Is Islamic Finance a Socially Responsible

Finance?

RAFE HANEEF

CEOCIMB Islamic

16 November 2016

Contents

Section 1

Integrating Islamic Finance and Sustainability

Section 2

SRI Sukuk

Case Study: Khazanah SRI Sukuk

3

Section 1

Integrating Islamic Finance and Sustainability

4

Islamic Finance and Impact on Sustainability

Businesses can impact the environment, communities & society

• Banks need to work closely with its business customers to understand and manage these issues

• These issues pose a risk to our clients’ businesses, and therefore to our business

• Need to manage potential negative impact to the environment, communities, reputation, and potential punitive measures, e.g. fines

Sustainability policy and framework

• Business customers within sensitive sectors must apply consistent standards of international good practice, going beyond international laws and agreements, e.g. chemicals, forestry, mining & metals, energy, freshwater , infrastructure, etc

Sustainability process implementation

• At outset of client relationship, check whether client is in compliance with

sustainability risk policy

• Implement monitoring process, similar to that of monitoring credit risk

• Support client to make necessary improvements to become compliant

Significant correlation between Islamic Finance and ESG philosophies

but current practices fall short of expectations

Integrating Islamic Finance and ESG

ESG refers to environmental, social and governance implications when extending financing

Environmental: climate change, pollution, protection of biodiversity and the protection of indigenous communities and endangered species;

Social: diversity, poverty, human rights, consumer protection, sin stock, animal welfare etc.;

Governance: corporate structure, employee welfare, executive compensation etc.

The UNPRI has issued a list of six principles as guidelines for investors/financiers to take into account in their investment/financing decision-making:

1. We will incorporate ESG issues into investment analysis and decision-making processes

2. We will be active owners and incorporate ESG issues into our ownership policies and practices

3. We will seek appropriate disclosure on ESG issues by the entities in which we invest

4. We will promote acceptance and implementation of the Principles within the investment industry

5. We will work together to enhance our effectiveness in implementing the Principles

6. We will each report on our activities and progress towards implementing the Principles

Banks’ Integral Role and Ambit of Influence

6

IFIs

Adopting ESG Policies

Tighter global

regulation (EIA)

Customer awareness

Renewable energy

investments

Climate change

adaptation

Changing risk profiling

and assessment

NGOs

Increased consumer

awareness of sustainable

life-style, ethical finance,

environmentally

conscience consumerism,

sustainable capitalism

Mounting pressure on Governments

from international organizations and

NGOs to set targets and move towards

greener economies

Evolving

international

standards for risk

management that

incorporate E&S

risks (EPIII

launched in 2013)

CO2 emissions will

eventually be

priced (Guardian) Studies have shown that banks are

vital players in the climate change

adaptation and mitigation efforts,

particularly influencing SME

behaviour

Reducing global GHG

emissions necessitated the

need for infrastructure &

renewable energy project

which require large

investments

Independent organisations like

BankTrack are mounting pressure

on banks to improve their negative

E&S impact

There are a number of

organisations and NGOs

that work towards

creating a unified

approach to what has

become an area of huge

growth, including:

- UN Principles for

Responsible

Investment

- World Business Council

for Sustainable

Development

- UNEP Finance Initiative

- The World Bank’s IFC

- Global Reporting

Initiative

7

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60 70 80 90 100

En

vir

on

me

nta

l P

erf

orm

an

ce

In

de

x

(EP

I)

Regulatory Quality (RQ)

Regulator Quality & EPI for EPFI Countries

EPFI

Non-EPFI

Source: Sultan, H (2013): Sustainable lending in international banking markets

Influence the creation of

demand:

• Tax incentives for

companies who

measure their impact

• Reduced capital

requirements for FI that

take into account

environmental risk

• Mandatory reporting of

environmental footprint

(CO2, water, waste etc.)

Align with other global

practices and initiatives

(ESG, EP, SRI etc.)

Sharing of best practices

(e.g. EU legislation and

approach and China’s

greening of the financial

system initiatives)

A recent research concluded that correlation exists between the quality of regulation and environmental performance index of any country, resulting in, for example, higher adoption of EP

Regulators can assist managing perception of higher costs and risks linked with incorporating environmental aspects in financial decision making

Recently Malaysia saw the launch of two initiatives:

Securities Commission in issued framework for SRI Sukuk in August 2014

Bursa Malaysia has launched an ESG Index in December 2014

Regulators’ Role in Integrating Finance and ESG

8

2014: Securities Commission introduced SRI Sukuk framework to finance various sustainable

and responsible investment initiatives

2014: ESG index launched: FTSE4Good Bursa Malaysia Index, which selects from top 200

Malaysia stocks in the FTSE Bursa Malaysia EMAS Index

2015: Valuecap Sdn Bhd allocated RM1 billion to invest in companies that scored high on

ESG Index – the Malaysian ESG Opportunity Fund

2015: Bursa Malaysia launched Sustainability Framework and issued a Sustainable Reporting

Guide and Toolkit.

2015: EPF began investing in ESG principles, initially with fixed income instruments, and then

migrated the standards to other asset classes.

2015: KWAP moved to adopt responsible investing. ESG principles formulated & outsourced

ESG mandate to External Fund Managers and set up one internally-managed ESG mandate

2016: EPF Chairman announced EPF’s ESG investments are also aligned with its Shariah

strategies. It will eventually dispose of its stake in British American Tobacco. It also does not

invest in gambling, alcohol or alcohol-related businesses.

ESG Developments and Initiatives in Malaysia

9

Section 2

Socially Responsible Investing (SRI) Sukuk

Case Study: Khazanah SRI Sukuk

10

Malaysia Sustainable and Responsible Investment (SRI) Sukuk Framework launched 28 August 2014

Objective: Facilitate financing of sustainable and responsible investment initiatives

• Meet demand of retail and sophisticated investors for access to a wider range of investment products and facilitate greater participation in the sukuk market

• Growing concerns over environmental and social impact of business and greater demand for stronger governance and ethics from businesses

• Facilitate the creation of an eco-system conducive for SRI investors and issuers

• An extension of the existing sukuk framework; therefore all other requirements in the Guidelines on Sukuk continue to apply

Additional areas addressed in SRI sukuk framework

• Utilisation of proceeds

• Eligible SRI projects

• Disclosure requirement

• Appointment of independent expert

• Reporting requirement

Source: Securities Commission Malaysia

11

Projects that can be deemed an ‘Eligible SRI Project’

Natural Resources Renewable Energy / Energy Efficiency

Community and EconomicDevelopment

Waqf Property / Assets

Water infrastructure, treatment and recycling

New or existing renewable energy (solar, wind, hydro, biomass, geothermal and tidal)

Public hospital / medical services

Development of waqf properties / assets

Sustainable forestry or agriculture

Efficient power generation and transmission systems

Public educationalservices

Remediation and redevelopment of polluted or contaminated sites

Energy efficiency which results in reduction of greenhouse gas emissions or energy consumption per unit output

Community services

Biodiversity conservation Urban revitalisation

Sustainable land use Sustainable buildingprojects

Sustainable waste management

Affordable housing

Source: Securities Commission Malaysia

12

SRI Sukuk Disclosure Requirements

Prospectus for SRI sukuk must include:

• Details of the Eligible SRI project and, to the extent possible, impact objectives from the Eligible SRI project

• Statement that the issuer has complied with the relevant environmental, social and governance standards or recognised best practices relating to the Eligible SRI project.

• Independent expert must issue a report on the Eligible SRI project and such report must be included in in the prospectus

Annual reporting, via newsletters, website updates, annual report or any other communication channels, to sukukholders on the following:

• Original amount earmarked for the Eligible SRI project

• Amount utilised for the Eligible SRI project

• The unutilised amount and where such unutilised amount is placed or invested pending utilisation, and

• Where feasible and to the extent possible, the impact objectives from the Eligible SRI project

Source: Securities Commission Malaysia

13

ISSUER

OBLIGOR Khazanah Nasional Berhad (“Khazanah”)

Ihsan Sukuk Berhad (“Ihsan”), a special purpose vehicle initiated by Khazanah

PRINCIPAL ADVISER/ LEAD ARRANGER

CIMB Investment Bank Berhad (“CIMB”)

JOINT SHARIAH ADVISERS CIMB Islamic Bank Berhad and Amanie Advisors Sdn Bhd

FACILITYRM1.0 billion in nominal value Sukuk programme established under the “Sustainable andResponsible Investment Sukuk” framework (“Sukuk Programme”)

FACILITY TENURE

OFFERING SIZE TBD

Twenty five (25) years from the date of the first issuance

OFFERING TENURE

ISSUE PRICE 100%

Seven (7) years

PERIODIC DISTRIBUTION PAYMENT FREQUENCY

RATING Initial rating of AAA(s) by RAM Rating Services Berhad

Annual basis

ISLAMIC PRINCIPLE

USE OF PROCEEDSIhsan: To purchase the Sukuk InvestmentsKhazanah: To fund Yayasan AMIR’s Trust Schools Programme for 2015

Wakalah Bi Al-Istithmar

GOVERNING LAW Laws of Malaysia

Case Study: Khazanah SRI SukukSummary Terms and Conditions of the Offering

14

KEY PERFORMANCE INDICATORS (“KPIs”)

(i) A minimum of twenty (20) schools are selected under Yayasan AMIR’s TrustSchools Programme for a five (5)-year intervention period (the “5-YearIntervention Period”) during the term of the First Sukuk Ihsan (“IdentifiedSchools”);

(ii) At least fifty per cent. (50%) of the teachers of the Identified Schools are ratedat the Establishing level or above in their observations after the end of theirrespective Identified Schools’ 5-Year Intervention Period; and

(iii) At least fifty per cent. (50%) of the senior leadership of the Identified Schoolsare rated at the Establishing level or above in their observations after the endof their respective Identified Schools’ 5-Year Intervention Period.

SUKUKHOLDERS OPTION TO WAIVE

The Sukukholders may, at their option, waive their rights, benefits andentitlements to the Periodic Distributions (including accrued but unpaid PeriodicDistribution Amount (if any)) and the nominal amount payable under the Sukuk tobe issued pursuant to the Sukuk Programme (“Sukuk Ihsan”) (in whole and not inpart), by selling to Khazanah their Sukukholdings in the Sukuk Ihsan for a nominalconsideration of RM1.00 (“Option to Waive”) in accordance with the terms of theSukuk Ihsan.

Case Study: Khazanah SRI SukukSummary Terms and Conditions of the Offering (Cont’d)

Malaysia Deal of the Year (2016)

Deal of The Year (2016)

Best Islamic Finance Advocacy Award 2015

Most Outstanding Islamic Finance Product 2015

Social Impact Deal of the year (2016)

Most Innovative Deal of the Year (2016)

15

Khazanah(Investment

Wakeel/Obligor)

Sukukholders

Sukuk Investments(Tangible Assets & Commodity

Murabahah Investment)

Issue Sukuk Ihsan

Sukuk ProceedsAppoint Khazanah asInvestment Wakeel to invest the

Sukuk Proceeds

2. Invest into & manage Sukuk Investment

3. Periodic Distributions

4. Purchase Undertaking(Exercise Price)

Period Distributions

CIMB Islamic Trustee Berhad(Sukuk Trustee)

4. Dissolution Distribution Amount

Appoint Ihsan as Wakeel

2

4 4

1a

1c

1d

3

3

1b

Ihsan(Wakeel/

Issuer)

Case Study: Khazanah SRI Sukuk Structure

16

Should we not move beyond what is legal to what is right?

BENEFICIAL

(TAYYAB)

LEGAL

(HALAL)

Award-winning Islamic finance franchise

The World Islamic Capital Markets Excellence Award (2007)

Best Innovation in Islamic Finance (2015)

Best Islamic Bank in Asia (2005, 2006-2013)

Best Islamic Bank in Malaysia (2012, 2013)

Best Sukuk House (2008) Islamic Finance Deal of the Year

(2005, 2011) Best Sukuk Deal (2009, 2010) Best Provider of Islamic Financial

Services in Malaysia (2004) Best Domestic Market Sukuk House

(2003) Most Innovative Deal (2013) Best Project Finance Deal (2013)

Islamic Fund House of the Year (Malaysia) (2007, 2008)

Best DCM House Malaysia (2014-2015)

Best Investment Grade Bond (2015) Best Islamic Financing (2006-2008,

2010, 2011) Best Islamic Financing Deal (2008,

2012, 2014) Best Islamic Finance House (2006-

2009, 2011, 2012, 2014) Best Project Financing (2014)

Asian Banker Achievement Award for Islamic Finance (2009, 2010)

Sukuk House of the Year, Asia Pacific (2012-2016) Sukuk House of the Year, Malaysia (2014-2016) Best Islamic Investment Bank /House in Asia Pacific

(2010, 2013, 2015) Sukuk House of the Year, Indonesia (2016) Best Sovereign Sukuk Deal (2014, 2015, 2016) Best Islamic Investment Bank in Malaysia (2015) Best Sovereign Sukuk – Highly Commended (2016) Best Deals in Hong Kong, Indonesia, Japan, Malaysia

and United Kingdom (2015) Best Equity-Linked Deal (2015) Best Sukuk (2016) Best Corporate Sukuk Deal (2012, 2013, 2015) Islamic Deal of the Year (2014) Islamic Deal of the Year (2012, 2013) Best Quasi-Sovereign Sukuk (2015, 2016) Best New Sukuk (2015) Best Sukuk for Social Good (2015) Best REIT Sukuk (2015) Best Corporate Hybrid Sukuk/Best Local Currency

Sukuk (2015, 2016) Best Corporate Hybrid Sukuk – Highly Commended

(2015) Best Islamic Project Finance Deal (Malaysia) (2009,

2011, 2013, 2015) Best Islamic Deal, Malaysia Deal (2012-2014) Most Innovative Deal / Best Islamic Local Currency

Deal (2012-2014) Best Islamic Equity Linked Deal (2014) Islamic Bank of the Year (2010, 2012, 2013) Best Islamic Bank of the Year Country Awards (2010,

2012, 2013) Best Quasi-Sovereign Sukuk/Best Islamic Equity-

Linked Deal (2013) Best Islamic Deal, Bahrain (2013) Best Islamic Investment Bank in Asia (2012) Best Islamic Restructuring Deal (2012) Highly Commended Islamic Finance Deal - Malaysia

Deal (2010, 2011)

Best Islamic Bank in Malaysia (2007, 2008, 2010, 2013, 2014)

Deal of the Year (2014, 2015) Malaysia Deal of the Year (2009, 2012-

2015) Most Innovative Deal of the Year

(2013, 2015) Social Impact Deal of the Year

(2014, 2015) Perpetual Deal of the Year (2013, 2015) Infrastructure Deal of the Year

(2009, 2015) Project Finance Deal of the Year (2009, 2015) Murabahah Deal of the Year (2014) Sovereign Deal of the Year (2009-2011,

2014) Indonesia Deal of the Year (2010, 2014) UK Deal of the Year (2014) Emerging Asia Deal of the Year (2014) Sukuk Deal of the Year (2014) Real Estate Deal of the Year (2014) Hybrid Deal of the Year (2014) Best Overall Islamic Bank 1st Place (2009,

2010), 2nd Place (2008), 3rd Place (2007) Most Innovative Islamic Bank (2009-

2011) Musharakah Deal of the Year (2013) Tawarruq Deal of the Year (2010) Ijarah Deal of the Year (2010, 2011) Cross-Border Deal of the Year (2010-

2012) Turkey Deal of the Year (2015)

Best Islamic Bank in Malaysia and Asia (2008-2010,2015)

Best Sukuk Bank (2010, 2015)

Most Innovative Deal/Innovative Islamic Deal of the Year in South-East Asia (2010, 2011, 2013-2015)

Best Deal of the Year in Southeast Asia (2015)

Best Islamic REIT Deal of the Year in Southeast Asia (2014)

Special Marquee Awards: Best Islamic Finance Bank in South-East Asia (2010, 2012-2014)

Best Islamic Finance Deal of the Year in South-East Asia (2007-2013)

Best Islamic Finance House (Malaysia) (2008-2010, 2014)

Islamic Finance Deal of the Year (2009, 2010, 2013-2015)

Inaugural Lead Manager Award for Foreign Currency Programme(2015)

World’s 1st Yen Sukuk (2014) Worlds’s 1st Rated Perpetual

Subordinated Sukuk (2014) Top Lead Manager for Corporate

Sukuk (2006-2008, 2013) Award of Distinction Blueprint

Awards: World's first Islamic residential mortgage-backed securities deal (2006)

No. 1 Lead Manager Award (Islamic) by Programme Value (1990-2002, 2004, 2006-2009)

No.1 Lead Manager Award (Islamic) by Number of Issues (1990-2002, 2004, 2006-2009, 2013, 2014)

Innovation in Islamic Finance (2013)

Best Domestic Debt House in Malaysia (2015)

Best Regional Islamic Bank in Asia (2010-2013)

Best Islamic Bank in Malaysia (2010-2013)

Asia’s Islamic Deal of the Year (2011, 2013, 2015)

Most Innovative Bank for Islamic Finance (2012, 2015)

Global and Asia Pacific Islamic Bank of the Year (2013)

Islamic Finance Deal of the Year (Asia Pacific) (2011, 2014)

Islamic Finance Deal of the Year (America) (2014)

Islamic Finance Deal of the Year Europe (2014)

Highly Commended Islamic Finance Deal (2009)

Global Islamic Investment Bank of the Year (2006)

Real Estate Finance Deal of the Year in Asia Pacific (2014)

CIMB Islamic: Award-winning Islamic Finance Franchise

Thank You