Stimulate investments with green bonds

THE Malaysia’s 12th Plan (12MP) represents an ambitious and holistic commitment (so far) to put in place the structural conditions for the green economy and accelerate its growth as an integrated component fundamental to the nation’s economic and sustainable development. .

Take Chapter 7: “Improving Socio-Economic Development in Sabah and Sarawak”, for example. In the section “Optimizing regional economic corridors for integrated socio-economic development”, the 12MP undertakes to ensure that “[s]special tax and non-tax incentive regimes to attract investment [originating] by BIMP-EAGA [Brunei-Indonesia-Malaysia-Philippines – East Asean Growth Area] … will be explored, in particular programs that promote green growth and green infrastructure ”(p. 7-20).

At the same time, in the section “Improving the quality of life through the implementation of a green city action plan” (also in relation to Sabah and Sarawak), “… towns and villages keys will be identified for the inventory of greenhouse gas emissions and the assessment of climate resilience (pages 7-23).

Above all, “[a] a green finance mechanism will be put in place and innovative incentive programs will be introduced to promote investment in green infrastructure, including energy, transport and housing ”.

Strategy B6 in Chapter 7 talks about promoting green growth through a functioning and efficient green market and accelerating green initiatives by supporting the circular economy. Again, the 12MP is committed to ensuring and providing that “[e]economic instruments, environmentally motivated subsidies and existing green finance incentives [are] used to support companies in the greening of their activities ”.

Chapter 8: “Advancing Green Growth for Sustainability and Resilience” under Theme 3 (Advancing Sustainability) is the centerpiece of the green economy agenda under the 12MP. In turn, Theme 3 is conceptually driven by Game Changer VIII: “Embrace of the Circular Economy” and Game Changer IX: “Accelerating Adoption of Integrated Water Resources” (among others).

The strategies “described under Theme 3 will complement the strategies under Theme 1: Resetting the economy and Theme 2: Security, inclusiveness and well-being”.

The introduction to Chapter 8 states that “[i]In the twelfth plan, green growth will be enhanced to ensure sustainability and resilience. This will be undertaken by implementing a clean, green and resilient development program through the national approach… These efforts will be supported by public and private investments and appropriate green financing facilities ”(p. 8-2).

In an EMIR Research article, “The 12th Malaysian Plan and New Ways to Raise Funding Sources” (September 30), we highlighted two particular funding methods – through public-private partnership (PPP ) – namely, financing through tax increases and social impact. bonds (SIB).

Although originally intended to apply to social and socio-economic policies such as reducing re-offending (re-offending) of released convicts by offering mentoring, training and employment programs, SIBs are flexible in their design and objectives.

The use and deployment of SIB as a source of funding for the green and sustainable growth agenda should therefore be explored. As such, the SIB, which was first pioneered in the UK (Social Financing Ltd), can just as easily be referred to as green impact bonds (GIB) or simply green bonds (GB).

Basically, SIBs have three parties or stakeholders in the program. These are the State (public sector), the investor (private sector) and the supplier (private sector). The initial costs may be borne by the public sector “directly” (bilateral) or “indirectly” (multilateral).

And this is where the private sector (profit and non-profit, i.e. social enterprises) leads the design and delivery of planned public projects. Full payment will only be made once key performance indicators (KPIs) – mutually agreed upon by all parties or stakeholders – are met.

If directly (bilateral), the funds could come from the government “borrowing” from or rather, to be precise, the intermediation of the investment funds of Bank Negara, or from what would be a green investment bank, which could be modeled on that of the United Kingdom. (again the first of its kind in the world – and now known as the Green Investment Group).

Our green investment bank would be 100% owned by Bank Negara – the Ministry of Finance or the Ministry of Environment and Water, or both, holding “preferred shares”. The government raises funds by intervening between investors (Bank Negara, green investment bank) and service providers (private sector and social enterprises).

This is similar to the theory of “loanable funds” in traditional economics textbooks with respect to banks playing the conventional role in financial intermediation (of depositors ‘and borrowers’ funds), except that the theory is not everything. quite accurate and rather misplaced.

If “indirectly” (multilateral), government-related companies (GLC) and companies listed on Bursa Malaysia (which has its own strong green and sustainable development agenda as embodied in its Sustainability Reporting Guide, and willingness to be carbon neutral in 2022, and achieve net zero emissions by 2050 across its operations) can provide funding as investors (private sector or business) – again, the government playing the role of intermediary.

We should use our GLC to the maximum or the optimum in this regard. Special purpose vehicles or consortia, for example involving GLC with (other) listed companies, can also be incorporated as an alternative / option.

In the case of “direct” payments, the public sector will raise and intervene the funds by issuing GIB / GB to Bank Negara or the green investment bank. Here, the interest rate will be very low, that is, lower than the market rate. In turn, the payment will earn interest (to Bank Negara or Green Investment Bank) and will be recycled to the account (s) intended for (purchase) GIB / GB. Otherwise, the government can simply borrow at low interest from the green investment bank.

Regarding “indirect” payments, the process under “direct” payments can be extended to GLC and / or listed companies, which means that now the public sector can issue GIB / GB to Bank Negara or to the green investment bank to pay the GLC and / or listed companies.

If KPIs are met, final payments can, again, be made directly or indirectly. The KPI can range from the installation of green and renewable energy mechanisms for the transport and communication network of smart cities to river rehabilitation projects, etc.

Indirectly, the final payment can also take the form of a participation in the capital of the entities providing the services. A dedicated GLC can be formed, who can take part in future stock ownership plans where profits can then be reallocated as income to the government. In turn, the income generated can be recycled to pay back the Bank Negara or the Green Investment Bank. Or by bearing the initial costs of other GIB / GB projects.

Our GIB / GB can be a full-fledged model or further support in the development of a wider green bond market, as indicated by the Asean Green Bond Standards, Asean Social Bond Standards and Asean Sustainability Bond Standards – including the Securities Commission (SC) is a player and contributor. Other methods can be (re) configured during the design of GIB / GB.

Examples include peer-to-peer lending and finance companies – again with government as the intermediary and which can pay a higher interest rate and mobilized as a form of retail government bonds (i.e. an investment vehicle allowing members of the public to increase their personal savings or retirement returns) – analogous to the Sukuk Prihatin launched by former Prime Minister Tan Sri Muhyiddin Yassin. Finally, our EPF (Employees Provident Fund) can also be a leading investor for GIB / GB.

In the SC Capital Market Master Plan 3 on ‘Mobilizing Capital for Sustainable and Responsible Businesses’, green finance in Malaysia is already largely funded through bank loans, bonds / sukuk, including those issued in the part of its Sukuk Framework for Sustainability and Responsible Investment and ASEAN. Green Bond Standards and Venture Capital (p. 73).

The GIB / GB as proposed here – for the funding of green projects and programs under the 12MP – is intended to complement and complement the role and function of the state in driving the green agenda as a facilitator and co-investor.

Perhaps for the 12MP mid-term review, the implementation of GIB / GB can be explored (if launched earlier) or considered for deployment.

In the final analysis, GIB / GB are consistent with the 12MP “whole-of-nation” approach by intensifying “collaborative efforts and ensuring the complementarity of actions undertaken by stakeholders to address environmental issues” (p. 8-11).

Jason Loh Seong Wei is Head of Social, Legal and Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

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