Another sign of the Malaysian government pushing the sustainability, ESG and socially responsible investments (SRI) agenda is the decision in January 2021 of the Securities Commission Malaysia (SC) to expand its Green SRI Sukuk Grant Scheme to encourage more companies to finance green, social and sustainability projects through SRI Sukuk and bonds issuance.
“With this expansion, the grant is now renamed as SRI Sukuk and Bond Grant Scheme and applicable to all Sukuk issued under the SC’s Sustainable and Responsible Investment (SRI) Sukuk Framework or bonds issued under the ASEAN Green, Social and Sustainability Bond Standards (ASEAN Standards),” explained SC Chairman, Datuk Syed Zaid Albar.
The move is an enactment of the announcement in the National Budget 2021, when Finance Minister Tengku Zafrul Tengku Abdul Aziz, keen to further encourage the issuance of SRI Sukuk and bonds that meet green, social and sustainability standards in Malaysia, extended the existing income tax exemption on grants amounting to RM6 million to finance the external review expenses, limited to RM300,000, for Green SRI Sukuk to all SRI Sukuk and bonds which meet the ASEAN Green, Social and Sustainability Bond/Sukuk Standards approved by the SC; and extending the income tax exemption period by 5 years.
These exemptions are for applications received by the SC from 1 January 2021 to 31 December 2025.
In the Islamic capital market (ICM), Malaysia has led from the front in pushing the sustainability, ESG and SRI agenda in the Islamic debt market. Ever since the SC introduced its SRI Sukuk Framework in 2014, the first of its kind in the global ICM, Malaysia has pioneered facilitating SRI, Green Sukuk and ESG products, primarily through tax exemptions and other incentives. This latest measure brings grant and other government support for sustainability, ESG and SRI debt instruments under one umbrella scheme.
According to Tengku Zafrul, the government is committed to the UN’s Sustainable Development Agenda. “The Government through cooperation with the UN,” he revealed “will establish the Malaysia-SDG Trust Fund or MySDG Trust Fund with an initial allocation of RM20 million, which will coordinate financing from various public and private sources systematically. Thus, various parties can contribute and be involved in efforts to ensure the SDG is achieved by 2030. Towards creating a Sustainable Financial Hub and positioning Malaysia as a regional hub for a sustainable lifestyle, the Government will continue to formulate its long- term efforts for this purpose.”
In August 2020, the Government issued its first digital Sukuk online, the RM500m (US$123.4m) Sukuk Prihatin, which was oversubscribed to the tune of RM666m. This will be followed by Putrajaya’s first Sustainability Bond in Malaysia for environmental and social initiatives in 2021. Furthermore, the Government will also continue the Green Technology Financing Scheme 3.0 with a fund size of RM2 billion for two years up to 2022 which will be guaranteed by Danajamin, the state-owned financial guarantee insurer of bonds and Sukuk, to encourage the issuance of SRI Sukuk.
The Green SRI Sukuk Grant Scheme was established in 2018 to assist issuers in defraying up to 90% of the external review costs for SRI sukuk. Thus far, says the SC, it has benefitted eight issuers involved in renewable energy, green building and sustainable projects.
“As a regional leader in sustainable and responsible investment, Malaysia’s capital market offers companies efficient and reliable access to financing of sustainable projects that can positively contribute to the environment and society, in alignment with the country’s commitment to the Sustainable Development Goals and the climate change agenda,” said Datuk Albar.
Recognised as a pioneer in Islamic finance and more recently for climate-friendly Sukuk offerings, Malaysia made up 19% of Sukuk and bonds issued under the ASEAN Standards. As at December 2020, RM5.4 billion SRI sukuk have been issued under the SRI Sukuk Framework, out of which 58% or RM3.1 billion are also recognised under the ASEAN Standards, and another RM635 million bonds issued under the ASEAN Standards. This, added Datuk Albar, signifies the demand for an asset class that meets the criteria for Shariah as well as sustainable and responsible investing.
The SC is encouraging and inviting applications from potential issuers under the SRI Sukuk and Bond Grant Scheme where eligible issuers can claim the grant to offset up to 90% of the external review costs incurred, subject to a maximum of RM300,000 per issuance. The SRI Sukuk and Bond Grant Scheme is administered by Capital Markets Malaysia, an affiliate of the SC. The SC envisages a continuous issuance of SRI Sukuk and bonds in advancing Malaysia as a regional sustainable finance hub.
The above developments also come under the Sustainable & Responsible Investment Roadmap (2019-2024) for the Malaysian Capital Market introduced in December 2019 which aims to create a facilitative SRI ecosystem and chart the role of the capital market in driving Malaysia’s sustainable development.
According to the SC, it is estimated that in the next ten years, the world needs about US$5 trillion to US$7 trillion every year to fund the UN’s Sustainable Development Goals while in Malaysia, it is projected that in the next five years, the market will require RM45 billion to finance the long-term development goals. “The capital market can play a critical role to address this gap especially in the green, social and sustainable sectors,” added Datuk Albar.
The Roadmap identified 20 strategic recommendations to drive the development of a facilitative and vibrant SRI ecosystem and position Malaysia as a SRI centre in the region. These include widening the range of SRI financing instruments, increasing SRI investor base, building a strong SRI issuer base, instilling strong internal governance culture, and designing an information architecture in the SRI ecosystem.
Malaysia’s capital market is also beholden to the ongoing impact of COVID-19. Tengku Zafrul on 18 January unveiled his latest stimulus package designed to mitigate the impact of a resurgence of the virus and the new round of tightened social distancing measures. However, says Fitch Ratings, more than half of the announced RM15 billion (about 1% of GDP) stimulus consists of a reprioritisation of previous measures, including RM3 billion to cover the cost of the COVID-19 vaccination programme.
The authorities expect the impact of the additional spending on Malaysia’s fiscal deficit to be offset by revenues associated with a recent rise in oil prices and spending cuts elsewhere in the budget. “At this stage they have not revised their previous 2021 fiscal deficit target of 5.4% of GDP, down from an estimated outturn of 6.0% in 2020. Fitch continues to view the 2021 target as achievable,” says Fitch.
The latest lockdowns will dampen this year’s growth rebound in Malaysia. As in many countries, according to Fitch, the main risk to Malaysia’s growth outlook – both in 2021 and 2022 – is the timeline and efficacy of the vaccination programme. “We assume that the authorities will start vaccinating in March, and inoculate enough of the population by early 2022 that they will be able to relax the vast majority of pandemic-related restrictions.”