Malaysia revises its Guidelines on Sustainable and Responsible Investment Funds

Global Growth of Sustainable Finance

The World Investment Report 2022, released by the United Nations Conference on Trade and Development (“UNCTAD”), has shown strong growth in sustainable finance in global capital markets. UNCTAD estimates that the value of sustainability-themed investment products in global financial markets amounted to USD5.2 trillion in 2021, up 63% from 2020. These products include (i) sustainable funds and (ii) sustainable bonds, including green, social and mixed-sustainability bonds. The number of sustainable funds reached 5,932 by the end of 2021, up 61% from 2020. The total assets under management (AUM) of these funds reached a record USD2.7 trillion, an increase of 53% from the previous year (figure 1). [1]
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Strong growth in sustainable finance is primarily driven by stock exchanges and other market operators, by integrating ESG considerations in market infrastructure. The regional exchanges across the ASEAN region, through the ASEAN Capital Markets Forum [3] (“ACMF”), have also collaborated to push the sustainable finance agenda across the region.

National initiatives under the SRI Roadmap

On a national level, the Securities Commission Malaysia (“SC”) has undertaken various initiatives to support the development of a holistic sustainable and responsible investment ecosystem under the Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap). These include the release of the Sustainable and Responsible Investment-linked (SRI-linked) Sukuk Framework [4] and the expansion of the SRI Sukuk and Bond Grant Scheme to include issuances under the SRI-Linked Sukuk Framework and the ASEAN Sustainability-Linked Bond Standards. [5]

Revised Guidelines on Sustainable and Responsible Investment Funds

On 17 February 2023 the SC revised its Guidelines on Sustainable and Responsible Investment Funds (“the Guidelines”) following the introduction of the ASEAN Sustainable and Responsible Fund Standards. This is timely given that a total of 58 Sustainable and Responsible Investment Funds with RM7.05 billion net asset value were offered in Malaysia as at 31 December 2022. [6]

The revised Guidelines has been rearranged and consists of three parts, namely:

• Part A: Sustainable and Responsible Investment (“SRI”) Fund;
• Part B: ASEAN Sustainable and Responsible Fund Standards [7] (“ASEAN SRF Standards”); and
• Part C: Application to Qualify as an SRI Fund and an ASEAN Sustainable and Responsible Fund.

Lastly, it is worth noting that a tax exemption on the statutory income derived from fund management services of managing a fund in accordance with the Guidelines is made available under the Income Tax (Exemption) (No.5) Order 2018 and Income Tax (Exemption) (No.5) Order 2021. [19] Chapter 5 of the Guidelines set out the qualifying conditions for a tax exemption in relation to managing an SRI Fund.

Commentary

The revision to the Guidelines results in the expansion of the pool of funds that may be eligible to qualify as an SRI Fund. Further, the standardisation of the ASEAN SRF Standards would also enable fund managers to tap into a regional pool of investors (not just at national level). With this widening pool of sustainable funds on a regional level, we are hopeful that this would meet the increasing demands for sustainable funds from investors in general. This in turn would lead to a stronger growth in the sustainable finance products space in the equity capital market, hopefully matching the strong growth of sustainable bonds.

This article was authored by Andreanna Ten. If you have any questions or require any additional information, please contact the Zaid Ibrahim & Co. (in association with KPMG Law) partner you usually deal with.

This alert is for general information only and is not a substitute for legal advice.

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[1] Please see UNCTAD, “Chapter IV Capital Markets and Sustainable Finance” in World Investment Report 2022 (9 June 2022) at <https://unctad.org/system/files/official-document/wir2022_ch04_en.pdf>for further details.

[2] Source: UNCTAD (based on Morningstar Data). UNCTAD, “Chapter IV Capital Markets and Sustainable Finance” in World Investment Report 2022 (9 June 2022) at<https://unctad.org/system/files/official-document/wir2022_ch04_en.pdf>.

[3] The ASEAN Capital Markets Forum (“ACMF”) is a forum which comprises capital market regulators from ASEAN countries whose primary task is to promote greater integration and connectivity of regional capital markets.

[4] Please refer to our article on the Introduction of Sustainable and Responsible Investment (SRI)-Linked Sukuk Framework.

[5] Please see Securities Commission Malaysia, ‘Driving Greater Growth in Sustainable and Responsible Investment - Enabling a More Relevant, Efficient and Diversified Market’ for further details.

[6] Securities Commission Malaysia, ‘Driving Greater Growth in Sustainable and Responsible Investment - Enabling a More Relevant, Efficient and Diversified Market’.

[7] The ASEAN SRF Standards aims to provide the minimum disclosure and reporting requirements that can be consistently applied to collective investment schemes (“CIS”) that seek to qualify under the ASEAN SRF Standards, considering the rise of CIS with ESG investment focus and the need for a comparable, uniform and transparent disclosure of information to mitigate the risk of greenwashing. Please see ASEAN Sustainable and Responsible Fund Standards for further details on the ASEAN SRF Standards.

[8] Paragraphs 3.01(a) and 3.03(b) of the Guidelines.

[9] Paragraphs 3.04 and 3.05 of the Guidelines.

[10] Such strategies include ESG integration, ethical and faith-based investing, impact investing, negative screening, positive screening, thematic investments, and any other ESG-related strategies, as may be authorised by the SC. Please see guidance to paragraph 3.08 of the Guidelines for further guidance on such strategies.

[11] Paragraph 3.08 of the Guidelines.

[12] Paragraph 3.09 of the Guidelines.

[13] Paragraphs 4.03 and 4.04 of the Guidelines.

[14] Paragraph 4.05 of the Guidelines.

[15] Paragraphs 4.06 and 4.07 of the Guidelines.

[16] Paragraphs 4.08 to 4.16 of the Guidelines.

[17] Paragraphs 4.17 to 4.20 of the Guidelines.

[18] Paragraph 7.07 of the Guidelines.

[19] Appendix I, the Guidelines.