SUSTAINABLE & RESPONSIBLE INVESTMENTS IN THE ISLAMIC CAPITAL MARKETS · 2018-02-26 · Securities Commission Malaysia 55 Supervision Surveillance Licensing Enforcement • Undertakes

SUSTAINABLE & RESPONSIBLE INVESTMENTS IN THE ISLAMIC CAPITAL MARKETS

2ND ISLAMIC FINANCE INTELLECTUAL DISCOURSE

Badlishah Bashah Islamic Capital Market Development

22 Feb 2018

The Securities Commission – Functions

• Malaysia’s Islamic Capital Market - Statistics

• Capital Market Masterplan2: Sustainable and Responsible Investments (SRI)

• Sustainable Development Goals

• Islamic Finance & the Sustainability Agenda

• SRI Initiatives by the SC

• Other SRI initiatives – Waqf Development

2

Agenda

© Securities Commission Malaysia 3

MINISTER OF FINANCE

BNM SECURITIES COMMISSION

MALAYSIA (“SC”)

Listed Companies Stockbrokers Asset Managers,

Unit Trusts Investment Banks

EXCHANGE

SC was established on 1st March 1993 under the Securities Commission Malaysia Act 1993. SC is a self-funding statutory body with investigative and enforcement powers. It reports to the Minister of Finance and its accounts are tabled in Parliament annually.

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Capital Market Institutional Framework


Development of the

capital market

Supervising exchanges, clearing

houses and central depositories Licensing and supervising

all licensed persons

Regulating all matters

relating to unit trust schemes

Regulating all matters relating to

securities and futures contracts Regulating the take-overs

and mergers of companies

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SC - Main Regulator for the Capital Market

© Securities Commission Malaysia 5 5

Supervision

Surveillance

Licensing

Enforcement • Undertakes various enforcement actions for breaches of securities laws

• A gatekeeping function: assesses individuals and companies operating in the capital market meet “fit and proper” requirements and have relevant capabilities

• Conducts surveillance of markets to ensure fair and orderly markets and of PLCs to ensure timely and accurate disclosures and good governance

• Conducts oversight of intermediaries and exchange for ethical business conduct and prudent compliance and risk management practices

Approvals • A gatekeeping function: Regulates offerings and issuance of securities and financial products

Others

• As the capital market expands, SC’s responsibilities and oversight have expanded to cover a broader range of participants such as trustees, rating agencies and activities such as investors education and the audit oversight board

Rule-making • Custodian of the Capital Markets and Services Act 2007 and various securities-related regulation and guidelines

SC’s Regulatory Mandate - Maintain Fair and Orderly Market and Safeguard Investors’ Interest

© Securities Commission Malaysia 6 6

Regulation of ICM is Part of Overall Capital Market Regulations

ICM business and transactions accord same level of investors protection as in conventional market, e.g. process of regulation, supervision and enforcement;

Common regulatory approach to regulating ICM products – same liability on the part of the intermediaries, e.g. due diligence and representation; and

Disclosure, transparency and governance apply equally to both conventional and Islamic products, hence same legal and regulatory protection.


ICM Regulatory Practice: Two-tier Approach

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Tier 1 Universal / General Regulatory

Requirements

Tier 2 Specific Shariah Requirements

Sukuk Additional disclosure on Shariah adviser, utilisation of proceeds

Islamic Unit Trust Shariah adviser to certify that fund complies with Shariah requirement

Islamic REITs Tenants’ activities and rental income must comply with Shariah requirement

Bonds Trust deed, eligible persons, etc

Unit Trust Investment committees, trustees, management company, etc.

REITs At least 75% investment in real property

* These requirements are also applicable to Sukuk, Islamic Unit Trust and Islamic REITs


Regulatory Level : National SAC

• National level Shariah Advisory Council (SAC) established under Section 31ZI of the SCA

• Comprises prominent Shariah scholars, jurists and market practitioners

• Acts as a reference point for industry

• Publication of the SAC Resolutions

Industry Level :

Shariah Committees

or Shariah Advisers

•Mandated by regulation

•To advise, review and endorse compliance of products/services with Shariah principles

Regulatory Level : Supervision of

Shariah Advisers

at industry level

•Registered with SC based on compliance with the Registration of Shariah Advisers Guidelines

•Guidelines: General roles and responsibilities, fit and properness, academic qualification, experience and requirements for continuous professional development

Shariah Governance Framework from Regulator Level to Industry Level

Effective Shariah Governance Framework

© Securities Commission Malaysia


Malaysia’s Islamic Capital Market - Statistics

• Capital Market Masterplan2: Sustainable and Responsible Investments (SRI)





9

Agenda


Malaysia’s ICM has grown to RM1.7 trillion

CAGR = Compounded Annual Growth Rate

2017 2006

Islamic Equity

Sukuk

RM1,134 billion

RM146 billion

CAGR 6.8%

CAGR 16.2%

RM548 billion

RM760 billion

10

695

1,692

48

50

52

54

56

58

60

62

0

400

800

1,200

1,600

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

%

RM

bill

ion

Year

Size of the ICM (LHS) ICM as a percentage of the total capital market (RHS)

1854


ICM is a Key Component of the Malaysia’s Capital Market

As at December 2017

Bonds outstanding Total: RM1,292 bil

Total Capital Market RM3,199 bil

ICM RM1,893 bil

(59%)

Equity Total: RM1,907 bil

Sukuk RM760 bil (59%)

Bonds RM532 bil

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Shariah-Compliant RM1,134 bil (59%)

Shariah Non-Compliant RM773 bil


2014 2015 2016 2017 Global 75.8 71.3 56.1 77.5

Malaysia 18 20 16 28 Percentage 24% 28% 29% 37%

Source: Data from 2014 – 2016 from IFSB, 2017 from MIFC

Global Islamic Funds



Capital Market Masterplan2: Sustainable and Responsible Investments (SRI)





13

Agenda

Growth outlook to 2020

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Source: SC

• Baseline projections of Malaysian capital market expanding from RM2.0 trillion in 2010 to RM4.5 trillion in 2020

• Several industry segments will achieve critical mass and experience accelerated growth with increased economies of scale

- ICM will grow from RM1.1 trillion to RM2.9 trillion

- Unit trust NAV will grow from RM0.2 trillion to RM0.8 trillion

- Notional value of derivatives traded will grow from RM0.5 trillion to RM4.2 trillion

• Greater internationalization can add 50% to size of Malaysian capital market

8.2% CAGR 11.0%

CAGR

717.5

2,033.9

4,483.7

0

1,000

2,000

3,000

4,000

5,000

2000 2010 2020f

Baseline projection for capital market: RM4.5 trillion in 2020

Market segments

Growth strategies to expand role of Malaysian capital market

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Deep and broad markets are pre-requisite to achieving high growth and high income

0%

20%

40%

60%

80%

100%

120%

0

20

40

60

80

100

120

USD trillion

Global market capitalisation

1990 1999 2009

Market capitalisation to GDP

Increasing impact of capital market on economies

- Global equity market capitalisation relative to GDP rose from 47.6% in 1990 to 83.2% in 2009

- Emerging markets’ share of global equity market capitalisation rose from 13% in 1990 to 24% in 2009

Sources: World Bank, WFE and SC

Expand role of capital market in financing business ventures, creating jobs, widening ownership of assets and generating returns on long-term savings

Growth strategies

Promote capital formation

Increase intermediation efficiency and

scope

Deepen liquidity and risk intermediation

Facilitate internationalisation

Strengthen human capital and

Information architecture

Growth Strategies to Expand Role of Malaysian Capital Market

Promote socially responsible financing and investment

• SRI provides a base for investment products such as SRI indices and exchange-traded funds (ETFs). SRI can also be used to finance small projects such as for affordable housing, small business creation, development of community facilities, empowerment of women and minorities, education, childcare and healthcare.

• As Malaysia becomes increasingly affluent, it is critical that PLCs and intermediaries enhance their international reputation through increasing their participation in projects which promote sustainable development.

• Thus, Expanding the role of the capital market in developing innovative approaches to finance environmental projects by using a broad range of financing instruments. Innovative products such as green funds or bonds can be used to finance investments in low-carbon technologies and support various programmes to test innovative approaches to managing climate

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Sustainability Development Goals




17

Agenda

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UN Sustainable Development Goals

Global Standards and Principles

1. UN Global Compact

• Launched in 2000 and enabled businesses to be a part of the solution for a more sustainable and inclusive global economy by promoting globally responsible business practices.

• Participated by more than 7000 companies from over 120 countries.

2. UN PRI (United Nations Principles for Responsible Investment)

• Launched in 2006 as an open global initiative for institutional investors to adopt responsible business practices regarding ESG (environmental, social, governance) issues.

• Besides promoting awareness of ESG issues, it also facilitates an exchange of information regarding ESG issues via a collaborative forum of responsible investors around the world.

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The Ten Principles of the UN Global Compact

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Human rights

• Principle 1 : Businesses should support and respect the protection of internationally proclaimed human rights; and

• Principle 2 : make sure that they are not complicit in human rights abuses.

Labour

• Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining

• Principle 4: the elimination of all forms of forced and compulsory labour

• Principle 5 : the effective abolition of child labour; and

• Principle 6: the elimination of discrimination in respect of employment and occupation

Environment

• Principle 7: Businesses should support a precautionary approach to environmental challenges;

• Principle 8: undertake initiatives to promote greater environmental responsibility; and

• Principle 9: encourage the development and diffusion of environmentally friendly technologies.

Anti-Corruption

• Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery.




Sustainability Development Goals

Islamic Finance & the Sustainability Agenda

SRI Initiatives by the SC


21

Agenda

Global SRI Assets

Source, Global Sustainable Investment Review 2016

The largest markets for sustainable investing in Asia ex Japan are: Malaysia (30%) Hong Kong(26%) South Korea (14%) China (14%)

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Shariah compliant & Shariah SRI

Shariah Compliant Products

(Negative Screening)

Products exchangeable for money

Halal

not traded under duress

No Riba

traded in the open market

No Monopoly

Shariah SRI

Intl’ Labor Standards

Environ-mental impact

Employee Relation

Shariah compliant product

Halal & Toyyiban

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Need to explore going to next phase of halalan toyibban. By introducing social impact values e.g. SRI, ESG suited to Shariah.

SRI

ESG

SRI Exclusion Screening vs current Shariah Screening

-Both Screening are negative Screening methods

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Activity SRI Exclusion Screening

Shariah Screening

Adult/Entertainment Yes Yes

Alcohol Yes Yes

Animal Welfare Yes No

Armament Yes Yes

Gambling Yes Yes

Genetics Modification Yes No

Interest/usury No Yes

Pork No Yes

Tobacco Yes Yes



Capital Market MasterPlan2: Sustainable and Responsible Investments

The Global Sustainability Agenda

Islamic Finance & the Sustainability Agenda

SRI Initiatives by the SC

Other SRI Initiatives – Waqf Development

26

Agenda


27

27

SRI Sukuk Framework

Eligible Issuers

Eligible issuers as set out under Chapter 7 of the UCMP Guidelines i.e. corporations and foreign governments

Utilisation of Proceeds

Proceeds must be utilised only for eligible SRI projects

Eligible SRI Projects

Eligible SRI projects are limited to natural resources, renewable energy and energy efficiency, community and economic development and waqf properties/ assets

Assessment

An independent party may be appointed to undertake an assessment of the eligible SRI projects

Reporting

Annual reporting on the status of the eligible SRI projects to the investors


Notable SRI Sukuk

Issuer Ihsan Sukuk Berhad (SPV)

Issue Size RM100 million

Issuance Date May 2015

Profit Rate 4.30%

Tenure 7 years

Structure Wakalah bi al-Istithmar (investment via an Agent)

Governing Law Laws of Malaysia

Utilisation of proceed

For trust schools programme (educational purposes)

Mechanism Step-down mechanism for repayment to investors based on targeted indicators

Source: Khazanah

Ihsan Sukuk Berhad

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Green Bond Market

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Source: Climate Bonds Initiative


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30

Eligible Green Projects (Under SRI Sukuk)

Natural Resources Related Projects (i)Sustainable land use; (ii) Sustainable forestry and agriculture (iii) Biodiversity conservation (iv) Remediation and redevelopment of polluted /contaminated sites (v) Water infrastructure, treatment and recycling (vi) Sustainable waste management projects

Renewable energy and energy efficiency Projects

(i) New or existing renewable energy (solar, wind, hydro, biomass,

geothermal and tidal)

(ii) Efficient power generation and transmission systems

(iii) Energy efficiency which results in the reduction of greenhouse

gas emissions or energy consumption per unit output

Preserve and protect the environment and natural

- Conserve the use of energy

- Promote the use of

renewable energy

- Reduce greenhouse

gas emission


Tadau Energy Sdn Bhd

Notable SRI Sukuk

Issuer Tadau Energy Sdn Bhd.

Issue Size RM250 million

Issuance Date 27 July 2017

Profit Rate 5.20-6.55% per annum

Tenure 16 years

Structure Istisna and Ijarah (investment via an Agent)



Construction solar photovoltaic (PV) plants with a total capacity of 50 MWac (the Plants), in Kudat, Sabah.


Quantum Solar Park

Notable SRI Sukuk

Issuer Quantum Solar Park (Semenanjung) Sdn Bhd

Issue Size RM1 billion

Issuance Date 6 October 2017

Profit Rate 4.86% - 6.16%

Tenure 18 years

Structure Murabahah via Tawarruq (investment via an Agent)



Construction three current solar photovoltaic (PV) power plants concurrently, one each in Gurun (Kedah), Merchang (Terengganu) and Jasin (Melaka) owned by QSP Semenanjung’s three wholly-owned project companies.


PNB Merdeka Ventures

Notable SRI Sukuk

Issuer PNB Merdeka Ventures Sdn. Berhad (spv)

Issue Size RM2 billion

Issuance Date 29 December 2017

Profit Rate %

Tenure 15 years

Structure Murabahah via Tawarruq and Wakalah (investment via an Agent)



To finance the total cost relating to the Office Tower and Office Tower Infrastructure Works.


Islamic Fund and Wealth Management Blueprint – Three strategic thrusts

Strengthen Malaysia’s

positioning as a global hub for Islamic funds

Establish Malaysia as a regional centre

for Shariah-compliant

Sustainable and

Responsible Investment

Develop Malaysia as an

international provider of

Islamic wealth management

services


IFWM Blueprint: Thrust 2

Establish Malaysia as a regional centre

for Shariah-compliant

Sustainable and Responsible Investment

• Build upon Malaysia’s position as

Asia’s largest SRI market for its Islamic funds

• Leverage commonalities in the underlying principles between Islamic investing and SRI

• Enhance and strengthen the SRI ecosystem and its entire value chain

• Align with the national agenda on sustainability


SRI Fund Framework

• In December 2017, SC issued Guidelines on Sustainable and Responsible Investment (SRI) Funds and applicable to both conventional and Shariah-compliant funds.

• The purpose of the Guidelines is to facilitate and encourage greater growth of SRI funds in Malaysia.

• This Guidelines enable funds to be designated as SRI funds – thus widen the range of SRI products in the market and attract more investors in the SRI segment.

• The Guidelines applies to fund products within the SC’s oversight, e.g. unit trust funds, real estate investment trust funds, exchange-traded funds, and venture capital and private equity funds.


FTSE4GOOD Bursa Malaysia Index- Modus Operandi

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On June 2017, Malaysia demonstrates its innovation by offering Waqf shares through an IPO, believed to be the first for the global Islamic finance industry.

Larkin Sentral Property Berhad

Size of shares (mil)

850 million new shares worth RM85 million (US$19.86 million) to the wholesale and retail markets

Principal Adviser

Maybank Investment Bank Berhad

Share price RMO.10 each shares issued

Shariah status Endorsed as Shariah compliant by the Shariah Advisory Council of the Securities Commission Malaysia (SC)

Use of proceeds

Proceeds from issuance of the shares, will be utilised to finance the upgrading of Larkin Sentral Terminal. Under the scheme, share subscribers will endow the shares together with all its rights and entitlements to a trustee and the dividend from the waqf shares aimed to help small traders from the low-income and single-mother groups to pay reasonable rental rates for the market’s shop lots.

World’s First Waqf Shares Through An Initial Public Offering (IPO) - A landmark event for the global Islamic finance industry

Documents

SUSTAINABLE & RESPONSIBLE INVESTMENTS IN THE ISLAMIC CAPITAL MARKETS · 2018-02-26 · Securities Commission Malaysia 55 Supervision Surveillance Licensing Enforcement • Undertakes