Cover Story: Channelling private investment to tackle climate change

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on January 6, 2020 - January 12, 2020.

The well-being of people across many regions and the future biodiversity of our planet will hinge on the collective actions — large and small — of all public and private stakeholders around the world.

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The man who moves a mountain begins carrying away small stones.”

This oft-mentioned quote attributed to Confucius may describe the journey of sustainable finance in recent times — and how private investment flows have been gradually and progressively positioned to help countries rise to the challenges posed global warming.

In January 2004, the-then Secretary General of the United Nations, Kofi Annan, wrote to the CEOs of 55 of the world’s leading financial institutions, inviting them to join efforts to develop guidelines on how to better integrate environmental, social and governance (ESG) issues into asset management, securities brokerage services, and associated research functions. The resulting report, known as the Who Cares Wins report, was published under the auspices of the UN Global Compact.

A year later, Annan invited a group of the world’s largest institutional investors to join a process to develop the Principles for Responsible Investment (PRI). The principles were launched in April 2006 with fewer than 100 signatories. Today, there are 2,372 signatories globally. The Malaysian signatories include Khazanah Nasional Bhd, Retirement Fund Inc and the Employees Provident Fund, which signed up in 2017, 2018 and 2019 respectively.  

signing the PRI, asset owners, investment managers and their service partners commit to publicly report on their responsible investment activity, including how they have considered specific climate-change risks in their portfolios. Given that current signatories represent some US$86.3 trillion (RM357 trillion) of assets under management, PRI signatories play an important role in driving investment towards protecting the environment and human communities.

While these are encouraging signs, they are still small, incremental victories when compared with the immensity of the threats posed climate change. One needs only to look at the unremitting rise in carbon dioxide levels in the atmosphere in the past 100 years. The average surface temperature of our planet has increased about 0.9°C since the late 19th century, driven upward primarily greater human-made emissions into the atmosphere.

At the World Bank, we have seen that pressing environmental and social challenges such as climate change are a major obstacle to development progress in countries, and to our mission to end extreme poverty and increase shared prosperity.

The projected effects of climate change include US$500 billion in annual damages from natural disasters and 100 million additional people pushed into poverty the end of this new decade. In December 2018, the World Bank announced a new set of climate targets for 2021-2025, committing around US$200 billion in support for countries to take ambitious climate action.

It is encouraging to see that many global investors are responding and dialing up their share of sustainable investments — not just because of the perceived social benefits but also because of the solid financial returns.

Research global financial services company MSCI on the impact of ESG on shareholder value revealed that companies with strong management of industry-specific ESG risks and opportunities outperformed their peers with poorer management of the same risks and opportunities over five years from January 2013 to December 2017.

Investors are increasingly embracing ESG factors in their investment decisions. MSCI findings reported a 25% spike in subscription revenue from ESG data and 11% from indexes, which cover more than 1,000 ESG-themed products. Major wealth management firms such as Merrill Lynch and Morgan Stanley are increasingly discussing impact investing with their high-net-worth clients.

Globally, investment options have been growing in the past five years when it comes to ESG investing, ranging from green bonds to ESG investment funds. Regionally, the Asean Capital Markets Forum — comprising the capital market regulators of the Asean countries — launched the Asean Green Bond Standards on Nov 8, 2017, followed the Asean Social Bond Standards and Asean Sustainability Bond Standards on Oct 11, 2018. Subsequently, there have been bonds and sukuk issuances using these standards in Malaysia, Singapore, Thailand and the Philippines.

In recent years, the World Bank has embraced this “green investing” agenda and worked closely with the Malaysian government to develop innovations. This partnership led to the issuance of the world’s first green sukuk in July 2017 Tadau Energy Sdn Bhd.

Subsequently, numerous other green sukuks and green bonds were issued, including the first-ever Sustainable Development Goals (SDG) sukuk in October 2018 HSBC Amanah and the world’s first sustainability sukuk in October 2019 Edra Solar Sdn Bhd.

What should Malaysia focus on in 2020 to advance the agenda of sustainable finance?

First, regulatory bodies could help define the way forward encouraging or requiring the use of the standardised methodology in the reporting of investments. Such a step would allow for easier evaluation of the ESG performance of investment managers. Greater transparency would allow end-investors to manage their investment decisions accordingly. Within this area, for example, the World Bank is supporting Bank Negara Malaysia and the Securities Commission Malaysia in developing the principles for a “green taxonomy” for tagging green assets.

Second, analytical capabilities related to assessing climate-change risks can be improved. The Central Banks of England and the Netherlands currently have comprehensive frameworks for assessing climate risks. For regulators in developing countries such as Malaysia, there is a need to develop similar frameworks to better understand how the local environment can be affected climate-change risks — both in physical and non-physical terms. This step necessitates better data collection, including granular geospatial exposure data, and additional tools to quantify risk, such as macro-level stress tests that consider climate impact.   

Finally, the enabling environment for innovation in sustainable finance can be strengthened. Regulators can also support innovation in the field of sustainable finance. Subject to fiscal considerations, Malaysia could consider demonstrating its commitment to sustainability substituting some of its existing stock of debt with sovereign green bonds to finance public investment projects with positive environmental and social impacts.

Blue bonds, a debt instrument used to raise capital to finance marine and ocean-based projects with a positive environmental or economic impact, as well as forestry and sustainability sukuk, are additional instruments that could be considered for use in Malaysia.

As awareness of the importance of sustainable finance continues to grow in Malaysia, the coming decade should focus on converting such incremental steps into larger and bolder actions to help tackle the global challenges of climate change.

The well-being of people across many regions and the future biodiversity of our planet will hinge on the collective actions — large and small — of all public and private stakeholders around the world. Sustainable finance provides a channel for private investors to play their roles.


Firas Raad is the World Bank’s representative and country manager for Malaysia