The alignment of sustainable finance to the values and principles of Islamic finance and investing has become a globally accepted concept amongst issuers and investors. Recognition of this alignment is at the heart of the Securities Commission Malaysia’s (SC) initiatives in sustainable financing which the regulator embarked on in 2014 with the issuance of its Sustainable and Responsible Investment (SRI) Sukuk Framework.
Since then, there has been significant traction in this space, with Malaysian issuers having issued the highest number of corporate sustainable sukuk issuances globally: a total of 11 green and sustainable sukuk issuances and an issuance size of RM5.02 billion as at December 2020.
Recent Efforts in Developing the Ecosystem
At the end of 2019, the SC revised its SRI Sukuk Framework, expanding the list of SRI projects deemed eligible under the Framework to provide clarity whilst encouraging diversity and innovation in the types and variants of sustainable sukuk. Todate, the 11 issuances have been to finance a range of projects including large scale solar, green buildings, hydropower and education. For the industry to continue to grow, development in this space will be underpinned by breadth of projects and innovative transactions.
To further encourage sustainable finance, the government of Malaysia in its budget proposal in November 2020 announced measures to support Malaysia’s advancement in developing its sustainable finance ecosystem.
To facilitate the issuance of sustainable sukuk and bonds, the SC’s SRI Green Sukuk Grant has now been renamed as the SRI Sukuk and Bond Grant Scheme and applicable to all sukuk issued under the SC’s Sustainable and Responsible Investment (SRI) Sukuk Framework or bonds issued under the ASEAN Green, Social and Sustainability Bond Standards (ASEAN Standards) Further, the tax exemption on this grant has been extended for a five-year period ending 2025. Meanwhile, the existing tax deduction on issuance costs of SRI Sukuk approved by or lodged with the SC has been extended till end 2023.
The Government will also continue to fund the Green Technology Financing Scheme 3.0 or GTFS3.0 with a fund size of RM 2 billion for two years up to 2022 which will be guaranteed by Danajamin Nasional to encourage the issuance of SRI Sukuk. The GTFS is a special financing scheme that was first introduced in 2010 by the government to support the development of Green Technology in Malaysia.
Earlier this year the Malaysian government issued the ‘Sukuk Prihatin’ to contribute towards the country’s economic recovery following the COVID-19 pandemic. Following this, the government has announced the issuance of its first sovereign sustainability bond or sukuk for environmental and social initiatives in 2021. This issuance will be yet another significant milestone for Malaysia in signalling the commitment by the country as a whole – government, regulators, investors, corporates and intermediaries.
Impact of COVID 19
While the SC’s efforts in driving its sustainability agenda has been impacted by the pandemic, by no means has sustainability taken a back seat. If anything, the pandemic has provided greater impetus, urgency and motivation to consider ESG factors in how the financial sector moves forward.
Whilst funding a transition to a low-carbon economy is still high on the agenda, the SC is taking a closer look at how funding can make a greater impact on social issues: protecting jobs and livelihoods, ensuring greater equality and alleviating poverty.
In this regard, the capital market is well placed to utilize the concept of waqf or the Islamic endowment. Another recent milestone by the SC is the launch of the Waqf-Featured Fund framework to facilitate the offering of unit trust funds and wholesale funds with waqf features that integrate commercial and social objectives.
Waqf is naturally aligned to social outcomes, but for it to thrive as a capital market product it is important that there is a stable, sustainable and consistent income stream from waqf assets. It is therefore critical that industry look beyond the norm, and to consider the possible innovative, diversified use of waqf assets, perhaps through the issuance of waqf-enabled sukuk for social infrastructure projects.
Within the social finance space, Islamic crowdfunding has also been instrumental in facilitating fundraising through the capital market for social projects particularly in the microfinance and small-to-medium enterprise segments. Further growth is expected within this space as more micro enterprises and SMEs continue to seek funding to sustain and grow their businesses.
The pandemic has given us a new lens through which to view how and what we finance, fund and invest in. Social, governance and environmental principles are being prioritised more than ever before and as a whole the business world is now placing a larger emphasis on the concept of ‘doing good’.
Malaysia’s progress in this space is due in no small part to its entire ecosystem of industry players from the investment banks to the rating agencies, law firms and Shariah advisors that have embraced the need for sustainable financing and have worked alongside regulators to advance its development. Going forward its strong Islamic finance ecosystem of industry players is well placed to take the lead in the delivery of innovative solutions in supporting the country’s transition to a low-carbon economy.
This article is contributed by Navina Balasingam, Head, Stakeholder Engagement & Business Development at Capital Markets Malaysia (CM²). CM² is set up by Securities Commission Malaysia (SC) to strengthen its internationalisation agenda for Malaysia’s capital market. Visit https://www.capitalmarketsmalaysia.com/ for more info.
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