Creating value through ESG and sustainability


Investment strategy: The EPF headquarters in Kuala Lumpur. The fund has embarked on a journey to put in place adequate mitigation measures against climate change risks while capturing investment opportunities that arise as solutions to the climate crisis.

AT the Employees Provident Fund (EPF), it is our belief that aligning our investment activities with the broader interests of society would serve our objectives as a retirement savings fund that is driven by long-term, sustainable value creation for our stakeholders.

While the EPF has largely been an ethical investor in the past by screening out sectors that are deemed to be unethical, becoming a signatory to the United Nations-supported Principles of Responsible Investment in 2019 served as a catalyst for the EPF to gradually embed sustainability considerations into its investment analysis and decision-making processes.

In refining its investment approach, the EPF recognises that in addition to financial considerations, the environmental, social, and governance (ESG) factors are essential for making better informed and holistic investment decisions.

By incorporating ESG or sustainability into its investments, we can achieve the primary objectives of enhancing risk mitigation processes in addition to realising opportunities for value creation.

On environment, we are cognisant that climate change and environmental degradation can result in significant financial risks within corporate value chains, and consequently affect the value of EPF’s investments. With the impact of climate change well underway, we aim to align our investments amid the transition into a low-carbon future.

To further solidify our commitments to sustainability, two overarching sustainability targets have been pledged – one, to have a fully ESG Compliant Portfolio by 2030; and two, achieving a Climate Neutral Portfolio by 2050.

Investment strategy: A man printing out his statement at EPF headquarters in Kuala Lumpur. The EPF has embarked on a journey to put in place adequate mitigation measures against climate change risks while capturing investment opportunities that arise as solutions to the climate crisis.Investment strategy: A man printing out his statement at EPF headquarters in Kuala Lumpur. The EPF has embarked on a journey to put in place adequate mitigation measures against climate change risks while capturing investment opportunities that arise as solutions to the climate crisis.

Given the EPF’s position as a leading institutional investor in Malaysia, we believe that our sustainability ambitions and vision-driven corporate practices will influence and impact adjacent businesses, investee companies, external fund managers, and by extension, will benefit our members and have an impact on the wider sustainable ecosystem.

Conversations around participating nations’ commitments to a 1.5° world and net-zero initiatives are at its peak. While it has been years since the Paris Agreement, the world has renewed its climate ambitions in Glasgow this month.

Amid the backdrop of the Intergovernmental Panel on Climate Change’s (IPCC) “code red for humanity” report and the 26th United Nations Climate Change Conference (COP26), 151 countries had submitted or updated their Nationally Determined Contributions to slash their emissions by 2030.

Under the Paris Agreement’s five-year ratchet mechanism, countries including Malaysia have to progressively renew and enhance their level of greenhouse gases reduction, in line with the goal of keeping temperature rise below 2°C.

If we hope to avoid the worst predictions by the IPCC on increased frequency of extreme weather events and cataclysmic change on a global scale, global warming needs to be collectively addressed with deep and rapid de-carbonisation efforts.

It is timely that Malaysia announced its target of becoming a carbon-neutral nation by 2050 in the 12th Malaysia Plan 2021-2025. Indonesia, Singapore and our trade partners are also not missing the beat with coming up on similar net-zero targets by the second half of the century.

The global trend is now quickly shifting towards nourishing the low-carbon economy and starvation of the most polluting activities, presenting both risks and opportunities for investors like the EPF.

In line with the commitment to a mid-century carbon neutrality target, we applaud the recent Malaysian government’s Budget 2022 announcement of the establishment of the Voluntary Carbon Market initiative that will be launched under the advocacy of Bursa Malaysia.

This initiative will act as a voluntary platform for carbon credit trading between green asset owners and other entities transitioning towards low-carbon practices.

Furthermore, we deem that the provision of a Low Carbon Transition Facility by Bank Negara, with a fund value of RM1bil to assist small and medium enterprises (SMEs) adopt sustainable and low-carbon practices in the recent Budget 2022, as timely and holistic given that the SMEs form the backbone of the Malaysian economy.

While coal-fired power plants remain a highly contentious issue, particularly in developing markets due to the need to balance the energy trilemma, Malaysia has taken the leap to commit to no new coal-fired power plants development, albeit allowing for replacement of expiring capacities towards a greener economy while ensuring a just transition.

In tandem with national ambitions and targets, the EPF has also embarked on a journey to put in place adequate mitigation measures against climate change risks while capturing investment opportunities that arise as solutions to the climate crisis.

In early 2021, the EPF established its Sustainable Investment Policy, which explains the organisation’s broader approach to sustainable investing and integration of ESG factors into its investment considerations and stakeholders’ engagements.

Details of the roadmap to climate neutrality is currently work-in-progress but it will be anchored on EPF’s stewardship philosophy that centres around four key activities, namely proxy voting, active engagement, monitoring and collaborative initiatives.

Also in development is a Climate Change Policy to provide the EPF with a holistic approach in addressing climate change. This policy covers EPF’s approach, expectations on investee companies and action plans in addressing material sub-issues of climate change.

Taking a step further, six priority sector policies, developed based on EPF’s exposure to the sector and the imminent risks posed by the sector, will also align with the Climate Change Policy as part of the yardstick in EPF achieving its climate neutrality target.

Our regulators have been resolute in this development with the launch of the new Capital Market Masterplan 3 (CMP3) by the Securities Commission.

With the enablement of a more efficient and relevant market combined with evolving regulatory approach, CMP3 will be key in developing the sustainable investing space in the next five years through the mobilisation of capital, greater stakeholder involvement and increased capacity for collaboration.

As the previous masterplans have displayed success in strengthening corporate governance within the capital market, the EPF looks forward to the positive change that will be brought about by the CMP3 that will support and complement the initiatives the nation and relevant bodies have put in place in building a more sustainable future for the country.

Rohaya Yusof is the chief investment officer of the Employees Provident Fund. She is currently chairman of the Institutional Investors Council Malaysia and the Board of Trustees, Yayasan Khazanah. The views expressed here are the writer’s own.

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