The 4th March 2021 marked the launch of a unique and pioneering deep dive into the complexities of how best to support environmental, social and governance (ESG) and sustainable finance from a regulatory and legislative perspective — a comprehensive new initiative from Capital Markets Malaysia (CMM) in partnership with IFN. LAUREN MCAUGHTRY writes.
Bringing together some of the most senior and experienced regulators and standard-setters from markets around the world, the new report explores in granular detail the regulatory aspects of sustainable and ESG finance across multiple comparable jurisdictions, taking examples and insights from their unique experiences to develop a roadmap of best practice in emerging markets, assisting forward-looking regulators to develop their own supervisory regimes for sustainable finance.
Taking into account significant events, recent shifts in global policy and supervision, different behaviors in different markets and implications for investors, we discuss how these factors can influence the growth and development of the sustainable finance sector, and how linkages can be fostered between ESG and Islamic finance.
Sharifatul Hanizah Said Ali, the executive director of Islamic capital market development for Securities Commission Malaysia, is joined by a distinguished panel including Emmanuel Givanakis, deputy CEO of the Financial Services Authority at Abu Dhabi Global Market; Grace Hui, the managing director and head of green and sustainable finance in the Markets Division of Hong Kong Exchanges and Clearing; Satoshi Ikeda, the chief sustainable finance officer with the Japan Financial Services Agency; and Nikhil Rathi, CEO of the UK’s Financial Conduct Authority (FCA).
Joining these regulators are some of the most influential figures within global standard-setting for sustainable finance: including Will Martindale, speaking as the director of policy and research at the United Nations Principles for Responsible Investment; Stephen Nolan, the co-director of the UN Environment Program Enquiry; and Paul Tang, a member of the European Parliament.
“There are multiple drivers for policy reform,” comments Martindale. “First, policy reform can reward first movers — the investors that have integrated sustainability considerations in their investment process, sometimes at cost. Second, policy reform can create efficiencies — sustainable finance has evolved at speed with a wide degree of terminology and interpretation; policies can provide clarity. Finally, policy reform is necessary to close the sustainability gap — markets remain inconsistent with planetary boundaries.”
The new report explores these possibilities in detail, including comprehensive country-by-country case studies outlining in depth the individual policies, frameworks and legislative processes implemented at each level to address specific challenges along the journey.
“Finance has a key role to play in the transition to [a] cleaner and less carbon-intensive economy. Good regulation has an important role to play in this transition,” urges the FCA’s Rathi.
And the concept is urgently needed, with global standardization of the sector continuing to fall short, despite some strong progress in recent years within individual jurisdictions.
“So far, there has been a clear market failure to develop sound and universal standards in this field,” warns Tang. “Leaving this up to the market alone [will] not create politically optimal solutions.”
Covering a wide range of driving factors including forward-looking scenario analysis, data management and the role of rating agencies, the report concludes with an in-depth exploration of the capacity- and awareness-building of both SRI (sustainable and responsible investment)/ESG and Islamic finance in developing-country financial systems, where lack of financial inclusion and heightened environmental degradation offer significant opportunities for growth. Regulators can play a key role in this convergence, stresses Nolan.
“Regulators’ role in countries where lack of financial inclusion and heightened environmental degradation are a concern can be simultaneously promoting Islamic and sustainable finance,” Nolan comments. “A significant sustainable finance skills gap exists in financial markets. Overcoming it requires effort from governments, industry, educational systems and financial centers.”
Addressing this skills gap is one of the single biggest steps that can be supported by regulators to encourage development. Sharifatul emphasizes that “the availability of a large and continually renewed skilled and educated workforce is critical in the development of an enabling SRI ecosystem that enhances the performance and competitiveness of this market segment”.
To learn more, and to access the wealth of insights contributed by our expert contributors, download the full report here.