Sustainable Finance: State of Market in Malaysia

Sustainable Finance: State of Market in Malaysia

The Growth of Sustainable Finance

Sustainable finance refers to any form of financial process which supports economic growth and incorporates environmental, social and governance (ESG) considerations to drive sustainable development outcomes. Over the past few years, sustainable finance, especially green bonds and climate bonds, have been gaining attention as a critical financial instrument to finance the low-carbon energy transition. Concurrently, the sustainability-related considerations, also known as the ESG concept is increasingly building momentum as investors start to integrate those factors into their investment decisions and channel funds towards investments that produce quantifiable ESG benefits along with long-term economic returns.

Significant investments will be needed to achieve global sustainable development goals and climate objectives. The UN estimates that the cost of achieving the SDGs will be approximately US$3.3 to US$4.5 trillion per year. This financing gap has led to the growth in sustainable finance based on the range and volume of financial products and services developed over the years. Based on the Climate Bond Initiative database, the amount of green bond and loan issuance globally has significantly increased by over 51% from US$171 billion in 2018 to US$259 billion in 2019.

The same growth trend is observed in ASEAN. The demand for sustainable finance in ASEAN is steadily driven by several factors such as the rise of value-based investors, increasing infrastructure demand and heighten climate change awareness. A report by DBS and the UN Environment Programme suggested that demand for additional ASEAN green investment from 2016 to 2030 would be around US$3 trillion. As of May 2020, 58 sustainable bonds (i.e. green bonds, social bonds and sustainability bonds) amounting to US$13.8 billion have been issued in ASEAN

Sustainable Finance in Malaysia

The demand for and popularity of sustainable financial products has grown over the years since the launch of the Sustainable Responsible Investment (SRI) Framework in 2014. Malaysia’s first sustainable Sukuk and first green Sukuk was launched in 2015 and 2017 respectively. By offering Shariah-compliant SRI products, Malaysia would be able to strengthen its position as a leading Islamic finance marketplace as well as enhance its value proposition as a centre for sustainable finance

The three types of sustainable financial products that are more widely seen in Malaysia are green Sukuk or bonds, social bonds and sustainability bonds. As of June 2020, a total of 12 green Sukuks, two social bonds and three sustainable bonds were issued in Malaysia.

Bonds/Sukuk Amount (in US$ million) No. of deals
Green bonds/Sukuks
1,181
12
Social bonds
51
2
Sustainability bonds
858
3

Total

2,090

17

The graphs below show the growth of the different types of bonds over the years

List of sustainable bonds in Malaysia

Issuer (year) Amount (in million) Standards Use of proceeds

Green bonds

Tadau Energy Sdn Bhd (July 2017)

MYR 250 (USD 58)
SRI, GBP
Solar

Quantum Solar Park (October 2017)

MYR 1,000 (USD 236)
SRI
Solar

PNB Merdeka Ventures Sdn (December 2017)

MYR 690 (USD 171)
SRI, ASEAN GBS
Building

Sinar Kamiri Sdn Bhd (January 2018)

MYR 245 (USD 63)
SRI, GBP
Solar

Segi Astana Sdn Bhd (January 2018)

MYR 415 (USD 106)
ASEAN GBS
Building

UiTM Solar Power Sdn (April 2018)

MYR 222.3 (USD 57)
SRI, ASEAN GBS
Solar

Pasukhas Green Assets Sdn Bhd (February 2019)

MYR 17 (USD 4)
SRI, ASEAN GBS
Hydropower

PNB Merdeka Ventures Sdn (June 2019)

MYR 445 (USD 108)
SRI, ASEAN GBS
Building

Telekosang Hydro One Sdn Bhd (August 2019)

MYR 470 (USD 115)
SRI, ASEAN GBS
Hydropower

Telekosang Hydro One Sdn Bhd (August 2019)

MYR 120 (USD 25)
ASEAN GBS
Hydropower

Cypark Ref Sdn Bhd (October 2019)

MYR 550 (USD 132)
SRI
Solar

PNB Merdeka Ventures Sdn (December 2019)

MYR 435 (USD 106)
SRI, ASEAN GBS
Building

Total green bonds

USD 1,181

Social bonds

Khazanah Nasional Berhad - Sukuk Ihsan (April 2015)

MYR 100 (USD 28)
SRI
Education

Khazanah Nasional Berhad - Sukuk Ihsan (June 2017)

MYR 100 (USD 23)
SRI
Education

Total social bonds

USD 51

Sustainability bonds

HSBC Amanah Malaysia (October 2018)

MYR 500 (USD 120)
SBG
UN SDGs

CIMB Bank Berhad (October 2019)

USD 680
ASEAN SUS
UN SDGs

Edra Solar Sdn Bhd (October 2019)

MYR 245 (USD 58)
SRI, ASEAN SUS
Renewable energy, socio-agriculture

Total sustainability bonds

USD 858

Total volume of sustainable bonds

USD 2,090

Data in the table as of March 2020

Sustainability index

Figure: Index performance comparison: FTSE4Good Bursa Malaysia vs FTSE

Bursa Malaysia EMAS (2015-2019) as of 31 March 2020

In 2014, Bursa Malaysia and FTSE Russell launched the FTSE4Good Bursa Malaysia Index which comprises Malaysian stocks selected from the top 200 companies in the FTSE Bursa Malaysia EMAS Index based on their ESG performance.

The figure above compares the performance of the FTSE4Good Bursa Malaysia with the FTSE Bursa Malaysia EMAS over the period from January 2015 to October 2019. It shows that the FTSE4Good Bursa Malaysia has underperformed the FTSE Bursa Malaysia EMAS by 1.2% over the period. Even so, it is expected that in the long-run, ESG strong companies will outperform better. It appears that the MSCI Emerging Markets ESG Leaders Index has continuously outperformed the MSCI Emerging Markets Index over the longer run, especially post global financial crisis. It is also expected that in the longer run, companies’ disclosures would increase in uniformity due to streamlined reporting frameworks to warrant better investor evaluation.

Besides, FTSE Russell launched in April 2016 the FTSE4Good ASEAN 5 Index which constituents are companies with prime ESG practices listed on Bursa Malaysia, Indonesia Stock Exchange, the Philippine Exchange, Singapore Exchange and the Stock Exchange of Thailand. The index methodology for both the FTSE4Good Bursa Malaysia Index and FTSE4Good ASEAN 5 Index is publicly available on FTSE Russell’s website.

Regional and national initiatives in support of sustainable finance

Companies, regulatory bodies and local policymakers are developing initiatives to support and incentivise investments in projects with sustainability objectives.

On a regional level, several ASEAN Member States (AMS) have participated in various international initiatives related to sustainable finance. This demonstrates an interest to promote the development of sustainable finance in line with international practices. The Securities Commission of Malaysia (SC), Bursa Malaysia, Monetary Authority of Singapore and Singapore Exchange Limited are supporting the Task Force on Climate-related Financial Disclosures (TCFD) which aims to provide voluntary, consistent climate-related financial risk disclosures for use by companies.

Central banks from the four AMS – Indonesia, Malaysia, Singapore and Thailand – are part of the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) which objective is to enhance the role of the financial system to manage risks better and mobilise capital for green and low-carbon investments in the broader context of environmentally sustainable development.

In Malaysia, Bank Negara Malaysia (BNM) and the SC are taking action to support the management of climate-related risks in the financial sector. In September 2019, they jointly established the Joint Committee on Climate Change (JC3) with representation from 20 industry players to pursue collaborative actions for building climate resilience in the Malaysian financial sector. The JC3 will be guided by three key mandates — building capacity through sharing of knowledge, expertise and best practices in assessing and managing climate-related risks; identifying issues, challenges and priorities facing the financial sector in managing the transition towards a low carbon economy, and facilitating collaboration between stakeholders in advancing coordinated solutions to address arising challenges and issue. To take the agenda forward, the JC3 has established four sub-committees focusing on risk management, governance and disclosure, product and innovation, and engagement and capacity building.

The SC has been playing a pivotal role in supporting the development of sustainable and responsible investments in Malaysia. In November 2019, the SC issued the Sustainable and Responsible Investment Roadmap, which aims to facilitate the sustainable finance ecosystem and outline the role of the capital market in driving Malaysia’s sustainable development. The five-year roadmap identified 20 recommendations which are mapped to five overarching strategies aimed at driving a vibrant SRI ecosystem for Malaysia as well as for the region. These include widening the range of SRI instruments, increasing SRI investor base, building a strong SRI issuer base, instilling influential internal governance culture, and designing information architecture in the SRI ecosystem. To support the growth of SRI funds, the SC also released Guidelines on SRI Funds enabling funds to be designated as SRI funds and introduced tax exemption on management fees received for the management of SRI funds from the year of assessment 2018 to 2023.

A key priority for Capital Markets Malaysia (CMM), an affiliate of the SC, over the next three (3) years (2020 – 2022) is executing initiatives to maintain Malaysia’s global leadership in Islamic Capital Markets by leveraging on sustainable and responsible investments. In January 2020, CMM and Global Compact Network Malaysia, the local network of the United Nations (“UN”) Global Compact have jointly launched the Global Compact Network Malaysia Centre of Excellence (CoE). The purpose of the CoE is to build up sustainable practices amongst private sector companies and to ensure how these companies raise financing is sustainable.

On the banking front, BNM encourages Islamic banking institutions (IBIs) to adopt a value-based system to create positive social impacts. In October 2018, BNM released guidance documents to help IBIs with the implementation of Value-based Intermediation (VBI) which is defined as an “intermediation function that aims to deliver the intended outcomes of Shariah through practices, conduct and offerings that generate positive and sustainable impact to the economy, community and environment, consistent with the shareholders’ sustainable returns and long-term interests.”

While VBI shares similarities with ESG, SRI and ethical finance, it relies on Shariah to determine its underlying values, moral compass and priorities. In November 2019, the “Value-based Intermediation Financing and Investment Impact Assessment Framework – Guidance Document” (VBIAF) was introduced to guide the implementation of an impact-based risk management system. The VBIAF also serves as a reference for other financial institutions intending to incorporate ESG risk considerations in their risk management system.

Conclusion and outlook

Funds are in the financial system. The challenge is to channel them to where they are most needed. Positively, investors have heightened interest in the ESG impacts of their investments. The investors’ interests on ESG impacts have pushed asset managers to “do good” with their investments and propelled financial institutions to offer sustainability-related products. Sustainable finance provides an opportunity to address a breadth of ESG issues such as climate change, gender equality and accessibility to essential services.

Malaysia has progressively demonstrated its leadership in sustainable Islamic securities with the introduction of policies, framework and roadmap. Furthermore, with the relevant guidelines in place at the ASEAN level, via the ASEAN Green Bond Standards, ASEAN Social Bond Standards and ASEAN Sustainable Bond Standards, the backdrop exists for sustainable finance market to grow further.