Securities Commission Malaysia (SC) has taken significant steps to promote sustainability and environmental, social, and governance (ESG) principles in the capital market. This has been a critical development in the face of climate change and other sustainability challenges that the world is facing today which the nation’s leading capital market regulatory body is committed to enhance.
As sustainable investments gain momentum, market participants are increasingly looking for more clarity and standardisation of economic activities that would qualify as sustainable investments. On 12 December 2022, the SC released the principles-based sustainable and responsible investment taxonomy for the Malaysian capital market (SRI Taxonomy).
The Sustainable and Responsible Investment (SRI) sukuk framework aims to provide a clear and comprehensive basis for the issuance of SRI sukuk, which are Islamic financial instruments that adhere to sustainability and ESG principles.
This framework provides issuers with guidelines on the use of proceeds, reporting requirements, and eligibility criteria for SRI sukuk issuance. The framework is designed to encourage issuers to raise funds through sustainable and socially responsible means.
The SC has also introduced the Sustainable and Responsible Investment (SRI) Funds Framework. The framework encourages the development of sustainable investment funds by providing clear guidelines on the use of proceeds, investment criteria, and disclosure requirements.
The framework seeks to encourage investors to invest in companies that demonstrate strong ESG practices and promote sustainability in their business operations. Securities Commission Malaysia Chairman Dato’ Seri Dr. Awang Adek Hussin said: “It is important to have a sound foundation in place for the country to move ahead with its sustainability agenda. This entails a common set of standards, definitions, and even data, to ensure that we are better-equipped to comprehend the issues and work together towards a shared goal. Only then can we make a difference.
“Malaysia was among the earliest in the region to release specific guidelines to facilitate sustainable financing and investments, as well as encourage this segment’s growth. Take for example, the SC’s Guidelines on Sustainable and Responsible Investment Funds, or SRI Funds in short. Since its introduction in 2017, the number of SRI funds in the market has grown to more than 50, with a total size of RM7 billion.
“We continue to update the guidelines to suit current market requirements where revision have been made to incorporate additional disclosure and reporting requirements to enhance the transparency of SRI funds, among others.
“In addition, requirements to qualify for the ASEAN Sustainable and Responsible Funds Standards, or SRFS, were included. These regional standards are the work of the ASEAN Capital Markets Forum’s Sustainable Finance Working Group, of which the SC is co-chair. The SC intends to work closely with government ministries, agencies, and other stakeholders to shape a country-level plan, including developing a supportive ecosystem for sustainability disclosures.”
Dr. Awang Adek said he believes that the SRI Taxonomy presents a significant opportunity to ensure the standardisation and comparability of SRI assets; avoiding possible market fragmentation and reducing the risk of green washing.
It allows for proper and consistent identification and classification of various types of economic activities aligned with environmental, social and sustainability objectives. This will provide the necessary transparency for capital market participants on what constitutes being sustainable. Also, as it is domestically-driven, the Securities Commission Malaysia ensured that it suits local requirements – be it for our corporate issuers or investors.
The SC has also introduced the Guidelines on Sustainability-Linked Bonds (SLBs). These guidelines encourage the issuance of bonds that link the issuer’s financial performance to ESG performance targets. The aim is to encourage issuers to improve their ESG performance and incentivize investors to invest in companies that demonstrate a commitment to sustainability.
The SC has also established a dedicated Sustainability and Climate Change (SCC) Department. This department is responsible for developing and implementing the SC’s sustainability initiatives, promoting sustainable and responsible investment practices, and monitoring the implementation of sustainability practices by market participants.
Moreover, the SC has launched several initiatives to promote sustainability in the capital market. For example, the SC has introduced the Green Bond Grant Scheme, which provides financial assistance to issuers of green bonds. The scheme aims to encourage the issuance of green bonds, which are bonds that fund environmentally sustainable projects.
The SC has also established the Sustainable Financing and Investment Platform (SFIP), which is a digital platform that aims to connect issuers and investors of sustainable and responsible investments. The platform provides issuers with a wide range of services, including sustainability assessment, ESG reporting, and access to potential investors.
To surmise, the Securities Commission Malaysia has taken significant steps to promote sustainability and ESG principles in the capital market. The SC’s initiatives, such as the SRI sukuk framework, the SRI Funds Framework, and the Guidelines on SLBs, are designed to encourage issuers and investors to adopt sustainable and responsible investment practices.
The establishment of the SCC Department, the Green Bond Grant Scheme, and the SFIP are further examples of the SC’s commitment to promoting sustainability in the capital market. These initiatives are critical in addressing the sustainability challenges that the world is facing today and promoting sustainable development in Malaysia.