By NG MIN SHEN
The Securities Commission Malaysia (SC) will launch a sustainable and responsible investing (SRI) investment funds framework by year-end to capitalise on the country’s maturing capital market and leadership in Islamic finance.
SC MD of development and Islamic markets Zainal Izlan Zainal Abidin said Malaysia already enjoys a strong footing in the global Islamic capital market and similarities between Islamic finance (IF) principles and SRI open new growth opportunities in SRI and Shariah-compliant finance.
“This a chance for us to amalgamate the two segments and grow SRI together with the Islamic capital market. We are being recognised as an SRI centre by virtue of our capabilities in IF,” Zainal Izlan told the media at the Responsible Investment Forum in Kuala Lumpur last Friday.
SRI is gaining attention as investors begin to look at how to reconcile returns with environmental, social and governance (ESG) concerns.
Many of the principles related to SRI are already used in IF, including avoiding investment in additive substance and to focus on social justice and environmentally friendly, green technology.
“We are close to the final stages of developing the framework and we hope to launch this before the end of the year,” Zainal Izlan said.
He said the SRI industry is relatively new in Malaysia, but the global demand for SRI continues to grow.
Global SRI assets expanded 25% from 2014 to 2016 to the value of US$22.9 trillion (RM98.25 trillion). The Global Sustainable Investment Review 2016 said Malaysia has the largest SRI market in Asia with a 30% share in the region (excluding Japan) as it recognises Shariah-compliant funds as part of the SRI universe.
“The increasing awareness and demand for SRI globally is creating significant opportunities for IF further growth in view of the commonalities in the principles and values underlying both segments,” Zainal Izlan said.
He added that SC will continue to facilitate development of products and services that meet the requirements of both SRI and Islamic finance, to ensure the capital market serves the needs of investors and issuers.
The SRI investment funds framework comes on the back of SC’s SRI sukuk framework, introduced in 2014 to continue pioneering the development of the Shariah-compliant SRI segment.
A dedicated framework will aid SC in achieving its goal of developing Malaysia as a regional centre for Shariah-compliant SRI funds.
According to the Principles for Responsible Investment (PRI), responsible investment is an approach to investing that aims to incorporate ESG factors into investment decisions, to better manage risk and generate sustainable long-term returns.
Zainal Izlan said while there is growing understanding of ESG factors, more need to be done to create greater awareness.
Bursa Malaysia Bhd, the operator of the local bourse, is also pushing for SRI. It launched the FTSE4Good Bursa Malaysia Index in December 2014, profiling companies with good ESG practices.
The internationally benchmarked index was the first to be launched in Asia and comprised 24 constituencies in the initial stages. Since then, the stocks have increased to 43.
Bursa Malaysia chief regulatory officer Yew Yee Tee said feedback from companies and investors typically highlights the lack of information on sustainability and its value propositions, case studies and examples. “We’re thinking about leveraging on technology to have an information portal for this, expected to be launched by end-2017 or early 2018,” she said.
She observed that studies conducted by the London Business School Coller Institute of Private Equity and Deutsche Bank Climate Change Advisors point to a direct correlation between companies’ ESG incorporation and their stock and accounting-based performances.
“There is a need to push the sustainability agenda. One challenge is for companies that practice ESG to disclose such measures so that investors are aware and can make investment decisions based on that,” she said.
Initiatives implemented by Bursa Malaysia to aid companies include mandating disclosures of sustainability practices by companies, providing training and guidances on said disclosures and targeted engagement with various companies.
“We’re also looking into creating a listing service for issuers with regard to green bonds, for instance. This would be a platform to propel and incentivise companies to integrate ESG factors and make appropriate disclosures, and investors can benefit from those disclosures,” Yew said.