The Securities Commission Malaysia (‘SC’) had on 30 June 2022 launched the Sustainable and Responsible Investment linked (‘SRI-linked’) Sukuk Framework (‘Framework’) to facilitate fundraising by companies in addressing sustainability concerns such as climate change or social agenda.
 
With the shift towards developing a climate-resilient future, companies particularly those in high-emitting industries are at a high risk of being phased out. The SRI-linked sukuk will enable those companies to transition into a low-carbon or net zero economy.

The Framework is an extension of the initiatives under the SRI Roadmap that was introduced in 2019 to broaden Sustainable and Responsible Investment (‘SRI’) products offerings. This initiative reflects the SC’s commitment to expand the reach of the Islamic Capital Market (‘ICM’) to the broader stakeholders of the economy and build an enabling ICM ecosystem for the sustainability agenda.
 
The SC recognises that there are significant opportunities for the market to attract a more diverse issuer and investor base and undertake a wide range of sustainable projects. The SC stated that as at 31 December 2021, the global sustainable bonds outstanding exceeded USD1 trillion with sustainability-linked bonds making up USD118.8 billion.
 
According to the SC’s Executive Chairman, Dato’ Seri Dr Awang Adek Hussin, the Framework will encourage greater mobilisation of private sector and issuers' financing towards sustainable development and meet the increasing global demand for sustainable financing. Dato’ Seri Dr Awang added that this is in line with the initiatives outlined in the Capital Market Masterplan 3 to reinforce Malaysia's value proposition as the regional centre for shariah-compliant SRI.

Under the Framework, the proceeds raised can be utilised for general purpose, subject to the issuer committing to future improvements for sustainability outcomes within a predefined timeline, which will be monitored using key performance indicators (‘KPIs’). The financial characteristic or structure of the SRI-linked sukuk may be varied based on the success or performance of the issuer in meeting its KPIs and sustainability goals. These KPIs must, among others: (a) be significant to the issuer’s sustainability and business strategy, (b) address relevant environmental, social or governance challenges in the issuer’s industry, and (c) be within the issuer’s control.
 
The Framework also provides greater transparency for investors by requiring issuers to appoint an external reviewer before issuance and an independent verifier post-issuance to assess compliance with the framework and issuer’s sustainability performance which can be tracked by investors. The external reviewer and verifier may be consultants or audit firms which have expertise in sustainability or environmental, social and governance (ESG) matters and may be a local person or be based outside of Malaysia,

Further details of the requirements for the SRI-linked sukuk are set out in Chapter 9 of Part 3 of the Guidelines on Unlisted Capital Market Products under the Lodge and Launch Framework and Chapter 23 of the Guidelines on Issuance of Corporate Bonds and Sukuk to Retail Investors.
 
A set of Frequently Asked Questions issued by the SC on the SRI-linked Framework can be accessed here.
 
Alert by Hafidah Aman Hashim (Partner) and Sharifah Shafika Alsagoff of the Islamic Finance Practice of Skrine.