The landscape of Environmental, Social and Governance (ESG) investment in Malaysia has seen significant growth in recent years. Companies forced to prioritise the ESG agenda in part due to strong regulatory guidance on trajectory of ESG investing in Malaysia, and bolstered by the efforts of large, influential funds including the Employees Provident Fund (EPF) and the country’s sovereign wealth fund Khazanah Nasional Bhd.
Strengthening climate change frameworks
There are numerous guidelines and policies at play to guide ESG and support longer-term sustainable and transition finance in Malaysia. Some of the government-led ESG initiatives, which include various policies and programmes to promote sustainable development, are the National Policy on Climate Change, the Green Technology Financing Scheme, the Green Technology Master Plan, the National Green Procurement Policy, and the Green Technology Tax.
Regulatory bodies such as the Securities Commission Malaysia (SC) have also played a crucial role in accelerating this movement, publishing guidance notes and establishing taxonomies to streamline the domestic development of ESG investing, and has also launched the Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market.
A crucial area of focus for Bank Negara Malaysia (BNM) and the SC’s Joint Committee on Climate Change (JC3) is supporting the consistent and credible application of the Climate Change and Principle-based Taxonomy (CCPT).
The Committee says to have noticed considerable differences in how financial institutions classify assets and investments. JC3 is working towards publishing guidance and developing criteria for due diligence and screening, with the aim of harmonising these practices.
Additionally, JC3 recognises the need to address existing data gaps and aid businesses in evaluating the environmental impact of their operations. By the end of 2023, JC3 plans to complete most of its work to align practices for the CCPT implementation.
In the wake of increasing climate change concerns, the SC continues to focus on promoting sustainable business practices, including advocating for better sustainability disclosures, especially for smaller businesses.
JC3 continues to collaborate with government ministries, agencies, and industry associations to align financial sector responses to climate-related risks with national and business strategies. This collaborative effort sends a strong signal that large investors are increasingly directing capital towards sustainable investments, pushing corporate Malaysia to bolster their sustainability practices.
Funds bolster green commitment and governance practices
As part of its environmental commitment, wealth fund Khazanah aims to achieve net-zero emissions by 2050 and carbon-neutrality in its own business operations by 2023. It’s also paving the way in governance, aiming to enhance board competency in sustainability at portfolio companies by 2024 and include ESG-linked Key Performance Indicators for key roles by 2023. In terms of social responsibility, Khazanah is working towards ensuring 30% representation of women in boards and senior leadership roles at its key portfolio companies by 2025.
Within its current portfolio, emphasis will be placed on the adoption of net-zero targets, setting explicit gender diversity goals, along with stressing the importance of effective governance at both board and management levels, and transparent voting procedures.
Regarding new investments, Khazanah is taking the initiative under its Dana Impak mandate for catalytic sectors, evaluating a variety of projects that align with ESG-related themes such as clean energy, climate technology, and social inclusion.
And to drive its own sustainable investment initiative, the EPF has set up a dedicated team at the Sustainable Investment Centre (SIC) that independently assesses new investment proposals based on ESG expectations. Their ultimate goal is to achieve a fully ESG-compliant portfolio by 2030 and a climate-neutral portfolio by 2050.
The Green Investment Tax Allowance (GITA) and Green Income Tax Exemption (GITE) have been extended until December 31, 2023, and are garnering overwhelming response from the industrial and commercial sectors. MIDA has approved investments in green projects and services amounting to RM15.4 billion with 2,496 projects from 2017 to March 2022.
Growing interest in sustainable investing
Malaysia is witnessing a surge in sustainable investment, with many institutions launching their own sustainable investment frameworks. As of end-December 2021, there were 34 Socially Responsible Investing (SRI) funds with a combined net asset value of RM5.07 billion, offering investors a range of conventional and Shariah-compliant ESG-focused funds. Individual investors are also showing increasing interest in ESG, which will further catalyse sustainable investment growth in the region.
The SRI Roadmap launched in 2019 provides strategic direction to drive the SRI ecosystem and positions Malaysia as a regional SRI centre. This includes increasing the range of SRI instruments, enlarging the investor base, and establishing a strong SRI issuer base. Furthermore, instilling a strong internal governance culture and creating a robust information architecture are integral parts of this vision.
As SC Chairman Datuk Seri Dr Awang Adek Hussin aptly put it, “This sends a strong signal that our largest investors are increasingly allocating capital into sustainable investments, motivating corporate Malaysia to step up their sustainability practices.”
ESG readiness of banks in Malaysia
The ESG readiness in Malaysian banks, which was assessed in a 2021 survey by PwC Malaysia on how Malaysian banks are integrating ESG into their business practices. The survey found that 71% of respondents have considered climate change risks, 93% have assigned a department to operationalise ESG, and 50% have conducted or planned board-level training on ESG.
In addition, 21% of respondents said they have already embedded three ESG-related frameworks within their organization, namely the CCPT, the Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF), and the Task Force on Climate-related Financial Disclosures (TCFD).
Of the 14 Malaysian banks surveyed, 57% said they had adopted the VBIAF, and 64% said they will adopt the TCFD by this year. At its tenth meeting in May 2023, JC3 said it will review the TCFD Application Guide for Malaysian Financial Institutions which was released by JC3 in 2022 to take into account the requirements of the upcoming release of the general sustainability-related (S1) and climate-related (S2) disclosure standards by the International Sustainability Standards Board (ISSB).
But only half of respondents said they had adopted the CCPT at the time of the survey, with the other 50% saying they plan to implement it by this year. Respondents said navigating the CCPT set out by Bank Negara Malaysia comes with its own intricacies. These range from an absence of client data or information and challenges in applying principles-based guidelines in practice, to difficulties in measuring indirect environmental impact and a shortage of expertise in the area of ESG.
With most banks globally struggling to meet ESG requirements, some banks in Malaysia like Hong Leong Bank and CIMB Group Holdings have distinguished themselves in this arena. CIMB ranked fourth in ESG performance out of 155 influential global banks in the inaugural 2022 Financial System Benchmark at COP27 in Egypt last year — the bank was acknowledged as a leading performer in the realm of governance and strategy, and also demonstrated commendable performance in the areas of “respecting planetary boundaries and adhering to societal conventions”.
And Hong Leong Bank received praise for promoting ESG practices across its operations, working with its borrowers to improve standards, incorporating ESG evaluation in its loan approval process, and practicing disclosure of ESG-related information. HLB introduced its ESG framework incorporates 12 of the 17 United Nations Sustainable Development Goals (SDGs) and BNM’s Guiding Principles in assessing economic activities taken from the CCPT.
