FOR years, investment decisions have been made with one eye on future prospects.
If the company is on solid footing, has a solid business that is growing and is a paymaster of consistent dividends, then this criteria would come in handy for investors when deciding to put their money on buying the stocks or bonds of such companies.
But the world has changed. Corporate responsibility has gained greater prominence, as investors say companies too must be good stewards of business and do more for society than just focus on making profits. Good corporate citizenship is becoming a must.
The evolution has, thus, led to the subject of Environmental, Social and Governance (ESG) principles becoming a lot more important. Pension funds and big money are increasingly stressing that their money should be invested in companies that just don’t only deliver longer-term shareholder value, but also do so in a proper way.
When the Employees Provident Fund (EPF) announced its third-quarter investment numbers this week, it said it would start investing in ESG principles from next year.
The EPF says it would start implementing ESG principles on fixed-income instruments, subsequently migrating these standards to other asset classes.
The Government wants to promote Malaysia as a market for Socially Responsible Investment. In the tabling of Budget 2015, it said among the measures which would be implemented was introducing the ESG to raise the profile of listed companies, which had high socially responsible practices.
It said the Securities Commission would introduce the Sustainable and Responsible Investment (SRI) Sukuk framework to finance various sustainable and responsible investment initiatives.
“In addition, the Government will establish an SRI fund to be invested in listed companies which demonstrate high accountability, transparency and sustainability, including inclusiveness in diversity encompassing gender, age and ethnicity,” said Prime Minister Datuk Seri Najib Tun Razak when delivering his budget speech.
For a start, he said Valuecap Sdn Bhd will allocate RM1bil to invest in companies that scored high on the ESG Index.
The crux is, just what would the ESG principles for funds such as Valuecap and the EPF be?
The definition of ESG is broad. Most agree that investing in companies that make weapons is a big no-no. For others, they include shunning investing in tobacco and sin companies, or companies with bad labour practices.
As equities would be an asset class the EPF would start using ESG principles to invest in, will it then sell down its stake in tobacco firm British American Tobacco (M) Bhd (BAT)? The EPF owns a 7.81% stake in BAT.
Will the EPF then adhere to conditions laid out by the Roundtable on Sustainable Palm Oil when investing in plantation stocks when sticking to its ESG criteria? Reducing the carbon footprint is a big part of ESG principles.
Such questions need answers, as the implications on its portfolio can be telling. The EPF is the largest fund in Malaysia, and as its investments in equities grow, deciding to invest in ESG principles can also influence the nature of the operations of the companies it invests in.
Most companies would want the EPF to be a cornerstone investor in their list of institutional shareholders. How would they react if the EPF starts to dictate ESG terms to management?
Then, there is the issue of returns. Judging from the MSCI indices for both the non-ESG and ESG, there is a gap in terms of performance. The ESG index underperforms the non-ESG index. Hence, how would its members feel if their returns were sacrificed to make Malaysia a better place? Maybe things would change in the future, but is the cost of implementing the ESG principles justifed at the expense of better returns?
With its adoption of ESG principles on investing in bonds expected to start next year, the EPF should make things clear as to just what these principles are. In that way, companies would know what they need to change and improve on if they want the EPF to be an investor.
Members too deserve to know just what the impact would be on their returns when the EPF starts adopting the ESG principles.
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