ESG to boost Islamic finance growth


ISLAMIC capital markets will continue to grow in line with the global economy, but with a rising emphasis on environmental, social and governance (ESG) and climate change.

Bursa Malaysia Bhd chairman Tan Sri Abdul Wahid Omar (picture) said Islamic finance in substance is at its core sustainable finance as it is supported by a legitimate underlying transaction, formalised via a legitimate contract or ‘aqad’.

He said Shariah principles and ESG requirements have a common universe of values such as not encouraging speculation or activity harmful to mankind, society or the environment.

“There are a lot of opportunities in Islamic social finance as we exit the Covid-19 pandemic. I don’t think Islamic finance is competing with the ESG, it is very much complementary in nature and when ESG gains traction, so will Islamic finance,” he said at the virtual 2021 APAC Summit yesterday.

He added that embracing ESG and committing to net zero is a must for business survival, with more than 130 countries expected to commit to net-zero carbon emissions goals by 2050-2060.

He said the “United Nation Principles for Responsible Investment, Principles for Responsible Banking and Principles for Sustainable Insurance” will eventually see all businesses get on board the net-zero carbon emissions movement.

On our part, the Malaysian Code on Corporate Governance 2021 by Securities Commission Malaysia introduced best practices and guidance to strengthen board oversight and the integration of sustainability considerations in the strategies and operations of companies, he added.

“Given the neutrality of ESG, we hope the financial institutions would start to offer Shariah-compliant ESG products, which will then appeal to both Shariah funds and non-Shariah funds as well,” he added.

The global Islamic asset under management (AUM) has grown by 2.3 times over the last decade to reach US$140 billion (RM587 billion) as at the end of 2020.

The total AUM of Islamic funds grew by 31.9% in 2020 despite the Covid-19 pandemic Abdul Wahid said the increase in the scale of funds might be an indication of the flow of funds into emerging market fixed-income funds, as a result of the search for yield and increased global liquidity.

He added that Islamic funds continue to remain concentrated by domicile in three core markets, namely Saudi Arabia, Malaysia and Iran, constituting around 81% of the total Islamic AUM.

“Malaysia alone accounts for 29.3% of the AUM. In Malaysia, Shariah funds grew by 41.5% over the past two and a half years to RM225 billion, equivalent to 24% of the total AUM of RM947 billion.

“There is also a tremendous growth potential for Islamic funds in Indonesia as its economy would grow significantly in the next few years,” he said.

Meanwhile, Abdul Wahid said the country’s current monthly minimum wage of RM1,200 can be revised upwards as the government has the capacity to accommodate the increment.

Abdul Wahid, who is a former minister in the Prime Minister’s Department, said it is important for the government to set a long-term or medium-term target so that businesses will have ample notice to plan accordingly.

“This would also encourage them to enhance automation and improve their processes, subsequently creating more high-value jobs. It is important for all employers to ensure their employees are sufficiently remunerated and are provided with good facilities, as well as a safe and conducive working environment.

“Businesses should take the initiative to offer fair remuneration for their workers instead of waiting for the government to announce a new policy on the minimum wage,” he said while highlighting ESG in terms of social aspect.

The minimum wage was last revised on Feb 1, 2020, with a RM100 hike. The planned increase was part of the government’s Budget 2020 and drive to modernise the country’s workforce.