PAVING THE WAY
Status as world’s most advanced Islamic finance market to help country achieve goal faster, says SC
MALAYSIA’S status as the world’s most advanced Islamic
finance market will help realise its bid to be a regional leader in the sustainable and responsible investing (SRI) space. This can also happen if more partners come on
board, says the Securities Commission.
THE Securities Commission Malaysia (SC) is paving the way to make the country a regional leader in the sustainable and responsible investing (SRI) space, but stressed that this grand objective cannot be achieved alone.
SC managing director of development and Islamic markets, Zainal Izlan Zainal Abidin, told NST Business recently that Malaysia’s existing status as the world’s most advanced Islamic finance market, however, would help the country achieve this objective faster.
“We had launched the SRI Sukuk Framework to facilitate the financing of sustainable and responsible investment initiatives back in 2014. This framework is in line with the initiative set out under the SC’s Capital Market Masterplan 2, which is focused on promoting socially-responsible financing and investment,” said Zainal, in explaining the beginnings of the SRI ecosystem in Malaysia.
“At that point, we noted the shifts in investor demographics and the growing concerns over environmental and social impact of businesses as well as greater demand for stronger governance and ethics from businesses. We also noticed that these ethical dilemmas had more or less already been addressed in Islamic finance, of which we are the global leader. The decision to develop what would be the world’s first SRI sukuk framework was, therefore, the most logical step forward.”
As a regulator, the SC is always looking to further enhance the country’s capital markets and SRI has been identified as this additional growth driver.
“We believe we can definitely capitalise on SRI and Islamic capital markets as they have many similar underlying principles, such as protecting the environment and focusing on community,” said Zainal.
“In fact, to be eligible to tap this framework and its myriad incentives, the proposed projects have to fall into four categories, which are: natural resources, green projects, social impact and waqf. All four categories, when one looks at them, would fit comfortably either within the Islamic finance space or SRI space or together.”
Zainal admitted that when it came to overall SRI investments, Malaysia, like any other emerging economies, still lagged behind developed economies.
This, he said, should not be looked at as a challenge but rather as an opportunity to learn as they were already active in the SRI space.
“The key drivers of SRI are mostly related to environment and community. Developed economies’ past or ongoing vigorous industrial push would have subsequently hurt their environment, and so preserving the environment and sustaining the community becomes a bigger issue in developed economies. Because of this, SRI has taken traction faster and in a more significant size there,” he said.
But Zainal was quick to point out that environmental issues were not unique to developed markets alone as some emerging economies faced such issues as well.
“Though Malaysia has an advanced capital market, some other emerging economies still deal with growing their capital markets. Thus, when grouped together, there is a difference in developed markets and emerging economies in terms of SRI.”
Malaysia may have been late to the SRI party, but excluding Japan, it is still the leader in Asia when it comes to SRI asset under management (AUM).
“We hold some 30 per cent of market share of SRI AUM and this is mostly attributed to our Islamic funds, which feed into the broader market out there,” he said.
“This is why we feel Malaysia has the opportunity to be a leader in this space on the premise that primarily, Malaysia is already a leader in Islamic finance.”
Zainal said there had been an increase of fund management houses seeking SRI offering into their portfolios.
“A number of foreign fund manager houses in Malaysia have already developed some SRI or environmental, social and governance sustainability capability in their home countries or other parts of the world, so what we are doing here is of significant interest to them,” he said, adding that there had been increasing interest from both local and foreign managers with offices in Malaysia.
As such, the SC is already in advanced stages of developing SRI funds framework, which will cater to fund managers that are already familiar with SRI, but not so much with Islamic finance.
“We are coming up with SRI funds frameworks, which will cater directly to these fund managers. Having said that, the SRI sukuk framework and other related SRI tools are also of interest to these fund managers because they are always looking to diversify their asset classes, and SRI funds with a tie-in into Islamic finance could be it,” he said.
“The interest from fund managers is encouraging as it is already part of the overall ecosystem environment — which is part of our five ‘I’s — issuers, investors, instruments, internal culture (governance) and information architecture. These are the important key components to help develop the right components and right ecosystem for SRI to grow.”
However, a persistent hindrance to higher SRI take-up would be the lack of awareness as well as willingness to take the plunge into SRI.
“SRI segment in Malaysia is still relatively new versus the United States and Europe, thus the immediate impact has not been significantly felt. What is important is that, there are already a lot of conversations in this segment,” said Zainal.
“There is more regularity of the SRI topic being discussed in financial conferences across the world and being recognised better, everywhere. Secondly, this recognition plays into our strength, given the existing link between Islamic finance and sustainability.”
He stressed that although the SC worked locally, its objective was to be a regional SRI centre over the next few years.
But to achieve this, he said, SC needed more players to come into the fold.
“From the government side, the SRI push is already a national agenda. In terms of operationalising, we like to work with more ministries as well as public-listed companies to begin undertaking green or SRI projects,” he said
“As of now, the SC is working with a number of ministries and corporate entities to help them make the jump into SRI. We truly believe there are opportunities for Malaysia to play a regional leadership position in this space, but this could only happen if we can get more partners on board.”
We believe we can definitely capitalise on SRI and Islamic capital markets as they have many similar underlying principles, such as protecting the environment and focusing on community.