It has taken many players– ranging from the country’s capital markets regulators, government bodies to the private sector.
Islamic sustainable finance has huge potential because it caters to the appetites of a wide spectrum of investors. It meets Sharīʿah objectives and emphasizes social and environmental considerations in investment.
But For other developing countries seeking to emulate this and develop sustainable investments to mitigate the effects of climate change, it is important to consider the building blocks that have contributed to this growth, which includes the following:
- Creating frameworks and guidelines for the ecosystem
A key step to creating a strong ecosystem is laying its foundation. This provides a regulatory framework to facilitate more green, social and sustainable financing.
Other financial regulators such as the Malaysian bourse (Bursa Malaysia) have also initiated a sustainability reporting requirement for large companies, and the Central Bank of Malaysia (BNM) has issued guidance documents that facilitate Value-based Intermediation (VBI) to re-orient Islamic finance business models towards realizing Sharīʿah objectives. Within this, the World Bank played a role by developing the VBI Financing and Investment Impact Assessment Framework (VBIAF), in partnership with the Global University of Islamic Finance (INCEIF).
- Participation of Environmental, Social and Governance (ESG) investors
Further strengthening this ecosystem has been the participation of six key institutional investors including Khazanah Nasional Berhad, the Retirement Fund (Incorporated) or KWAP and the Employees Provident Fund (EPF). These investors have become signatory to the United Nation’s (UN) Principles for Responsible Investment (PRI), signifying their commitment to a sustainable financial system on a global stage. The role of institutional investors is crucial to set the tone of ESG investments domestically, with the hope that other private investors will follow suit.
- Presence of a highly-skilled Islamic finance workforce
This is boosted by the growth of the local Islamic financial sector workforce which is technical assistance in developing local certifiers for green sukuk – thus providing a key push for the ecosystem. Additionally, the World Bank has also provided
- Raising awareness on ESG
Key stakeholders are also involved in the delivery of targeted capacity-building and communications activities to encourage embedding ESG in business operations. More awareness is being raised at the national level as the government is poised to play an important role in the green growth agenda, with green finance being a key component.
The momentum for sustainable finance also finds its footing regionally as the issuance of the ASEAN Capital Markets Forum (ACMF)’s Green Bond, Social Bond and Sustainability Bond standards which in line with the International Capital Market Association (ICMA) are among the efforts taken to promote Sustainable and Responsible Investment (SRI) in the region.
- High levels of government support through policy tools and incentives
on the issuance costs of SRI sukuk and can attract SRI issuers to invest in green technology activities in energy, transportation, building, waste management and service activities.
This is important in light of Malaysia’s commitments to the United Nations Framework Convention on Climate Change under the Ministry of Energy, Science, Technology, Environment and Climate Change.
To move forward, Malaysia must seek to diversify the market by encouraging more issuances from a wider range of environmental projects. Bringing it to the next level will also involve more key players such as state governments, municipals and banking institutions, while relevant stakeholders should expand its scope to cover areas such as affordable housing and disasters.
With the issuance of the world’s first green sukuk in 2017, the stage has been set for Malaysia’s Islamic sustainable finance ecosystem to scale greater heights.
Sustainable Finance Ecosystem