This article first appeared in Forum, The Edge Malaysia Weekly on December 14, 2020 - December 20, 2020

There has been a notable shift in discussions about sustainability and business in recent years, especially with the recent measures to support sustainable financing announced in Budget 2021.

The outbreak of Covid-19 accelerated concerns about climate change and social inequalities, especially as the pandemic proved just how vulnerable our environment and our economies can be. We have seen a surge in conversations on environmental and social issues and increasingly, people are putting their money where their mouth is.

Equity markets have seen a surge in volume as investors flock to potential winners amid the pandemic, and amid greater liquidity driven by low interest rates. But beyond this, investors are increasingly tapping debt markets to deliver longer-term sustainable returns.

A recent study by Moody’s showed that the global issuance of sustainable bonds hit a record US$99.9 billion (RM405.6 billion) in the second quarter of 2020, a clear signal that investors are increasingly demanding assets that are environmental, social and governance (ESG) friendly.

Combined social and sustainability bond volumes could total US$150 billion for the year as Covid-19 response efforts and heightened awareness of social issues related to healthcare and inequality continue to support issuances, according to Moody’s.

Already, the Bank of America had raised US$2 billion in debt markets in September this year to fight longstanding income and social inequalities in the US. In Europe, automaker Daimler AG raised €1 billion (RM4.9 billion) in its first green bond issuance, which was oversubscribed by more than four times and launched just a day after Germany raised a near-record amount of €6.5 billion in its debut green debt offering.

Closer to home, China, the world’s largest producer of carbon emissions, took the world by surprise when it announced at a virtual United Nations gathering in September this year that it was to hit peak carbon emissions before 2030 and be carbon neutral by 2060.

The proof is in the numbers: there is growing momentum for sustainable issuances and Malaysia, together with the rest of Asean, cannot afford to be left behind.

There has been progress — Indonesia was the first issuer of a sovereign green sukuk, raising US$1.25 billion in 2018 and an additional US$750 million a year later under the same programme. Both issuances were oversubscribed. The deal is a testament to not only the strength of investor demand but also what Asean capital markets can offer to the global sustainable finance industry.

In our own backyard, we made history when Cypark Resources Bhd successfully issued a RM550 million Sustainable and Responsible Investment (SRI) sukuk in 2019 to fund the development of three large-scale solar projects awarded by the Energy Commission of Malaysia. It was the first sukuk (Islamic bond) issued by a renewable energy contractor to collectively fund smaller-scale projects.

At the SRI 2020 Virtual Conference organised by the Securities Industry Development Corporation (SIDC) in August, I took the opportunity to ask Cypark founder and CEO Datuk Daud Ahmad what convinced him that an SRI sukuk was the way to go when it came to the group’s fundraising.

He responded that, apart from the more competitive rates offered by the debt capital markets, this unique financing structure enabled Cypark as the contractor to not only raise funds for several projects simultaneously but also raise the company’s profile among investors that are prioritising sustainability-linked assets.

Malaysia already has the strong and forward-thinking support of regulators when it comes to sustainable financing. Using its groundbreaking SRI sukuk framework launched in 2014, which preceded the launch of the United Nations’ Sustainable Development Goals in January 2016, the Securities Commission Malaysia (SC) was the first in the world to launch a green sukuk.

Budget 2021 also included provisions to help establish the country as a sustainable financial hub. It was announced that the Malaysian government would issue its first sustainability bond for environmental and social initiatives in 2021 and extend the existing income tax exemption for SRI green sukuk grant provided by the SC until 2025.

The existing income tax exemption grant is further expanded to all SRI sukuk and bonds that meet the Asean Green, Social and Sustainability Bond Standards approved by the SC. Furthermore, the government said it would continue the Green Technology Financing Scheme 3.0 or GTFS3.0 with a fund size of RM2 billion for two years up to 2022, which will be guaranteed by Danajamin to encourage the issuance of SRI sukuk.

The demand for such sukuk is demonstrated by the success of the government’s RM666 million Sukuk Prihatin, the latest social impact sukuk, which was oversubscribed by 1.33 times and encouraged a further issuance of RM166 million compared with an earlier announced target of RM500 million.

On top of that, Malaysia’s sustainable issuances have outperformed the overall market. In 2019, the BPAM Environmental, Social and Governance All Bond Index by Bond Pricing Agency Malaysia (BPAM) delivered returns of 8.21% compared with 6.49% from all domestic corporate bonds and sukuk under the RF BPAM CORPS All Bond Index.

On the potential issuers’ front, we witness the constituents of the FTSE4Good Bursa Malaysia Index increasing year on year since the launch of the index in 2014.

So what can Malaysia’s capital market players do to jump on and take advantage of this opportunity now? For starters, there needs to be a more attractive pricing differential between SRI-themed and non-SRI issuances. Of the SRI sukuk issued thus far, two-thirds are renewable energy-related but there has been no noticeable pricing differential between those and non-SRI sukuk from a coupon rate perspective.

Globally, however, green bonds are starting to see that differential compared with non-green bonds, largely because standards have converged. For example, there is an MSCI Green Bond Index that many investors use as a benchmark to decide if a bond is green. Likewise, the investment community needs to develop a unified set of ESG standards for taxonomy and rating to improve benchmarking in the SRI market. Using independent ESG assessments may help speed up the standardisation as some of these measures become more familiar over time.

Malaysia’s biggest investors have already prioritised sustainability-linked investments, noting that companies with stronger ESG practices are more likely to deliver better returns in the long run. The leaders of government-linked investment companies and institutions such as the Employees Provident Fund, Kumpulan Wang Persaraan (Diperbadankan) (KWAP) and Khazanah Nasional Bhd, which together have more than RM1 trillion of assets under management, have expressed their commitment to taking ESG factors into consideration when making investment decisions, leading by example.

Barriers to sustainable investments may still exist for many funds, but more conversations about how we can overcome them collectively need to happen. Already, Malaysian companies like Cypark are proving that building sustainable businesses are a long-term win for profits and the environment.

It is time to make business-as-usual better than usual — not just for today but tomorrow and the years to come too.

Fad’l Mohamed is CEO of Maybank Investment Bank Bhd

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