by attracting investors with SRI mandates to invest in Green, Social, Sustainable and Waqf properties/assets.

Key Components of SRI Sukuk

The key components of the SRI Sukuk Framework are;

  1. Utilization of Proceeds – The proceeds raised from the issuance of the SRI Sukuk are utilized only to fund any activities or transactions relating to the eligible SRI projects.
  2. Process for project evaluation and selection –An internal process is established to evaluate and select the eligible SRI projects
  3. Management of Proceeds – The proceeds allocated for the eligible SRI projects are credited in a designated account or otherwise tracked in an appropriate manner
  4. Reporting – An annual report on the following must be done;
    1. The original amount allocated for the eligible SRI projects
    2. Amount utilized for the eligible SRI projects
    3. The unutilized amount and where such unutilized amount is placed or invested pending utilization; and
    4. List of eligible SRI projects in which the proceeds have been allocated to, as well as a brief description of the said eligible SRI projects, and their impact or expected impact

Eligible SRI Sukuk Projects

The eligible SRI Sukuk projects may include Green projects, Social projects, a combination of Green and Social projects, and Waqf projects that relate to the development of waqf properties or assets.

These projects must seek to achieve any one or a combination of the following objectives:

  • Preserving and protecting the environment and natural resources;
  • Conserving the use of energy;
  • Promoting the use of renewable energy;
  • Reducing greenhouse gas emission;
  • Addressing or mitigating a specific social issue or seeking to achieve positive social outcomes especially but not exclusively for a target population

Examples of target populations include, but are not limited to the following:
Living below the poverty line; Excluded and/or marginalised populations and/or communities; Vulnerable groups as a result of natural disasters; People with disabilities; Migrants and/or displaced persons; Undereducated; Underserved, owing to lack of quality access to essential goods and services; or Unemployed 

  • Improving the quality of life in society.

Types of eligible SRI Sukuk projects may include, but not limited to the following:

Incentives and Grant Scheme

The incentive schemes offered under the SRI Sukuk framework are as follows:

Green SRI Sukuk Grant Scheme (the Grant) 
Issuers of a Green SRI Sukuk are entitled to apply for the Green SRI Sukuk Grant Scheme to defray the external review cost relating to green SRI Sukuk issuance under the framework.

An issuer can claim the Grant based on an issue or programme and can claim up to 90% of the actual external review cost subject to RM300, 000 maximum. If there is more than one issuance requiring a separate external review, the issuer will be able to claim on that review cost incurred.

The Grant is in effect from January 2018 until it is fully utilized. All green SRI Sukuk issuance from July 2017 onwards qualifies for the Grant. The Grant will be paid on a reimbursement basis within 60 days of complete submission.

Tax deduction on SRI Sukuk Issuances
Expenditures incurred on the issuance of SRI Sukuk approved or authorized by or lodged with the SC until the year of assessment 2023 will be given tax deduction. Most of the proceeds (90%) raised will be used solely for funding SRI projects.

Tax exemption
For any interest or profit gained concerning SRI Sukuk approved by SC, investors are allowed to file for tax exemption under the Income Tax Act 1967 (Revised 1971)– Schedule 6 – Exemption from Tax: Section 33A

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