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Saturday, May 25, 2024

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Advancing climate finance in Malaysia: 2022 in review

Malaysia’s climate finance ecosystem has seen significant development in the past 12 months, driven by political will, regulatory leadership and private sector actions. NAVINA BALASINGAM provides an overview.

Government-led initiatives
In September 2022, Malaysia’s National Energy Policy 2022–2040 was launched reflecting the role of energy as a significant contributor to enable other key economic sectors to thrive. Embedded within this policy is the country’s Low Carbon Nation Aspiration 2040 which seeks to achieve, among others, the following by 2040 (from 2018 benchmarks):
• Increase in percentage of the electric vehicle (EV) share from less than 1% to 38%
• Increase in total installed capacity of renewable energy (RE) from 7,597 MW to 18,431 MW
• Decrease in percentage of coal in installed capacity from 31.4% to 18.6%, and
• Increase in percentage of RE in the Total Primary Energy Supply from 7.2% to 17%.

In 2021, Malaysia strengthened its climate ambition by announcing its strongest Nationally Determined Contributions to date. Relative to 2005 levels, Malaysia now aims for an unconditional reduction in the economy-wide carbon intensity of GDP by 45% by 2030, a step up from the previous target of a 35% reduction.

The government is expanding existing funding programs and extending tax incentives to encourage the adoption of green technology in the country. It proposes to extend the application period for the Green Investment Tax Allowance and Green Income Tax Exemption to 2025 and to improve the Green Technology Financing Scheme (GTFS) by increasing the guaranteed value to RM3 billion (US$683.37 million) up to 2025, and expanding the scope of the guarantee to the EV sector. Financing guarantees for the waste management sector will be increased up to 80% under the GTFS.

The government has also announced its intention to introduce a carbon tax and examine the feasibility of setting up a carbon pricing mechanism.

The Malaysian government has successfully tapped into the domestic capital market in 2022 with an inaugural issuance of Sustainability Malaysian Government Investment Issues (Sustainability MGII) of RM4.5 billion (US$1.03 billion) in nominal value. Strong demand for the issuance was evidenced by the Sustainability MGII’s oversubscription of 2.38 times.

Government-linked companies (GLCs) and government-linked investment companies (GLICs)
The government has launched a sustainability framework that requires GLCs and GLICs to set targets to achieve portfolios that are fully compliant with ESG standards as well as carbon-neutral operations. These entities will also be required to undertake green procurements worth RM330 million (US$75.17 million) to drive its sustainability agenda forward, as well as provide EV infrastructure in the country.

We are already beginning to witness traction in this space.
• National oil company PETRONAS has set up a subsidiary called Gentari to pioneer the clean energy industry in the country. Gentari is committed to installing solar panels at government and commercial facilities with a cumulative PV capacity of three megawatts, as well as providing 500 units of EV-charging facilities throughout the country by 2024.
• Tenaga Nasional, Malaysia’s national energy company, is also committed to installing rooftop solar panels, as well as providing EV-charging facilities with an investment of RM165 million (US$37.59 million) until 2025 to support the government’s sustainability agenda.
• Khazanah Nasional will provide RM150 million (US$34.17 million) for supporting the development of nature-based solutions for Malaysia’s carbon markets ecosystem under its RM6 billion (US$1.37 billion) Impact Fund (Dana Impak).
• In 2022, the Principles on Good Governance for Government Linked Investment Companies were developed, setting the baseline governance and sustainability practices which consider the unique role and requirements of the different GLICs and their respective mandates, and aligning with global standards of good governance and sustainability and promoting accountability and transparency between the GLIC and its stakeholders.

Securities Commission Malaysia (SC)
The SC continues to prioritize the development of enabling regulations to further drive advancement in sustainable finance and investing.

In June 2022, it issued the SRI-linked Sukuk Framework and expanded the utilization of the SRI Sukuk and Bond Grant Scheme to include SRI-linked Sukuk issuances. The framework aims to facilitate the use of Sukuk to meet their transition finance needs.

The SC recently issued the SRI Taxonomy, providing guiding principles in financing a credible transition. Importantly, the SRI Taxonomy includes social objectives, which is particularly significant in the context of ensuring a just transition.

At the same time, the SC also issued a guidance note on managing ESG risks for fund management companies (FMCs) to provide clarity and outline expectations for effective analysis and management of material ESG risks that are present in the FMC’s investment portfolios.

In 2022, enhancements were made to the Malaysian Code for Institutional Investors (the Code), placing an emphasis on transparency of stewardship efforts and outcomes by introducing a Stewardship Spotlight, where signatories to the Code describe their stewardship actions and outcomes when talking to investee companies.

Corporate governance
The SC continues to focus on strengthening the corporate governance standards of listed companies through the implementation of its Corporate Governance Strategic Priorities (2021–2023).

On diversity, the SC has long prioritized better board diversity and the participation of women on boards, making it mandatory for all listed companies to have at least one woman director on the board, while encouraging a target of 30% women on boards of listed companies.

Bursa Malaysia
As the national stock exchange, Bursa Malaysia has long recognized the need to champion sustainability efforts of public listed companies (PLCs). In 2022, Bursa Malaysia launched a slew of ESG initiatives.

The Shariah compliant Voluntary Carbon Market exchange was launched in December 2022, enabling Malaysian companies to purchase voluntary carbon credits to offset their carbon emission footprint and to support financing for projects and solutions that reduce, remove or avoid greenhouse gas emissions.

Bursa also enhanced its sustainability reporting framework, requiring Main Market issuers to disclose climate change-related disclosures that are aligned with Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

In addition to existing ESG indices, this year it introduced the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Index and the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Shariah Index in partnership with FTSE Russell.

Bursa’s ESG Advisory Service was launched in July 2022, designed to help small- and medium-sized PLCs improve their ESG disclosures and credentials by leveraging internationally recognized standards and peer learning of best practices from industry leaders.

Emphasis on the SME sector
Recognizing the significant role that SMEs play in Malaysia’s economy, and the importance of SMEs within the supply chains of large organizations, the Ministry of Environment and Water Malaysia (KASA) and Capital Markets Malaysia (CMM) jointly launched a multiyear initiative to advance the adoption of ESG practices by SMEs in Malaysia. This includes several programs to build capacity among SMEs to become sustainable organizations and to be able to quantify and measure their carbon emissions.

KASA and CMM also plan to introduce simplified ESG disclosure guidance for SMEs. This will provide the baseline disclosures expected of SMEs in relation to ESG, and therefore encourage greater transparency on SMEs’ ESG disclosures.

Bank Negara Malaysia recently launched the Greening Value Chain program aiming to assist Malaysian SMEs in implementing impactful, long-term change to green their operations. It has also allocated RM1 billion (US$227.79 million) toward a Low Carbon Transition Facility for SMEs to fund capital expenditure or working capital to initiate or facilitate the transition to low-carbon and sustainable operations.

Joint Committee for Climate Change (JC3)
In June, the JC3, co-chaired by the SC and BNM, released the TCFD Application Guide for Malaysian Financial Institutions which outlines key recommendations to facilitate the adoption of TCFD recommendations by the Malaysian financial industry.

The JC3 is also working to release a comprehensive data catalogue to address the data needs of the financial sector by pointing users to credible sources of critical climate data needed to support identified use cases.

Beyond initiatives by the government and regulators highlighted above are the numerous innovative ESG product and service offerings being developed by Malaysia’s financial sector, both in the Islamic and conventional finance space. In achieving our 2050 climate ambitions, complementarity between government initiatives and policies and private sector actions will be crucial, and we must collectively move toward a whole-of-society approach to ensure this can be achieved.

Navina Balasingam is the general manager of Capital Markets Malaysia.

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