PETALING JAYA: Sustainable finance is fast gaining traction and is set to become the future mainstream financing instrument in corporate Malaysia at a time when the global economy is facing recessionary risk, according to industry experts.
With the various initiatives in place, they concurred that amid challenges, it would further spur the growth of sustainable finance and attract sustainable investments.
Sustainable finance relates to investment decisions that consider the environmental, social and governance (ESG) factors of an economic activity or project.
Over the past three years, Malaysia for example, has seen consecutive years of growth in the volume of sustainable debt issuances. In 2021, Malaysia saw a 306% increase from 2020, with a volume of RM8.425bil in such issuances.
This upward trend has continued and year-to-date, the nation has achieved a record RM10.64bil in sustainable debt issuances. This figure is anticipated to rise further.
Commenting on the growth of sustainable finance and whether the interest rate environment would have an impact on this type of financing, Maybank Investment Bank chief executive officer Datuk Fad’l Mohamed told StarBiz the bank was tracking record volumes and seeing a healthy pipeline and number of mandates moving into 2023.
He said more carbon-intensive sectors were leveraging on sustainability-linked markets to finance their climate transition.
Despite the current backdrop of rising interest rates resulting in a tightening of financial conditions worldwide, he said the fundamental outlook of the sustainable finance market remained favourable, and would continue to strengthen and innovate for years to come.
“This is consistent with global and regional market sentiment that overwhelmingly does not see rising borrowing costs as a major barrier to climate progress.
“The conducive policy environment as seen in major economies such as the US$430bil (RM2.03 trillion) Climate Bill in the United States and the affirmation from China’s President Xi Jinping of its dual-carbon goals in the recent 20th party congress further reinforces the market impetus,” he added.
OCBC Bank (M) Bhd managing director and senior banker, client coverage and head of investment banking, Tan Ai Chin attributed several growth drivers that would spur sustainable finance.
She viewed the recently launched sustainable and responsible investment (SRI)-linked Sukuk Framework by the Securities Commission as timely and would serve as a fresh catalyst for a more diversified type of ESG-related financing instruments.
Similar to sustainability-linked financing which is more commonly seen in the market, she said SRI-linked sukuk provided flexibilities where issuance proceeds are allowed to be utilised for general corporate purposes instead of being restricted to only a finite list of eligible green or social projects under the existing SRI sukuk.
Tan added that Bursa Malaysia was also scheduled to launch the Voluntary Carbon Markets Exchange (VCM) by year-end.
VCM would provide an avenue for companies to purchase carbon credits as temporary measures to offset their emissions.
Likewise, she said it also provided the opportunity for carbon-friendly project owners to be able to offer their carbon credits for sale as one of the cost recovery mechanisms. Hence, VCM is seen as another initiative which offers opportunities for sustainable financing to facilitate the funding required for such a transition journey, she noted.
A carbon credit refers to any tradeable certificate or permit representing the right to emit a set amount of carbon dioxide, or the equivalent amount of a different greenhouse gas.
“Bank Negara has also played a pivotal role in developing the sustainable finance markets via the issuance of the Climate Change and Principal-based Taxonomy (CCPT) in April 2021.
“Given the government’s commitment to achieve carbon-neutrality by 2050 and strong support from all industry stakeholders, we remain upbeat on the potential uptrend in sustainable finance which would eventually become Malaysia’s mainstream financing instrument in the future,” Tan said.
The CCPT provides standardised guidelines to financial institutions to assess and categorise economic activities which meet the climate objectives and promote the transition towards a low-carbon economy, for financing purposes.
On the sectors that would see strong growth in sustainable finance, Ernst & Young Consulting Sdn Bhd Malaysia Climate Change and Sustainability Services Leader and Partner, Arina Kok, said the energy sector would continue to be a key beneficiary of such an instrument.
“Under Asean’s sustainable development scenario, renewable energy investment is expected to grow five times over the next few years from 2019.
“Nonetheless, looking at the green schemes and green investment policies in place, sustainable construction (green buildings), transportation (electric vehicles) and sustainable waste management will be sectors that will be further driven by sustainable finance. And these sectors play a vital role in driving sustainable development and net-zero in Asean within the next decade,” she noted.
To a question on the challenges in sustainable finance, Kok said obtaining quality and credible ESG data was a critical challenge that many market players were facing.
Data is critical to ESG, and the lack of these data present some of the biggest challenges around understanding and measuring ESG, she said.
“Currently, ESG information is not yet sufficiently accurate, consistent, appropriate or timely enough to be used effectively. This in turn impacts decision-making and the understanding of the potential positive impact contributed by sustainable financing,” Kok said.
Maybank Investment Bank’s Fad’l said from the issuers side, not all issuers are ready to execute sustainable issuances. Mismatch between issuer aspiration and enterprise-level sustainability readiness is a common roadblock, he said.
To overcome these challenges, he said clear policies, incentives and initiatives that provide ‘top-down’ directions for industry and hesitant investors need to be introduced.
With the recently announced National Energy Policy 2022-2040 which targets clean transportation and renewable energy sources, he said there is promise for a stronger push for Malaysia’s transition to a low carbon economy.
“Secondly, diversification of sustainable debt products with sustainability-linked and transition instruments will make sustainable finance more accessible to a wider variety of issuers.
“These products are just emerging within Malaysian markets, with opportunity for further encouragement and promotion to more aspiring issuers.
“As a capital market intermediary, Maybank Investment Bank is supporting sustainable
Finance with the setting up of our dedicated team that is actively involved in product ideation, structuring, engagement and thought leadership,” Fad’l added.
In addition, he said the bank is guided by its Sustainable Product Framework that is aligned with regional and international principles and standards, such as the International Capital Markets Association’s Green, Social and Sustainability (GSS) & Sustainability-linked Bond Principles that provide clarity in developing green, social and sustainable products within this space.