Driving Sustainable Finance Post COVID-19

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This article was prepared for the 4th issue of the FIMM e-zine by Sarah Asha’ari with input from Aida Jalaludin from the Institute for Capital Market Research Malaysia (ICMR). All views and errors remain the authors’ own. They may not necessarily represent the official views of ICMR or any of the institutions with which ICMR is affiliated to. As a collaborative think tank, ICMR welcomes the exchange of ideas and knowledge-sharing on this topic. Should you have any questions or suggestions, please address your comments to Sarah Asha’ari at [email protected]

Overview:

In the past decade, capital markets have shown a surge in sustainability related financing and this is growing in terms of the variety of assets and investor base. There are many modalities of sustainable financing with many seeing impact investing, sustainability themed, ESG (environment, social and governance) integrations and engagements as part of sustainable finance.

Due to the varying definitions of sustainable investing, the actual figure of global asset size of sustainability related investments is difficult to ascertain. In 2019, the IMF estimated that the figures could range between USD 3 trillion (JP Morgan) to USD 31 trillion (Global Sustainable Investment Alliance 2019). 1 The Global Sustainable Investment Alliance expects this figure to grow to USD160 trillion by 2036.2


F1-Global-Assets-with-an-ESG-Mandate-(USD-Trillion).PNG
Source: Data sourced from The Global Sustainable Investment Alliance 2019, published in “Sustainable Investing: Shaping the future of finance” by the International Institute for Sustainable Development

Malaysia has adopted a holistic strategy to promote sustainable finance, which has seen much traction. At the national level, the overarching strategy and goals have been inked to ensure alignment of efforts and reporting. Given Malaysia’s demographics, there has also been a convergence between sustainable finance and Islamic finance, and Malaysia continues to leverage on Islamic finance and its values to push the sustainable finance agenda.

The regulators such as the Securities Commission Malaysia (SC) and Bank Negara Malaysia (BNM) have also put in place the necessary frameworks, guidelines and incentives to facilitate the pipeline for sustainable finance products. This has been complemented by the information architecture for sustainable finance through Bursa Malaysia’s compulsory reporting on sustainability metrics for public listed companies. The institutional investors in Malaysia, with their large asset size, have also been a key driver of sustainable finance with many having signed on to the UNPRI (United Nations Principles on Responsible Investing).

The Sustainable Development Goals (SDGs) are often seen as indicators of sustainable progress, and financing these key issues are central to the ability for the global community to meet the development agenda. Aligned to this, Malaysia has launched several SDG related bonds and sukuks such as the “Sustainable Development Goals Sukuk” by HSBC Amanah Malaysia Berhad used to finance projects that benefit the environment and communities and the “Sustainable Development Goals Bond” by CIMB Bank Berhad whereby the net proceeds of the SDG Bond will be channelled into various sectors aligned with SDG Goal 8, Goal 9, Goal 10, Goal 12, Goal 13, Goal 15 and Goal 16.3


Figure 2: Sustainable Development Goals (SDGs)

F2-Sustainable-Development-Goals-(SDGs).PNG



Impact of COVID-19

The COVID-19 pandemic has had a profound impact across multiple dimensions- health, social, economic and markets. The pandemic and ensuing global lockdown led to serious concerns about the shape of the overall economy which will reverberate into the future, including concerns on rising unemployment levels, viability of smaller businesses and the longer-term societal aspects.

Overall Covid-19 is seen to have a severe negative impact on the SDGs. SDG financing is being scaled down, possibly due to governments being forced to make trade-offs to prioritise health considerations at the expense of economic prosperity, and general slow- down in economic activity. While this was necessary to prevent the spreading of the virus, it was detrimental to the livelihoods of many.

Bringing the issue closer to home, prior to the pandemic, it was already projected that none of the Southeast Asian countries are poised to meet any of the 17 SDGs by the year 2030.4 Without sufficient funding, it will be difficult for the international community to meet these goals, which could worsen due to the devastating consequences of Covid-19.


Figure 3: Financing by SDG

F3-Financing-by-SDG.PNG

Source: United Nations Conference on Trade and Development (UNCTAD), based on Refinitiv, 2020


Moving forward

Nonetheless, the Covid-19 pandemic has driven communities into action. The issuances of social and sustainability bonds skyrocketed as issuers sought to raise capital for Covid-19 related socioeconomic consequences. The first four months of 2020 recorded the highest level of social bond issuances in history.7


F4-Monthly-issuances-of-social-bonds-(US-$Millions).PNG
Source: International Finance Corporation, 2020


Some jurisdictions leveraged on social bonds to provide support to SMEs. China issued some of the first Covid-19 response bonds in early 2020, designed to support small and medium enterprises (SMEs) impacted by the pandemic.8 The Korea Development Bank (KDB) successfully sold social bonds worth USD816 million to major local institutional investors with the proceeds aims at helping small business effected by Covid-19.9

In Malaysia, Covid-19 response bonds, such as the RM500 million Sukuk Prihatin was issued to raise funds to modernise telecommunications network in rural areas so as to help students get access to education.10 This bond is related to SDG 4 focusing on inclusive and equitable quality education for all and SDG 9 which focuses on inclusive access to Information and Communication Technologies.

Hence, despite the devastating efforts of the pandemic, this crisis also presents us with an opportunity to relook at the big picture and to seek effective levers of change necessary to fill the development gaps which have further widened due to the pandemic. This can be done only if we keep pressing forward on the sustainable development agenda, which is more relevant than ever today, and position it at the front and centre of the post-pandemic world.



References:
  1. “Global Financial Stability Report,” International Monetary Fund (Oct 2019), pp 85.
  2. “Sustainable Investing: Shaping the future of finance,” International Institute for Sustainable Development (Feb 2020), pp 6.
  3. “Sustainable Finance Landscape in Malaysia,” Malaysia Sustainable Finance Initiative (2020), pp. 15 – 16.
  4. “Asia and the Pacific SDG Progress Report 2020,” United Nations Economic and Social Commission for Asia and the Pacific, pp.57 (2020).
  5. Changes in the five-year averages from the period of 2010 – 2014 to the period of 2015 – 2019
  6. Changes in the quarterly averages from 2019 (full year) to the first three quarters of 2020
  7. “Social bonds can help mitigate the economic and social effects of the Covid-19 Crisis,” International Finance Corporation (Aug 2020), pp.3.
  8. “Social bonds can help mitigate the economic and social effects of the Covid-19 Crisis,” International Finance Corporation, (Aug 2020) pp.4.
  9. “KDB issues $816 mn social bonds to help coronavirus-hit SMEs,” Pulse News Korea (May 2020).
  10. “Malaysia launches Sukuk Prihatin, maiden digital Islamic Bond,” New Straits Times (Aug 2020).
Sources:
  1. https://www.icmr.my/driving-sustainable-finance-post-covid-19/
  2. FIMM e-Zine 2/2021 pg.16-19

 
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile.
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