The ‘gold rush’ to sustainability investments

Speaking to reporters on Thursday, president and group chief executive officer Ahmad Zulqarnain Onn said the fund believes that such assets present investment opportunities, especially to invest in companies that will reduce carbon emissions.

A boom in “green” assets could be under way as more institutional funds make pledges towards a net-zero future.

The latest is Permodalan Nasional Bhd (PNB), which announced its commitment to achieve Net Zero Enterprise by 2025 and Net Zero Portfolio by 2050.

PNB joins the Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP), which have already committed to making sustainability a component in guiding future investment decisions.

What caught the market’s attention is that PNB is allocating a fresh RM10bil fund to invest in “green and transition” assets by 2030.

Speaking to reporters on Thursday, president and group chief executive officer Ahmad Zulqarnain Onn said the fund believes that such assets present investment opportunities, especially to invest in companies that will reduce carbon emissions.

He said: “The world is shifting towards a new method of investing to more responsible investing.

“It is important for us to make a commitment under this framework by having a slice of our portfolio in new environmental, social and governance (ESG)-related investments.”

He added: “By allocating this, it is about finding the right opportunity for us to ride the upside on this trend.”

PNB is the country’s largest fund management company with RM338bil under management.

More than 60% of its assets under management or AUM is allocated to the Malaysian stock market.

The move by PNB is in sync with some global asset management companies. United States-based BlackRock and Singapore-based Temasek have jointly committed to invest US$600mil (RM2.5bil) to invest in “decarbonisation solutions”.

According to information on BlackRock’s website, the partnership “will seek to make investments in early stage growth companies targeting proven, next-generation renewable and mobility technology including emerging fuel sources, grid solutions, battery storage, and electric and autonomous vehicle technologies as well as in building and manufacturing sectors to drive decarbonisation, resource efficiencies, and material and process innovation.”

Interest in sustainable investing has surged over the last few years.

Bloomberg reported that global ESG assets are on track to exceed US$53 trillion (RM229.23 trillion) by 2025, representing more than a third of the US$140.5 trillion (RM607.66 trillion) in projected total assets under management.

While most ESG assets are mainly in Europe and the US, McKinsey and the Global Sustainable Investment Alliance expects that the next wave of growth could come from Asia, particularly Japan.

The question though is this – as more asset management firms race to make such investments, will this lead to overpriced “green” assets?

“Globally, everyone is looking into this theme of investment. Although some assets could be seen as overpriced today, they may not be in the future as it is a growing business and more companies are serious about reducing their emissions,” Areca Capital Sdn Bhd chief executive officer Danny Wong says.

He adds that in Areca, the fund has already installed ESG practices in its business to safeguard its long-term investments.

“The commitment to invest in sustainability will strengthen funds’ competitive advantages,” he points out.

With PNB and the EPF having set their goals of having fully net-zero portfolios by 2050, the question is whether Malaysian companies that are not deemed to be ESG-compliant or net-zero enterprises, face the prospect of losing such funds as their investors.

Presently, there are only 80 companies in the FTSE4Good Bursa Malaysia index, out of the 970 listed companies on Bursa Malaysia.

The FTSE4Good Bursa Malaysia index is seen as the “ESG” index for stocks on Bursa Malaysia.

Zulqarnain said that “divestment will be the last resort”, and that PNB is looking at an active role to also transform its investee companies to meet its ESG and sustainability agenda.

“At PNB, we will work hand-in-hand with our investee companies to develop value-creation plans that will ensure sustainable growth of their operational and financial performance.

“There is tremendous pressure nowadays for companies to not just perform financially, but also to integrate ESG aspects into their business.

“We believe that, through our collective effort, this new way of doing business will create meaningful benefits for PNB, our investee companies, partners as well as other stakeholders, and ultimately the millions of Malaysians who have entrusted their investments with us,” he said.

As of March 31, PNB’s investments made up 10% of the total market value of stocks listed on Bursa Malaysia, while the EPF held 15% of the market value of stocks on the FBM KLCI.

“There will be companies that may not be able to achieve a full net-zero emission target, but what they can do is to have a clear roadmap to instal ESG-practices and emphasise on ‘social’ and ‘governance’ components,” says Rakuten Trade head of equity sales Vincent Lau.

“Companies that are ESG-compliant are known to perform better in the long run on the back of sustainable practices,” he adds.

Among the sectors that may face challenges in ESG and net-zero transitions include oil and gas, plantations, construction and automotive.

PNB is the major shareholder in these sectors and is invested in almost 90 companies on Bursa Malaysia, including Sapura Energy Bhd, Velesto Energy Bhd, Sime Darby Bhd, Sime Darby Plantation Bhd, Sime Darby Property Bhd and UMW Holdings Bhd.

It also has substantial stakes in utility firm Tenaga Nasional Bhd and IJM Corp Bhd, which is involved in major construction works.

While the transition will be a difficult one for corporate Malaysia, if done right, Malaysian stocks can attract more international funds that are hungry for ESG-related investments.

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