How Cambodia’s Capital Market Can Support Sustainable Investments

Cambodia’s capital market has grown rapidly in recent years, asking participants and regulators an important question: How can they harness market power to promote environmental protection and socio-economic development?

One way to do this is to use financial instruments that take into account environmental, social and governance (ESG) objectives, such as green, social and sustainable bonds (GSS). The proceeds from these innovative debt securities are used to finance or refinance projects with positive environmental or social benefits.

Channeling savings into such investments can contribute to a green and resilient future for Cambodia, helping to achieve the 2022 priorities of the Association of Southeast Asian Nations (ASEAN), which is currently under the Presidency of Cambodia. It can strengthen the country’s resilience to climate change and strengthen micro, small and medium enterprises (MSMEs), in particular by supporting female entrepreneurship.

One of the main challenges in achieving this is that despite recent progress, Cambodia’s corporate bond market is still in its infancy. On the demand side, it lacks a solid and diverse base of domestic institutional investors. Although commercial banks have become major investors in this market, pension funds and insurance companies continue to hold cash in bank accounts.

Pension funds and insurance companies are typical investors in the long-term bond market, but the majority of pension and insurance premium income in Cambodia is in US dollars, making it more difficult for the country to develop a bond market in local currency.

On the supply side, bond issuers were drawn solely by the government’s tax incentive program. Current tax incentives will expire in January 2022, clouding the outlook for corporate bond issuance.

To mobilize private capital for sustainable investments, it is essential to tackle these issues and to continue to develop the overall capacity of the market. At the same time, however, policymakers can act to ensure that the market develops in a direction that supports investments aligned with ESG criteria. The following recommendations should be taken into account:

First, regulators should clarify that financial institutions and securities issuers are expected to integrate ESG considerations into their lending practices and business operations.

The National Bank of Cambodia’s membership in the Network of Central Banks and Supervisors for Greening the Financial System, as well as the efforts of the Securities and Exchange Regulator of Cambodia (SERC) to promote GSS bonds, are positive examples.

As chairman of the ASEAN Capital Markets Forum, a grouping of ASEAN securities regulators, the SERC is also expected to ensure that the development of the local GSS bond market is in line with regional initiatives. , such as the ASEAN Taxonomy for Sustainable Finance.

Second, the Non-Banking Financial Services Authority should encourage institutional investors, especially pension funds and insurance companies, to prioritize investments in GSS bonds. It should also encourage the mobilization of savings and private capital from a wider local investor base.

One way is to introduce new GSS-themed investment vehicles, such as mutual funds and other collective investment schemes, which would help retail investors access the bond market, ideally in local currency. via professional asset managers. As a result, retail investors with limited savings could invest in corporate bonds, including GSS bonds. This would increase demand while improving liquidity and market transparency.

Third, securities issuers, especially their boards and management teams, should recognize how their business operations can help solve ESG issues.

They should also be aware of the costs and potential risks associated with the negative environmental and social impacts of their operations.

For example, a company could install more energy efficient lighting in its office buildings, or it could prioritize local job creation, allowing workers to stay close to their families. Together, the actions of individual companies, including MSMEs, can have a significant impact. Banks can help by issuing GSS bonds to fund loans that MSMEs can use for ESG-compliant investments.

Fourth, capital market intermediaries in Cambodia need more training on GSS obligations from regulators, stock exchanges and development partners.

While these intermediaries can understand the bond market, they often lack experience with the principles and standards governing GSS obligations.

It is also essential to integrate sustainability into refresher courses for licensed intermediaries, as well as financial literacy courses for the general public. With a better ability to support issuance and external review, these intermediaries can contribute to a better functioning of the GSS bond market.

With the right policies and the strong support of stakeholders and development partners, regulators and participants can use the capital market to help achieve positive environmental and social outcomes, even for Cambodians who do not directly participate in the market. .

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