Environmental considerations are playing a bigger role in investors’ decisions
THE need for companies to adopt sustainable practices is becoming more important as investors are increasingly starting to consider this factor in their decisions.
While previously making profits were of optimal priority, investors are looking for more than just that. While profits are still important, it is equally or even more so important to ensure that businesses are run in a sustainable and responsible manner.
“Especially with millennials, there is a need to think about things that are much longer term. They want their investments to be invested in companies that will be around in the long term, companies that are responding to the changing world around us,” says United Nations Principles of Responsible Investing (PRI) managing director Fiona Reynolds.
She adds that the common misconception with businesses that adopt sustainable and responsible practices means giving up returns for social good. “People think that it’s about philanthropy. But instead it is about having good risk management processes in place. How do I think about risk in a holistic way. A company that is sustainable will be around much longer than those that aren’t.
“It’s all really about business excellence.
“How do we invest in excellent companies that have got the best processes in place and the best people working for them,” she says.
A recent survey conducted by the World Federation of Exchanges (WFE) showed that there is an increasing demand by investors for companies that apply sustainability practices and policies.
Out of 56 respondents to the survey, 39% said they received ESG-related queries from investors, of which 10 said that such inquiries are on the increase. This evidently shows that ESG concerns are becoming more widespread among global capital market participants.
WFE members collectively have a total global market capitalisation of US$64.7 trillion, with a total trading value of US$60 trillion.
WFE chief executive officer Nandini Sukumar said at the Bursa Malaysia ‘Global Sustainability & Impact Investing’ Forum 2015 that this trend is driven by climate change, the rising awareness of economic instability and widespread concerns over poverty, gender and opportunity issues.
Lafarge Malaysia Bhd chief executive officer Bradley Mulroney, one of the panelists during the forum, stressed that businesses have a responsibility to four stakeholders - shareholders, customers, employees and the community in which it operates in. “The point I have made repeatedly is that we work for Lafarge but we are citizens of the world. I want to make sure we are contributing to making the world a better place,” he says.
Moving forward, it is asset owners, and investors that will be the ones pushing businesses to apply sustainable practices and to be more responsible.
“It really has to be the asset owners, the pension funds. They are the ones that drive change. They are fundamental to us and responsible investment. The asset owners own the assets, the pension funds and the manager that manages for them are going to be invested in a way they are mandated to. If you don’t mandate them to do it, they’re not going to.
“They are absolutely key. You cannot get responsible investment happening if you don’t have the pension funds buy into it and you don’t have them driving it. They have to drive it. And the sovereign wealth funds,” she says.
Notably, the Employees Provident Fund (EPF) said late last year that it would start investing in ESG principles from this year. It said it would start implementing these principles on fixed-income instruments, and then later apply these standards to other asset classes.
It is the Government’s intention to promote Malaysia as a market for Socially Responsible Investment, as most recently seen in Bursa Malaysia’s inaugural ‘Global Sustainability & Impact Investing’ Forum 2015 held earlier this week.
VCAP Asset Managers Sdn Bhd, which is a unit of Government-mandated fund Valuecap Sdn Bhd, launched the first ESG fund earlier in the month. The fund is an open-ended equity fund benchmarked against the recently launched FTSE4Good Bursa Malaysia Index.
There are currently 25 constituent companies under the index including Lafarge, Malayan Banking Bhd, Astro Malaysia Bhd, Telekom Malaysia, and DiGi.Com Bhd. The companies under the index were chosen based on their approach in addressing ESG risks from the top-200 companies in the FTSE Bursa Malaysia Emas Index.
With the EPF taking a step in ESG investments, this could mean that companies not applying sustainable and responsible practices could lose out on having the EPF coming in to invest.
Making business sense
Running a business responsibly does not necessarily equate to forgoing profits, says Mulroney. “A vast majority of sustainable practices make perfect business sense. If there are aspects of it that makes you non-competitive, then you have to challenge it,” he says.
Essentially, sustainability is about running the business for the long term both effectively and efficiently. “And this is exactly in line with how you would run a business,” he says.
For Lafarge, this means having to think of solutions that it could offer to the real estate sector. “If you’re a commercial developer, you have to think about your tenants for the next 20 to 30 years. Take for example, if your clients were Fortune 500 companies, they would insist that any of their offices would have to be an energy-efficient building. Our job is to provide building solutions to the developer so that they can meet their clients’ needs.
“It’s not about compromising on quality and profitability. It is understanding where the business will be five to ten years and even beyond that,” he says.
Lafarge has been in the ‘sustainability’ space for a while now, and recently released its first sustainability report. Educating investors as well as employees of the company is extremely important, he adds.
The company has been working on reducing its carbon footprint by using alternative fuels such as biomass and other wastes as alternative fuels to reduce the use of natural resources.
Mulroney says in 2014, Lafarge saved a million tonnes in CO2 emissions.
“Our investors understand that we are here for the long term. And as a custodian we have a responsibility to hand it over in very, very good conditions. We have to make the team think in a more holistic way. It is very easy to get trapped in being penny wise and pound foolish. They have to think more of the mid to long term. This entails making sure whether everybody as part of the business are also thinking about the future and the impact business decisions on that,” Mulroney says.
Educating businesses and investors
Although responsible investing could still be a nascent idea to many, Malaysia is leading the way in the Asean region, says Reynolds.
“On the stock exchange side, some of the developing markets have been more receptive and are more advanced that the more traditional exchanges and are leading the world, and Bursa Malaysia is doing that,” she says, referring to the exchange’s ESG and sustainable practices initiatives.
The PRI has 1,400 signatories including institutional investors and pension funds. It aims to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices.
Still, people need to be educated about responsible investments, and this could be done in the next five years. “There is still a lot of confusion on responsible investing and sustainable practices, and this confusion is not limited to Asia,” she says.
Mulroney says investors should be given time to digest and understand it.
“We have to allow investors time to digest and understand it. There needs to be a maturity of the index. It is measured on the basis of open information.
“What we need to see, is as people better understand the index, and once that is also understood from the investor community point of view, then only you will see traction. It is still very early days in Malaysia,” he says.