Malaysia needs more SRI sukuk, says finance minister at launch of Sustainable and Responsible Investment Roadmap

KUALA LUMPUR - Malaysia’s government has backed its capital markets regulator’s new strategy to encourage sustainable development through investment with a call for more green sukuk.

The Securities Commission Malaysia on Tuesday (Nov 26) released a “roadmap” to promote sustainable and responsible development (SRI) through the capital markets. Its approach has its roots in sukuk, according to the country’s finance minister.

Speaking at the launch of the SC’s strategy, Lim Guan Eng said the government will encourage more SRI sukuk, which stem from guidelines introduced five years ago to help pay for social and environmentally sustainable initiatives.

“The issuance of the SC’s SRI sukuk framework back in 2014 has been essential to facilitate funding for green, social and sustainable projects for the benefit of the environment and the broader society,” he said at the SC headquarters in Kuala Lumpur.

“The government would like to see more issuances of SRI sukuks to finance these projects. This is why, at the recent 2020 budget, I announced the extension of the income tax deductions on the cost of issuance of SRI sukuks to 2023.”

Among the immediate initiatives to be rolled out under the commission’s SRI strategy is a revision of the earlier sukuk framework.

The revised guidelines have expanded the list of eligible SRI projects, tightened reporting and disclosure requirements and clarified the role of external reviewers.

The changes are covered in a booklet released by the SC to advise of the main features of its SRI strategy, which sets out to expand the role of the capital market to bring scale, financial discipline and commercial accountability to social and environmental projects that promote sustainable development.

These are among 20 recommendations aimed to drive “the development of a vibrant SRI system for Malaysia as well as the region” over the next five years, Syed Zaid Albar, chairman of the SC, wrote in an introduction to the booklet.

“These strategies serve to expand the range of SRI instruments, issuers, investors and ancillary services, while strengthening the disclosure and governance by drawing synergies from our existing global leadership in the closely aligned field of Islamic finance.”

The 2014 framework led to the inaugural SRI sukuk the following year, issued by Ihsan Sukuk, a unit of Khazanah Nasional, Malaysia’s sovereign wealth fund.

The proceeds of the 1 billion Malaysian ringgit ($240.9 million) issuance, channelled to Yayasan AMIR, an education non-profit, have been used to help fund 83 trust schools across 10 states.

The first green SRI sukuk, worth 250 million ringgit ($60.2 million) followed in 2017, to finance a 50 megawatt solar project by Tadau Energy.

So far, 10 green SRI sukuk have been issued, amounting to financing worth 4.3 billion ringgit ($1 billion).

INCENTIVES FOR MORE SRI SUKUK

To encourage more issuances, several incentives in the form of tax allowances and exemptions have been approved by the government, the finance minister said.

These include income tax deduction on the issuance costs of SRI sukuk and a 6 million ringgit ($1.5 million), tax exempted grant scheme established by the SC to offset the external review cost incurred by issuers.

Across conventional and Islamic markets, Malaysia accounts for almost 20% of $3.1 billion in cumulative green bonds issued by Southeast Asian countries, according to SC figures. Of these, Indonesia became the first country to issue a sovereign green sukuk worth $1.3 billion last year.

“Economic progress means that our continued demand for resources, such as energy and food, will test business resiliency,” said Syed Zyed, as he introduced the SC’s strategy.

“Given favourable prospects for the SRI segment in Malaysia, its development must be carefully guided to ensure the segment’s long-term vibrancy and sustainability.

“We would like to see a diverse base of issuers, investors and market intermediaries develop and grow this asset class,” he added.

SHARIAH-COMPLIANT COMPANIES ‘LOW ON ESG’

Speaking to Salaam Gateway, Najmuddin Mohd Lutfi, chief executive of Bank Islam’s investment arm, BIMB Investment, said interest in SRI had been bubbling in the Islamic sector since 2006, when the Malaysia International Islamic Financial Centre was launched.

The blueprint for the SC-backed venture covered banking, investment and capital markets, with SRI also mentioned, Najmuddin said, though he questioned whether green goals feature high enough in Shariah investment decisions.

“There are common traits between Islamic finance and SRI investing. But now there is the bigger question surrounding Islamic finance. Should we just be negative screening? There is a lot of discussion around this.

“Shariah-compliant companies do not necessarily have a very high standard in ESG,” he added, referring to environmental, social and corporate governance. “I think the scholars are working towards addressing this.”

To more effectively screen a project, investors must call on the new and more varied sources of data available now to model its environmental impact.

“Ultimately, we need information to really help Islamic finance integrate with ESG. When it comes to sustainability and ESG, it really depends on the capabilities of those making the assessment.”

BIMB Investment’s CEO in July said the company had already integrated “more than 250 ESG metrics” in its investment process since 2015.

The investment firm in August 2018 launched the world’s first ESG sukuk fund.

(Reporting by Richard Whitehead; Editing by Emmy Abdul Alim emmy.abdulalim@salaamgateway.com)

© SalaamGateway.com 2019 All Rights Reserved