Small and medium-sized enterprises (SMEs) play a significant role in influencing the future of the domestic and global economy. In Malaysia, SMEs are the backbone of the economy, making up over 97% of all businesses, contributing over 38% to GDP, and employing 48.2% of the workforce. These impressive statistics demonstrate that SMEs are a crucial driver of our nation’s sustainability agenda.
Some SMEs are integral parts of supply chains, which has led to increasing pressure for them to integrate environmental, social, and governance (ESG) considerations into their business practices.
There is a growing demand for SMEs to demonstrate greater environmental stewardship and social responsibility driven by the expectations of customers and suppliers. The business case for sustainable operations has never been stronger and will continue to intensify over time.
The role of SMEs has gained greater significance since our Prime Minister’s recent announcement of the Ekonomi Madani, which calls for the internationalization of SMEs. To achieve this, integrating ESG into their business practices will be non-negotiable.
The Malaysian capital market serves as a crucial platform for facilitating SMEs’ transition towards implementing sustainable practices.
The Securities Commission Malaysia (SC) set the stage for ESG development when Sustainable and Responsible Investment (SRI) was identified as a key growth strategy in the SC’s Capital Market Masterplan 2 (CMP2) launched in 2011.
This move made sense since Malaysia is a global leader in Islamic finance, which shares common values with sustainability. Therefore, developing the SRI segment was a natural progression for the country.
Building upon the foundation laid by the CMP2, the strategic initiatives under the Capital Market Masterplan 3 introduced in 2021 include facilitating greater fund flows to all businesses of various sizes and growth stages, as well as enhancing capital mobilization for businesses that create value for economic stakeholders.
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The market response has been positive. As of 2022, SRI sukuk issuances have amounted to RM18.9bil since the introduction of the SRI Sukuk Framework in 2014. There have also been more SRI sukuk issuances this year related to renewable energy projects and green building. The introduction of the Guidelines on SRI Funds in 2017 has expanded the Malaysian SRI funds sector to RM7.1bil Net Asset Value (NAV) with 58 SRI funds as of December 2022.
Last year, the SC launched the SRI-Linked Sukuk Framework to assist companies, especially in hard-to-abate sectors, in raising funds through a sukuk structure with features related to sustainability commitments.
These initiatives create a conducive environment for SMEs to transition and build upon the previous work done by the SC under its “5i strategy.” However, for SMEs to sync with these efforts, it will require a multi-stakeholder approach and ecosystem-wide enablers, from increasing awareness and understanding of sustainability risks and opportunities to providing access to financing and supporting capacity building.
Innovations in modern financing
In Malaysia, green and social projects are typically funded through bank loans, bonds, or sukuk. However, many SMEs lack the capacity to raise financing through these channels.
Modern financing solutions like equity crowdfunding (ECF) and peer-to-peer (P2P) financing platforms have the potential to address this issue. These innovative avenues can connect SMEs with more investors by offering cheaper, faster, and more convenient financing options.
Today, MSMEs are increasingly utilizing digital platforms to secure capital and financing. Up until June 2023, ECF and P2P financing have helped 9,415 MSMEs raise around RM5.4bil.Over the years, we have witnessed MSMEs involved in green businesses successfully raising funds on ECF platforms.
Capacity building is crucial
Most SMEs believe that strengthening ESG practices can enhance business potential and long-term value. However, only 28% of SMEs have adopted some elements of ESG practices. More efforts are needed to raise awareness among SMEs.
Capacity building is essential to achieve this goal. One of the SC’s actions in this regard is its collaboration with Capital Markets Malaysia (CMM) on the NaviGate series initiated in 2021. This initiative aims to promote greater awareness of sustainable capital market financing opportunities and foster enhanced business-capital connectivity, supporting economic growth and prosperity. Through the NaviGate series and other events, the SC and CMM have successfully engaged with over 1,000 SMEs.
The SC has also incorporated sustainability into its InvestSmart events, which promote investment awareness and literacy. The SME Focus Group under the Joint Committee on Climate Change (JC3) is another example of the collective commitment to raise SME awareness and encourage sustainability action.
Empowering SMEs: Driving sustainable growth through capital markets
The ecosystem is in place and continuously strengthened and refined to support our aspirations for a just and sustainable transition. No market or business can escape the global shift towards sustainable business, consumption, and growth.
SMEs’ participation in value chains, access to finance, and competitiveness will increasingly depend on their ability to measure, report, and improve their sustainability performance.
Credit: The Star : News Feed
