Slow sustainability integration a threat to IF

IF’s continued hold onto its old adage certainly is not in its best interest. It cannot get better with age by being lethargic


THE global sustainable and responsible investment (SRI) market is estimated to be worth US$22.9 trillion (RM93.2 trillion), growing 12% annually, according to the 2016 Global Sustainability Investment Alliance (GSIA) Report.

Global growth is robust with the principles for responsible investment (PRI), the world’s leading proponent for responsible investment, receiving more than 2,200 signatories reporting about US$82 trillion in asset under management (AUM). About 1,449 of them (asset owners and managers) are actively reporting under the PRI framework.

This new landscape is now mainstream, rapidly evolving and fast becoming a potent force for future finance. The good news — Islamic finance (IF) is part of this.

Signatories to the PRI commit themselves to abide by the PRI’s six core principles, offering possible actions for incorporating environmental, social and governance (ESG) issues into investment practice. As asset owners, Retirement Fund Inc and Khazanah Nasional Bhd are among Malaysia’s prominent signatories though many large domestic investment and other related institutions have not done so.

IF is an early advocate of value integration. Its principles give significant focus on social equity and justice, governance and fairness and finds compatibility with sustainable finance. Its unique proposition gained global recognition.

Thanks to Malaysia’s global leadership, it is Asia ex-Japan’s largest SRI market since 2014. The GSIA 2016 Report highlights Malaysia’s 30% share of the US$52.1 billion Asia ex-Japan’s SRI assets on account of its Islamic funds that predominantly deploy the exclusionary strategy.

But there has been modest new investment strategies offered since. Instead, Malaysia’s lead is narrowing as other thriving SRI markets such as Hong Kong (26%), Korea (14%) and China (14%) catch on, helped by marked improvements in ESG transparency.

IF’s continued hold onto its old adage certainly is not in its best interest. It cannot get better with age by being lethargic. The industry’s slow pace of progression to a large extent is perplexing. Thought leadership have been fairly scant.

Newly-conceptualised ideas and research findings hardly generate practical solutions beyond the many forums and roundtables. And this is despite the growing threats to its resilience amid dwindling innovation and muted responses to marketplace dynamics. Without a clearly-defined new Shariah strategy, efforts to scale up and expand do not look promising. Elsewhere, in almost every other part of the world, global financial services are transforming.

They respond to global issues with real sense of urgency. Interests on climate change and climate action, decarbonisation and achieving the set goals of sustainable development are factors being increasingly integrated into finance. Let alone the disruptive deployment of technology. In Malaysia, indications thus far are not reassuring.

The costs of complacency and being effectively non-responsive are revealing. In the equity market, top index-linked companies are not spared. To illustrate, Shariah-designated companies such as Top Glove Corp Bhd, IOI Corp Bhd and non-Shariah stocks Genting Malaysia Bhd have taken heavy beatings from the market, plunging in value and wiping billions in market capitalisation. They all had to grapple with ethical and sustainability-related issues.

The message is clear. ESG issues do have financial implication. Even the sukuk credit market is not secured. ESG filters are fast making inroads with the proliferation of ESG or sustainability sukuk fund and ESG scoring systems in credit rating.

Hitherto, being financially resilient is no longer a good enough measure. Investors, though diverse, now demand that corporation behaves in a way that helps make the planet safer, addresses environmental concerns and climate change, treats its workers fairly, practises good governance, examines its supply chain and many more. These intense scrutiny over a company’s values, culture and behaviour brings about unanticipated and abrupt impact and volatility, and poses new risks to markets. Enhanced ESG disclosures are facilitating this process.

Asset owners with sizeable AUM for that reason should be concerned. The likes of the Employees Provident Fund’s Islamic window, Permodalan Nasional Bhd that strives to adhere to lslamic investments, Lembaga Tabung Haji’s entire Shariah investments, takaful operators, big private mutual funds and other asset managers, should take cognisant of these mounting risks. Developing ESG capability within the investment and financing value chain have never been ever more pressing. But have they responded?

To remain competitive and relevant, IF must evolve. Here, leadership is vital. Malaysia is unique in that its two financial regulators are mandated by law to perform developmental roles. The Securities Commission Malaysia’s (SC) SRI strategies and Bank Negara Malaysia’s (BNM) value-based intermediation (VBI) model and framework should set the path for continued growth and impact. Prime examples are the SC’s embedded SRI sukuk and fund frameworks.

Greater effort at industry level for a sound ecosystem is imperative. Calls for additional screening methodology for Islamic equity has its merit. Such newly-designed investment strategy — pivoted against the Shariah’s larger objective should drive innovation and help build ESG and sustainability-related capability.

But greater clarity is needed. Deploying machine learning and big data could meaningfully address the many and diverse ESG data-points for analysis and decision making, while embracing international principles and best practices should, among others, assist in strengthening internal systems and processes.

Role of boards have never been more significant. As stewards, they must be driven by purpose out of realisation, not scorecard. Seeing the like of HSBC Amanah Malaysia Bhd responding and seizing the moment is energising. Its RM500 million green sukuk funding, the world’s first among Islamic banks, is impactful and demonstrate a strong-will to support sustainable development goal-related financing. Many others, unfortunately, have been unresponsive, less forthcoming, less visible and less substantive. And these are the real threats to IF.

Radzuan Tajuddin runs a consultancy specialising in strategy development of capital markets and sustainable finance. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.