15th Kuala Lumpur Islamic Finance Forum SUSTAINABILITY AND ISLAMIC FINANCE Zainal Izlan Zainal Abidin Securities Commission Malaysia 9 April 2019
Essence of Sustainability Meeting the needs of the present without compromising the ability of future generations to meet their own needs - UN Requires an integrated approach that takes into consideration environmental concerns along with economic development - UN Sustainability Encompasses overlapping investment trends such as values-based, socially responsible and impact investing - Bloomberg Sustainable investing is an investment approach that considers environmental, social and governance (ESG) factors in portfolio selection and management GSIA Sustainable investing deploys strategies that aim to maximize social good and financial returns World Bank 2
Sustainability and Finance Environmental, Social and Governance (ESG) Criteria for measuring sustainability and ethical impact of investments Concepts in Sustainable Finance and Investments Ethical Finance Seeking outcomes other than purely financial returns, based on faith or ESG considerations Impact Investing Generating positive, measurable social and environmental impact alongside a financial return Green Finance Pursuing opportunities that bring both a decent return and environmental benefit Venture Philanthropy Utilising venture capital concepts and techniques to achieve philanthropic goals 3
Principles of Islamic finance and sustainability: Common, shared goals Core principles of Islamic finance advocate positive values including good ethics, shared prosperity, financial inclusion and sustainable growth Key features demonstrate clear alignment between Islamic finance and sustainability: Promoting fairness in economic activities - including risk sharing, prohibition of riba (usury) Balancing commercial pursuits with social outcomes Using resources responsibly - promoting moderation and avoiding excesses Prohibiting industries that may be harmful to society e.g. alcohol, gaming, tobacco Pursuing social justice/equality including via zakat (alms-giving) 4
Global policy shifts require funding for sustainable development goals UN Sustainable Development Goals (SDGs) 17 global goals to achieve integrated sustainable development covering economic, social and environmental areas UN estimated US$11.5tn a year or US$172.5tn over 15 years to fund the 17 SDGs United Nations Conference on Trade and Development estimated a financing gap of US$5 to US$7 trillion per year for developing countries to realise SDG by 2030 Malaysia is committed towards the SDGs 5
Global policy shifts require funding for climate change initiatives Paris Agreement on Climate Change Global climate agreement to limit global warming to below 2 C Will come into effect in 2020 April 2016-177 nations signed the treaty, including Malaysia US$100 billion per year by 2020 to help developing countries cope with climate change 6
Green Finance Green finance is finance for a sustainable planet. It covers the gamut of financial services, institutional arrangements, country initiatives and policies, and products (debt, equity, insurance, or guarantees) designed to promote the flow of finance towards economic activities and projects - ADB Green finance products: green bonds green lending guidelines green banks carbon finance green insurance green IPOs green stock indices green credit green asset securitization Source: ADB Opportunities for Islamic finance 7
Demand for (green) infrastructure projects Over 15 years (2016 30), global economy needs to invest around $90 trillion in infrastructure assets WB Emerging economies will account for 60 % of the global infrastructure needs between 2016 and 2030 including many member countries of the OIC WB Developing Asia will need to invest $26 trillion from 2016 to 2030, or $1.7 trillion per year, if the region is to maintain its growth momentum, eradicate poverty, and respond to climate change ADB Of the total climate-adjusted investment needs over 2016 2030, $14.7 trillion will be for power and $8.4 trillion for transport. Investments in telecommunications will reach $2.3 trillion, with water and sanitation costs at $800 billion over the period ADB 8 24
Global trend for Green Bonds US$167.6bn - total green bond issuance US$17.5bn sovereign green bond issuance 45 markets from all continents 204 new issuers Source: Climate Bonds Initiative 35% Asia-Pacific achieved the highest regional year-on-year growth rate 9
Growing commitment towards Sustainable and Responsible Investments (SRI) at the global stage No. of PRI Signatories and AUM 100 2205 80 1714 1384 1501 60 1186 1251 1050 890 40 734 523 20 18 21 24 32 34 45 59 62 68.4 89.7 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Assets under management (US$ trillion) 2500 2000 1500 1000 500 0 Global SRI Assets (US$ trillions) 35 30 25 20 15 10 5 0 22.9 18.3 2014 2016 2018 Source: Global Sustainable Investment Alliance 30.7 Source: UN PRI Number of Signatories Assets under management (AUM) by UN Principles for Responsible Investment (PRI) signatories increased to US$89.7 trillion in 2018 from US$68.4 trillion in 2017 (+31%) with 32 signatories from ASEAN US$30.7 trillion assets professionally managed under SRI strategies (CAGR: 15.8% over 2 years) Negative/exclusionary screening is the largest approach with US$19.8 trillion or 36% of global SRI assets in 2018 10
Malaysia is well-positioned to drive SRI given its leadership in Islamic capital market (ICM) Turkey 3% Qatar 4% Indonesia 8% UAE 8% Sources: MIFC estimates GLOBAL SUKUK OUTSTANDING BY DOMICILE AS AT END-2018 Others 7% Saudi Arabia 19% Malaysia 51% Malaysia continues to be global leader in sukuk market: 51% of the USD427 billion total sukuk outstanding globally as at end 2018 37.5% of the USD112.4 billion global sukuk issuance in 2018 is MYR denominated 11
Malaysia is well-positioned to drive SRI given its leadership in Islamic capital market (ICM) (cont.) Luxembourg 4% Sources: MIFC estimates GLOBAL ISLAMIC AUM BY DOMICILE AS AT END-2018 Indonesia 4% Jersey 12% Others 14% Saudi Arabia 29% Malaysia 37% Malaysia has a distinctive Islamic fund management (IFM) industry: Largest global Islamic AUM by domicile at 37% Specific IFM license; guidelines for Shariahcompliance; fully liberalised; incentives 22 full-fledged IFM companies and 31 fund management companies with Islamic windows 12
Malaysia s commitments on the global agenda are embedded in national policies and targets Targets under the Midterm Review of 11th Malaysia Plan (2016-2020) UN SDGs Committed to support and implement the 2030 Agenda for Sustainable Development and its 17 Sustainable Development Goals (or SDGs) Paris Agreement Adopted the international climate agreement to limit global warming to below 2 C 45% At least 10% At least 17% 20% 30% 8,885 MW Reduction in GHG emissions intensity to GDP relative to the level in 2005 by 2030 Coastal and marine areas gazetted as protected areas Terrestrial and inland water areas gazetted as protected areas Government green procurement of selected green products and services Recycling rate of household waste Renewable energy installed capacity 13
Role of the Capital Market in meeting Malaysia s commitment on sustainable development SC emphasizes sustainability in its regulatory and developmental agenda The role of capital market can be expanded to create market based solutions to mobilise investments in technology and projects that promote sustainable and inclusive development (CMP2) Capital market is capable of bringing scale, financial discipline and commercial accountability to social and community-based enterprises and projects that promote sustainable development (CMP2) 14
Introduction of the 5i Strategies to build SRI ecosystem 4 Internal Culture & Governance 1 2 Funds Investors Pension funds Sovereign wealth funds Mutual funds 3 Instruments SRI Sukuk ESG index Issuers Listed companies Multilateral organisations 5 Information Architecture Sustainable & integrated reporting 11
Malaysian SRI ecosystem: Milestones 2014 Issuance of SC s SRI Sukuk Framework Launch of FTSE4Good Index by Bursa 2015 Issuance of Khazanah Nasional s SRI Sukuk Ihsan (1st tranche) Amendment to Bursa Malaysia Listing Requirements on Sustainability Reporting 2016 Issuance of Malaysian Code for Institutional Investors Tax incentive for SRI Sukuk issuers 2017 Launch of SC s Islamic Fund and Wealth Management Blueprint Issuance of Khazanah Nasional s SRI Sukuk Ihsan (2nd tranche), with retail portion Launch of revised SC s Malaysian Code of Corporate Governance Issuance of world s first green sukuk under SRI Sukuk framework Issuance of SC s Guidelines on SRI Funds Issuance of ASEAN Green Bond Standards and inaugural ASEAN Green Bond 2018 Establishment of RM6mil Green SRI Sukuk Grant Scheme which is tax exempted Issuance of ASEAN Social and Sustainability Bond Standards Issuance of world s first ESG Sukuk Fund 12
Building upon Malaysia s ICM experience to be regional centre for Shariah-compliant SRI SC s Islamic Fund and Wealth Management Blueprint, launched in January 2017 Vision: Malaysia to be a leading international centre for Islamic fund and wealth management 3 Strategic Thrusts, with 11 recommendations to be implemented on a phased approach: 1. Strengthen Malaysia s positioning as a global hub for Islamic funds 2. Establish Malaysia as a regional centre for Shariah-compliant sustainable and responsible investments 3. Develop Malaysia as an international provider of Islamic wealth management services 17
SRI Sukuk Framework: Alignment to the UN SDGs 18
Waqf Another catalyst for sustainability Development of Waqf assets: Improves socio-economic well being Unleashes their potential market value Provides avenue for Shariah-compliant funding ICM can propel waqf development via: Asset / Fund managers Sukuk issuance Innovation & digitalisation 19
Islamic Capital Market and the UN SDGs SDG 3: Good Health & Well-Being SDG 4: Quality Education Sukuk Ihsan (trust schools) IFFIm Sukuk (immunisation) SDG 10: Reduced Inequalities SDG 7: Renewable Energy Green Sukuk (building / solar) Waqf Shares (transport terminal) 20
Sukuk for sustainability: 6 green and 1 social impact SRI sukuk (RM2.42 billion raised) Sinar Kamiri RM245 million PNB Merdeka Ventures RM690 million Khazanah* RM200 million Pasukhas RM17 million Quantum Solar Park RM1 billion UiTM Solar Power RM222 million * The projects are in 10 states in Malaysia Tadau Energy RM250 million 299 MW Solar PV Power Plant Total amount raised: RM 1.7 billion Green Building Total amount raised: RM 690 million Hydropower Total amount raised: RM 17 million Education Total amount raised: RM 200 million 21
Green SRI Sukuk lodged with SC Issuer Programme Size (MYR Million) Issue Date Issued Amount (RM Million) 1 Tadau Energy Sdn Bhd 250.00 27 July 2017 250.00 2 Quantum Solar Park (Semenanjung) Sdn Bhd 3 Sinar Kamiri Sdn Bhd 245.00 4 5 6 PNB Merdeka Ventures Sdn Bhd UiTM Solar Power Sdn Bhd Pasukhas Green Assets Sdn Bhd 1,000.00 6 October 2017 1,000.00 2,000.00 30 January 2018 29 December 2017 245.00 690.00 240.00 27 April 2018 222.30 200.00 28 February 2019 17.00 22
Opportunities for ICM in driving sustainability agenda Facilitating more Islamic investment flows towards achieving SDGs Guiding ICM stakeholders on integrating sustainability Ongoing Actions Enhancing capacity in relation to sustainability Roadmaps to support development plans for sustainable finance Supporting Actions Experience-sharing with broader range of stakeholders On-going conversations towards standardisation 23
Addressing issues & challenges Ensuring sustainability businesses and projects are also Shariah-compliant Providing sufficient range of Islamic financing products to suit the different project structures and requirements Addressing if there is a need to sacrifice commercial returns to achieve the desired non-financial impact Overcoming investors skepticism on value proposition of sustainabilityfocused business and projects Raising the level of awareness and acceptance among relevant stakeholders Maintaining any additional costs (arising mainly from sustainability- and Shariah-related reviews and reporting) within reasonable level Enhancing appropriate and sufficient talent pool 24
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Securities Commission Malaysia 3 Persiaran Bukit Kiara, Bukit Kiara 50490 Kuala Lumpur www.sc.com.my