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Thursday, December 8, 2022

Launch Partners

Malaysia’s sustainability efforts: The present and the future

Malaysia is committed to achieve the SDGs, honor the Paris Agreement as well as achieve net-zero greenhouse gas (GHG) emissions by 2050. The Malaysian Ministry of Finance (MoF) published its 2023 economic outlook, along with the 2023 budget, which gives some insights on Malaysia’s progress toward sustainability 2022 and how the country will move forward in 2023.

Sustainability progress in 2022

The government reached several milestones in 2022 as part of its sustainability efforts including the establishment of the Malaysian Climate Action Council, the Joint Committee on Climate Change, as well as the launch of the National Energy Policy 2022–40, which seeks to future-proof Malaysia’s dependance on the energy sector sustainably.

Among the most notable achievements for the year is the government’s first ringgit-denominated sustainability Sukuk announced in the 2022 budget as well as the establishment of the MySDG Foundation in collaboration with the UN in Malaysia (see Figure 1).

Additionally, Bursa Malaysia launched the Islamic ESG Index to drive low-carbon adoption within the capital market and enhance sustainability reporting listing requirements in the Main Market and the ACE Market.

More crucially, Bursa Malaysia confirmed it will establish the Voluntary Carbon Market Exchange by the end of this year, allowing companies to offset their existing climate impact and carbon footprint with carbon credit products.

Also in 2022, the Securities Commission Malaysia issued the SRI-linked Sukuk Framework to aid companies achieve their sustainability goals.

Further, Kumpulan Wang Persaraan (KWAP) or the Retirement Fund (Incorporated), Malaysia’s civil servant pension fund, launched the TERAS 5 initiative to sustainably grow the size of its fund to a total gross fund size of RM200 billion (US$42.34 million) by 2025. KWAP has voiced its aspirations to transition to a fully Shariah compliant portfolio since as early as 2016.

Moving forward in 2023

With a size of RM372.3 billion (US$78.82 billion) and an allocation of RM95 billion (US$20.11 billion) for development expenditure, which is the country’s second-largest budget and largest allocation for developmental expenditure to date, the 2023 budget places a considerable emphasis on sustainability with two out of three of its agendas relating to sustainability.

“The 2023 budget is a responsible budget in balancing between an expansionary fiscal policy and at the same time implementing fiscal reforms towards ensuring the government’s financial sustainability in the long term. This budget will be responsible in building the country’s resilience to face any future crisis,” Tengku Zafrul Aziz, the finance minister, remarked.

The budget is also touted as being reformist in aiming to transform the country’s development landscape toward inclusivity and sustainability.

While the budget did not make any allocation for Islamic sustainable finance specifically, excluding the introduction of a tax deduction for the issuance cost of SRI-linked Sukuk for a five-year period, some allocations are relevant to Islamic sustainable finance.

The government will finance strategic projects under the budget through Bank Pembangunan Malaysia, which is a Shariah compliant development financial institution. The financing projects include, among others, the Sustainable Development Financing Scheme worth RM1.5 billion (US$317.53 million) to facilitate the government’s effort to achieve the SDGs.

As part of the government’s efforts toward achieving carbon neutrality, the budget has extended the Green Investment Tax Allowance and Green Income Tax Exemption for applications received by Malaysian Investment Development Authority from the 1st January 2024 to the 31st December 2025 to improve the incentives for solar activity.

The budget also increased the guarantee value under the Green Technology Financing Scheme (GTFS), which was first introduced in the 2021 budget, with guarantee value increases to RM3 billion (US$635.05 million) until 2025. The financing scope has been extended to include the electronic vehicle sector with a guarantee by the government up to 60%. The waste management sector’s financing guarantee has been increased up to 80%.

According to GTFS data, 78 out of 268 GTFS projects, about 28.36%, were financed by fully Islamic financial institutions with hybrid institutions, institutions which offer Islamic and conventional services, financing 16.55% of GTFS projects.

Also announced in the budget is the government’s intention to introduce a carbon tax and a feasibility study of a carbon pricing mechanism. As part of the implementation of the carbon pricing mechanism, the government will provide matching grants worth RM10 million (US$2.12 million) to support the preparation of carbon assessments by SMEs and for eligible related products.

“Already introduced in various developed countries, the carbon tax will serve as a new source of government revenue and is certainly a step in the right direction to assist our nation in achieving carbon neutrality by 2050.

“The extension of the Green Investment Tax Allowance (GITA) and Green Income Tax Exemption by another two years to the 31st December 2025 will also continue to incentivize and encourage businesses to accelerate the use of ESG-focused technology and embark on green projects,” Soh Lian Seng, the head of tax at KPMG in Malaysia, commented.

As part of the government’s net-zero carbon emissions efforts, the budget allocated RM17 million (US$3.6 million) to the Business Sustainability and Green Financing Scheme, RM10 million (US$2.12 million) to the Sustainability Incentive Scheme as well as RM1 million (US$211,486) to the Juara Lestari Scheme under the Shariah compliant SME Bank.

SDG-related initiatives under proposed Budget 2023
  • RM1 billion (US$211.72 million) allocated to the Keluarga Malaysia Hardcore Poverty Eradication program launched this year
  • RM300 million (US$63.51 million) additional allocation to BNM’s High Tech and Green Facility, RM500 million (US$105.86 million) for its Agrofood Facility and RM500 million for its SME Automation and Digitalization Facility
  • Skim Jaminan Pembiayaan Perniagaan received an allocation of RM9 billion (US$1.9 billion) for SMEs; RM3 billion for food security and RM3 billion for sustainable technology
  • RM50 million (US$10.58 million) allocated to women indigenous contractors; RM1 million allocated for access to financing for indigenous contractors under the Express Contract Financing Scheme by Majlis Amanah Rakyat, and
  • RM100 million (US$21.17 million) matching grant allocated to collaboration projects with non-governmental organizations; the grant includes specific allocations for rural water supply projects, rural electricity projects, medical and nutritional screening projects, educational projects and social enterprise development, among others.
  • While these are some of the sustainability-related allocations in the new budget, the parliament has been dissolved and the general election will be held on the 19th November 2022. As such, there remains a possibility that the shadow budget proposed by the opposition party would be implemented instead. The outcome of the general election will determine whether the sustainability allocations will be carried out

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