My Say: Sustainable finance a lever for growth

This article first appeared in Forum, The Edge Malaysia Weekly, on May 10, 2021 - May 16, 2021.
My Say: Sustainable finance a lever for growth
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In January, the country was badly hit by floods that displaced nearly 50,000 people. This exacerbated the impact of Covid-19 on struggling businesses, livelihoods, the healthcare system and the economy.

The pandemic aside, the Malaysian economy had suffered RM8 billion worth of damages, owing to climate-related events between 1998 and 2018. Given the rising magnitude and frequency of climate risks and their impact on businesses and society, the call to action is clear — strong cooperation between financial institutions and policymakers, businesses and society will be critical to drive the coordinated transition to a resilient and low-carbon economy.

To accelerate the transition, increased mobilisation of sustainable finance is needed to fund mitigation initiatives such as clean energy, energy efficiency and sustainable transport, and adaptation initiatives such as disaster management, infrastructure upgrade and sustainable land use.

Sustainable finance can be defined as any form of financial service that incentivises the integration of long-term environmental, social and governance (ESG) criteria into business decisions, with the goal of providing more equitable, sustainable and inclusive benefits to companies, communities and society.

While negative screening, such as absolute avoidance of activities, and thematic investing in selected sectors, such as clean energy, are commonly practised in sustainable finance, there is also a growing focus on diversifying sustainable financial practices into three other areas:

  •     ESG integration — incorporating ESG information and analysis into investment decisions with the objective of enhancing risk-adjusted returns;
  •      Impact investing — targeting positive measurable ESG impact alongside financial returns; and
  •      Norm-based screening and best-in-class (positive) screening according to defined ESG criteria.

Risk aside, climate change also presents opportunities to increase the range of financial products and services for renewable energy, green buildings and climate-smart agriculture and cities. The International Energy Agency projects the need for US$3.5 trillion (RM14.4 trillion) in annual global investments to build the infrastructure for a green economy.

Our World in Data, publisher of research and date of the world’s largest problems, found that the cost of solar and wind power plummeted at a staggering rate between 2009 and 2019, with the price of new solar falling by 89% and the price of onshore wind by 70%. It is now cheaper to invest in new renewables than in new coal power in every major energy market in the world, and soon it will be cheaper to build new renewables than to continue operating existing coal plants.

As markets advance in factoring ESG into risk-adjusted returns and more sustainable funds build competitive performance records, the lingering doubts about sustainable finance will diminish. According to S&P Global Trucost, over the past six years, the Standard & Poor’s 500 SDG (Sustainable Development Goals) portfolio increased by 136.2%. This compares with the S&P 500 portfolio, which generated a return of 125.8%. The research also indicated that companies with a higher proportion of their revenues coming from SDG-related products and services tend to outperform those with a lower proportion of their revenues.

Challenges

The challenges in driving sustainable finance lie in having a clear direction and incentives to pivot from traditional investing strategies. The availability of quality ESG information is also an ongoing challenge, as most businesses are at different maturity levels in managing and reporting on ESG practices. While regulatory and market standards continue to be developed, a coordinated transition requires a system-wide engagement and effective reporting policies to be implemented.

In response to the need for common industry standards and frameworks, Bank Negara Malaysia is collaborating with the local financial industry to issue Value-based Intermediation Financing and Investment Impact Assessment Framework (VBIAF) guides for the different sectors.

The sectoral guides will facilitate the practical implementation measures pursued by the Joint Committee on Climate Change, including the Climate Change and Principle-Based Taxonomy that will be finalised soon. The first set of VBIAF sectoral guides on palm oil, renewable energy and energy efficiency was issued on March 31, while the second set for the oil and gas, manufacturing, construction and infrastructure industries will be issued by year end.

The right strategy

With increasing pressure from the regulators, investors, organisations and society need to clearly define their sustainable finance strategies, resilience to emerging risks and their role in the global transition to the green economy. Successful sustainable finance strategies will be those that are actionable.

Setting the right strategy starts with defining just where and how organisations should engage in sustainability. It is not just a matter of figuring out the right policies, but of identifying the right actions to make sustainable finance a lever for growth. The board and senior management will have to think about the organisation’s purpose and mission. The right answers will help define sustainability goals that suit the organisation — those that are measurable, authentic, achievable, meaningful and aligned with stakeholders’ needs.

The right strategy is essential because greening the economy has huge potential upsides and may be the greatest commercial opportunity of our age.


Arina Kok is a director of Ernst & Young Advisory Services Sdn Bhd’s climate change and sustainability services (CCaSS) practice. The views expressed are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms. This is the second of a three-part series on sustainability in conjunction with Earth Day 2021.

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