Private sector’s role to promote green finance

As the government is actively promoting green agenda via policy and incentives, the participation of the private sector is now even more imperative.

The private sector in Malaysia, which is largely controlled by institutional investors, has been actively streamlining environmental, social and governance (ESG) factors in their investment portfolios. They serve as excellent examples of actors with strong internal drive to move towards Sustainable and Responsible Investment.

What is more rewarding to learn is that their strategies involve not only building capabilities from within, but also developing knowledge capacity and disseminating key information with stakeholders outside their organisation.

In principle, institutional investors have the duty to act in the best long-term interests of their beneficiaries. In this fiduciary role, there is a growing number of these organisations which believe that ESG issues can affect the performance of investment portfolios. As a result, there are now institutional investors that have become signatories to the United Nations (UN) Principles for Responsible Investment (PRI).

The UN PRI principles are voluntary and consist of an aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.

The principles complement the UN Global Compact, which requires companies to embed in their strategies and operations a set of universal principles in the areas of human rights, labour standards, environment and anti-corruption. There are also a natural extension of the work of the UN Environment Programme Finance Initiative, which has helped create greater awareness to the importance of environmental and social issues.

Malaysia’s pension management entity for public sector employees — Kumpulan Wang Persaraan Diperbadankan (KWAP), or the Retirement Fund Inc — became the first pension fund in the South-East Asian region to sign the UN PRI. It championed good governance, shareholder activism and continuously aligns its corporate objectives with the national agenda, namely green initiative and gender equality (women’s representation on the board). KWAP has now reached the asset size of RM100 billion, and sees itself not merely as an investor, but a responsible investor.

Spontaneous Participation

Similar observation applies to BNP Paribas Asset Management (BNPP AM). As one of the founding signatories of the UN PRI, it has been integrating ESG across all its asset classes. Although traditionally ESG has been closely associated with the equity side, BNPP AM made it a point to implement ESG across its fixed-income assets. This is made in line with the company’s internal strategy that comprises allocation of capital, responsible engagement with companies, transparency and commitment.

Transitioning to a low-carbon, climate-resilient and sustainable deve- lopment pathway requires significant finance and investment, and a shift in the way both the public and private sectors invest. To support the nations in achieving their nationally determined contributions (NDCs), there is a need to engage with the private sector to mobilise resources, innovation and know-how. The Paris Agreement requires each party to prepare, communicate and maintain successive NDCs that it intends to achieve. Parties shall pursue domestic mitigation measures to achieve the objectives of such contributions.

Contrary to the general belief, private sector participation in sustainable growth can often occur spontaneously rather than requiring a push from the government, since enterprises are able to assess the cost advantages of implementing green practices within their operations. Companies are engaging in green growth initiatives to improve their sustainability, and increase efficiency gains through better resource usage, or meet international labelling criteria. Even those initiatives — that are not specifically aimed at reducing costs or improving security and efficiency such as initiatives on green corporate social responsibility — can improve their international branding image, allowing companies access to new country markets.

Even though forward-looking businesses do have varied incentives to implement green growth practices, these companies often follow their own goals and agenda. Such initiatives that they enact will be for their own benefit, or are often forms of self-promotion rather than tangible and coordinated efforts to ensure long-term sustainability and growth. Hence, in order to build up a wider support and uptake for green growth policies within the private sector, the government needs to engage with businesses.

Towards Better-informed Investors

To boost green finance, opportunities will require all actors in the system to improve their engagement, understanding and competency on these issues. For example, professional and industry bodies should be engaged by investors to develop how ESG issues are incorporated within their professional designations. Similarly, educational programmes for issuers should be developed to raise awareness on green capital markets, and in turn create greater demand for sustainable financial services respectively.

Both the public and private sectors should deliver rapid improvements on the literacy of sustainable finance and educate citizens about how their investments can shape the world. These sectors are encouraged to collaborate with the industry, and educational and consumer groups. For instance, the Green Finance Institute — an initiative that champions sustainable finance in the UK and abroad in designing and delivering financial literacy programmes which are delivered in secondary, tertiary and continuing education. For example, in the UK, financial capability qualifications are currently available for those aged between 14 and 19 years old, and are offered in approximately 700 schools nationwide.

Current awareness on the importance of going green is causing no shortage of demand for green investment products, but the supply of green investment products is still limited and not large enough to cater to the investors’ huge appetite. As a result, instruments like green bonds are sometimes priced higher than their plain vanilla equivalents. Thus, this indicates the lack of education and awareness on the supply side to understand and issue more green-related investment products such as green sukuk.

  • Extracted from ‘Islamic Green Finance: Development, Ecosystem and Prospects’, a joint publication of the Securities Commission Malaysia and the World Bank Group.