The natural convergence of Islamic finance and sustainable and responsible investment (SRI), particularly the integration of environment, social and governance (ESG) factors into sustainability screening, has been recognized by many studies. Malaysia has been at the forefront of developing a facilitative SRI ecosystem in the capital market since 2014 with its 5i-Strategy encompassing (i) widening the range of SRI instruments, (ii) increasing the SRI investor base, (iii) building a strong SRI issuer base, (iv) instilling a strong internal governance culture, and (v) designing information architecture in the SRI ecosystem.
Among key SRI instruments developed by Securities Commission Malaysia (SC) are SRI funds offered to the market since the issuance of Guidelines on SRI Funds in 2017 (revised in July 2021).
The guidelines are applicable to both conventional and Shariah compliant funds under the SC’s purview including unit trust funds, wholesale funds, closed-end funds, exchange-traded funds, real estate investment funds and private equity and venture capital funds.
The Islamic Fund and Wealth Management Blueprint, launched in 2017, strengthened Malaysia’s advocacy of Shariah compliant SRI funds.
As at December 2021, 39 SRI funds comprising both unit trust and wholesale funds had been issued. Shariah compliant funds represented nearly 40% of the total portfolio (see Figure 1).
From just five in 2018 and 2019, the number of SRI funds increased more than fivefold to 29 in 2021 in line with the SC’s strategic direction to position Malaysia as the regional center for SRI (as envisaged in the SRI Roadmap for the Malaysian Capital Market 2019).
Complementing the growth of SRI funds, the Waqf-featured Fund Framework introduced in 2020 enables Shariah compliant funds to allocate returns wholly or partially to social impact projects. Another milestone for Islamic finance, the framework facilitates further market convergence of commercial and social objectives.
To this end, the government has extended to 2023 an income tax exemption for fund managers managing SRI funds. Provisions on additional disclosure and reporting requirements introduced by the Guidelines on SRI Funds aim to enhance transparency of SRI fund investment strategies. These include negative and positive screening, ESG integration, thematic investments and impact or social investing, all of which have attracted greater numbers of investors to SRI investments.
Despite the COVID-19 pandemic, total assets under management (AuM) of Islamic funds grew 31.9% in 2020, although its share relative to total fund management AuM stayed modest (see Table 1). Growth prospects remain bright given the rising emphasis on SRI and progression toward value-based intermediation for Islamic banks.
The issuance of the Principles-based SRI Taxonomy for the Malaysian Capital Market in December 2021, whose key objective is to identify ESG-aligned economic activities, will further accelerate growth.
| Table 1: Islamic AuM | ||
| 2020 | 2021 | |
| Islamic AuM (RM billion) | 216.8 | 225.1 |
| Total fund management industry (RM billion) | 905.5 | 951.1 |
| % Islamic AuM to total fund management industry | 24% | 24% |
| Source: SC | ||
Siew Suet Ming is the chief rating officer at RAM Ratings. She can be contacted at [email protected].