Dr. Joseph Cherian, Practice Professor of Finance at the Asia School of Business (ASB) in collaboration with MIT Sloan, has recently returned to Malaysia after many decades living overseas and held the prior position of Professor of Finance at the National University of Singapore (NUS) Business School, as well as managing director, global head, and chief investment officer in the quantitative strategies group of Credit Suisse Alternative Investments in New York.
He sees opportunities abound for Malaysia’s growth. Having worked on a wide range of subject matters, from his research on Islamic Sukuk bonds in Malaysia to his advisory role on Singapore’s national pension plan, Dr. Joseph Cherian now sees several areas in Malaysia’s economy that can be leveraged and elevated.
BusinessToday just had an interview with Dr. Joseph Cherian to get his views on issues like net-zero, sukuk and pensions.
BT: How is Malaysia progressing towards achieving net-zero? How far is Malaysia behind its goals?
Dr. Cherian: First some definitions. Achieving net zero – which means no net greenhouse gas emissions, be it carbon dioxide, methane, nitrous oxide or fluorinated gases – would have a big impact on climate change. According to the UN, to cap global warming to 1.5°C of the pre-industrial era temperature level, greenhouse gas emissions must come down by 45% by 2030 and attain net zero by the year 2050.
Malaysia is one of the 70 plus countries that has signed on to that target. The Malaysian sectors covered under net zero are energy, industrial processes and product use, waste, agriculture, and land use, land-use change and forestry (LULUCF). The commitment from the government appears to be robust. Various government linked entities, such as the EPF, Khazanah, TNB, Petronas and Sarawak Energy, appear to be equally committed to net zero.
To understand our progress, however, we need to scientifically track and measure the progress against targets. Example, the Climate Action Tracker (CAT) tracks and rates 39 countries in this manner by using scientific and quantitative methods & models. Unfortunately, while Singapore is included in the CAT, Malaysia isn’t.
BT: How to finance Malaysia’s goals of achieving net-zero?
Dr. Cherian: Funding net zero is not cheap. I wrote an entire article on it:Funding net zero – CLIMATE CHANGE – Magazine | Asia Asset Management (by Joseph Cherian)
While capital market instruments (such as carbon credits & offsets) and government levies (such as carbon taxes) can to a certain extent help achieve net zero goals, all countries, including Malaysia, will need huge amounts of financing to transform their respective national
economy towards net zero compliance by 2050.To put things in perspective, it is estimated that the world would need to spend approximately US$9.2 trillion annually on physical assets in energy and land use systems over the next 27 years (2023 – 2050).
If we use a back-of-the-envelope calculation, where it is estimated that the net zero cost is, on average, about 7.5% of GDP, that translates to about US$30 billion in annual net zero costs to Malaysia!
In any case, to raise even part of the requisite amount of net zero financing, one would need all the multilateral development banks’ balance sheets plus various capital market instruments, such as Green Finance, Green Bonds & Loans, Blended Finance, Sukuk, and so on.
What should the government and private sector do to win the global recognition in the sukuk industry?
I view Sukuk as Green Bonds. It is, by construction, totally aligned with the ESG principles. And we know Sukuk predates the coining of ESG. The rage now is ESG-based financing. Why not popularize Sukuk?
Malaysia is the world’s pre-eminent leader in Sukuk issuance, trading, and liquidity. It can use that leadership to nudge the world to recognize that Sukuk financing is a viable net zero financing instrument, which is green by construction, like Green Bonds, Blended Finance, etc. The world needs all the help it can get, and Sukuk lends itself naturally as a green finance solution. Good for the world, and especially good for improving Malaysia’s status as a global financial hub in this region. Just as the Chicago Board of Trade (CBOT) brought derivatives trading into the mainstream, Malaysia can help universalize and popularize Sukuk.
BT: The future of pensions and social protection in Malaysia. Around Dec 2022, there was a global ranking on the pensions and social protection. In Asia, Malaysia took the spot behind Singapore and Hong Kong. What should be done for Malaysian to secure a better pension system?
Malaysia has one of the best run pension systems in Asia. On the investments side, the EPF follows a prudent asset allocation scheme that targets long-term, risk-adjusted returns, which can also meet its liabilities (viz. member withdrawals).
That said, early withdrawals have become the scourge to pension adequacy in many countries, including Malaysia. The pandemic compounded the problem, especially in Malaysia, where close to US$35bn was withdrawn in aggregate (early!) due to members trying to meet pandemic-related exigencies and expenses.
So, while those with adequate savings can continue to rely on the EPF to protect and invest their savings until the point of retirement – where I hope a cost-efficient life annuity will be automatically made available within the EPF for members who want it – much still needs to be done for the members who have little left in the EPF. These folks are also probably in the B40 income group. An alternative subsistence (or living wage) pension scheme needs to be designed for them so that no one in Malaysia is left behind or falls between the cracks in their
retirement years.
The Malaysian Institute of Economic Research (MIER) issued a very nice report on this recently titled, “Retirement Fund Reform: The Future of Pensions and Social Protection in Malaysia (September 2022)”:
