In particular, there have been strong commitments from Malaysian financial institutions on sustainability and climate issues, while Malaysian firms have been integrating ESG considerations into their corporate framework.
THE age-old model of capitalism, driven by profits and focus on maximisation of value for shareholders, is transforming to take into account the challenges of climate change and other risks faced by industries.
Under environmental, social and governance (ESG) targets, companies are working towards net zero and carbon neutral status in the next two to three decades, while effecting changes in their capital allocation that will positively impact the environment, people and society.
Investors are taking a longer term view of ESG, especially after the pandemic, driven also by concerns on human rights, labour standards and gender equality.
Maximisation of returns is not necessarily the primary ESG goal for investors, as broader measures of ESG are increasingly recognised as a barometer of a company’s worth over the medium to long term.
Numerous studies show that companies with developed organisational processes to measure, manage and communicate performance on ESG issues vastly outperform companies that do not, said RHB Asset Management managing director Eliza Ong.
Asset managers increasingly recognise that this growing ESG tide is irreversible, seeing how stocks found wanting on labour management standards or those with questionable environmental impact, face erosion in their values.
Rising demand
In Europe, about half of retail investors intend to switch some of their investments, including their pensions, into ESG investments in 2022, according to study by Funds Europe, a business strategy magazine for the European cross-border management industry.
About 90% of investors surveyed in the Ernst & Young (EY) Global Institutional Investor Survey 2021 are already factoring in ESG-performance companies in their investment strategy considerations.
Nearly three-quarters (74%) of investors are more likely to divest from companies with poor ESG ratings, said the EY survey.
In general, individual investors do not have comprehensive understanding of ESG investing; they mostly want to do good and avoid controversial activities such as gambling, as well as industries involved in tobacco, weapons and coal.
With rising awareness of ESG, individual investors have higher expectations of their fund managers to generate positive ESG impact and influence investee companies in terms of better business practices, said Malaysian Association of Asset Managers (MAAM) chairman Ismitz Matthew De Alwis.
Many institutional investors have publicly disclosed their commitment to their ESG journey, while corporate investors are determined to meet the expectations of their many stakeholders, besides shareholders.
Khazanah Nasional Bhd has launched its sustainability framework and medium-term targets to guide the sovereign wealth fund and its investee companies in integrating ESG considerations into their core businesses.
One of the first in Asia to publicly commit to sustainability, the Employees Provident Fund (EPF) recently launched a sustainable investment policy that forms part of its agenda to become fully ESG-compliant by 2030 and a climate-neutral portfolio with zero greenhouse gas emissions, by 2050.
Various types of ESG disclosures include the:
> Global reporting initiative on ESG performance of companies
> Integrated annual report
> Taskforce on Climate-related Financial Disclosures, especially for banks and the financial sector
> Science-based targets initiative on net zero pledges
> Sustainability accounting standards board on ESG issues relevant to financial performance
On Bursa Malaysia, there are 87 stocks that comply with ESG requirements on the FTSE 4Good Bursa Malaysia index, under which ratings will consider a company’s ESG risk exposure, based on its line of business and the disclosed actions it has taken to address and mitigate pertinent risks.
Rising demand for ESG investing among their investors has also encouraged institutional investors to offer ESG-themed funds.
Large government-linked asset owners in Malaysia such as the EPF, Kumpulan Wang Persaraan, Khazanah and Permodalan Nasional Bhd are switching their assets under management into ESG-compliant portfolios.
Institutional investors such as pension funds, insurance companies, endowments, mutual funds and asset managers with large assets under management need good risk management tools to shield their investments from ESG risks and market uncertainties.
Stronger investor interest is expected in assets that adopt ESG and sustainability strategies across all sectors, especially in the automotive, industrial and consumer sectors.
Areas for consideration
The new approach in sustainable, responsible investing involves positive screening to select targets based on their ESG performance and negative screening to exclude targets with clearly-defined negative ESG impact, said Ernst & Young PLT executive director, strategy and transactions, Leslie Koh.
Under norms-based screening, targets are screened against the minimum standards of business practices based on international norms.
When making investment decisions, it is important to understand what material ESG risks the company is exposed to and how they are being managed by the company.
A company assessed to be below average from an ESG standpoint would warrant engagement; a company being seen as a leader may be engaged to share best practices.
Once an understanding is formed on the state of the company, its commitments and ability to change, the fund manager takes a portfolio action such as overweight, underweight or exit and decide to continue with engagement, said Principal Southeast Asia, Asean Equities and Malaysia, chief investment officer Patrick Chang.
Investors are susceptible to greenwashing risks on false or misleading information in regards to ESG.
Some key questions that could raise red flags include:
> What ESG investments and assets are considered ‘green’?
> How robust are the ESG practices of companies in the r energy (RE) sector?
> What ESG data is sufficiently reliable, given the limitations of ESG ratings in investment decisions?
Investors increasingly expect companies to upskill; in PwC’s December 2021 Global Investor survey, only 54% of investors polled cited that boards are sufficiently knowledgeable on ESG issues facing the companies, said PwC Malaysia, South East Asia’s Sustainability and Climate Change Leader, Andrew Chan.
The quality of disclosures is also important, especially amidst the sharpened focus on labour issues and other social inequalities.
Amidst ongoing challenges around measuring ESG efforts, it is worth considering if assessments of financial returns are supplemented with quantitative metrics on socio-economic and environmental impacts.
Khazanah Nasional, through its Project Chronos, is among the forerunners globally, to measure a company’s true worth, quantifying ESG impact to companies’ base value, as well as its individual companies’ socio-economic impact.
Malaysia is closely following global ESG investment trends that include, among other things, increased investments in renewables, energy transition, agriculture and food technology, mobility and the circular economy, said Maybank Investment Banking Group head of sustainability research, Jigar Shah.Growing ESG focus
Many local investors have embedded ESG-related frameworks within their organisations.
In particular, there have been strong commitments from Malaysian financial institutions on sustainability and climate issues, while Malaysian firms have been integrating ESG considerations into their corporate framework, said Nomura Asset Management Malaysia.
Malaysia must position for net-zero carbon transition by 2050; some of the key focus would include vehicle electrification, renewable power and energy efficiency.
RE drew more than US$2.6tril in investments from 2010 to 2019; the costs of solar and wind power have dropped 85% and 49% respectively from a decade ago, according to BloombergNEF as of September 2019.
It is now possible to turn profits from energy sources that can help lower greenhouse gas emissions – and investors are piling in, added Chang of Principal Southeast Asia. In Malaysia, the key drivers for solar energy growth include high irradiation, availability of land and large-scale solar tenders issued by the government on an annual basis.
Investments in climate change mitigation and adaptation initiatives is a growing major trend in Asia, as countries here are becoming susceptible to physical risks such as rising sea levels and flooding, said Maybank Asset Management regional head of research, Koh Huat Soon.
Rapid urbanisation in Asia presents environmental challenges such as coming up with radical solutions to limit carbon footprint and curb pollution.
Soaring record temperatures this summer in China and Europe has also made achieving net zero global emissions by 2050 more urgent.
A wealth of opportunities
With the world facing increasing risks of recession, it is a good time to accelerate potential counter-cyclical green investments.
Plantation and forestry companies will be monitored for sound environmental practices, such as sustainable forest management, responsible effluent discharge and avoidance of peat soil cultivation.
If well-managed, good ESG companies in these sectors present a wealth of opportunities for alpha generation and sustainable value creation, added Koh of Maybank Asset Management.
Further intense scrutiny can be expected on ESG practices of Malaysian companies, after the US Department of State downgraded Malaysia to bottom tier in its trafficking report for 2021, said Ong of RHB Asset Management.
Over the past year, plantation companies, glove manufacturers and electronic manufacturing services companies have hit the headlines, reportedly with customers either suspending relationships with these suppliers or products getting impounded on issues related to labour standards.
ESG and shariah investing have a common goal to promote social good.
Malaysia’s position as an Islamic capital market leader is seen in the promising growth of shariah-compliant assets f rom RM1.1tril in 2010 to RM2.3tril at the end of 2021, as reported in the Capital Market Masterplan 3.
Investments in fintech, greentech and biotech will continue, with some focus on commodities as geopolitical tensions reduces supply and highlights the importance of food security.
Post-Covid-19, investments in healthcare and pharmaceuticals may continue as the pandemic has brought healthcare into focus.
About 68% of the total Asean6 bonds and sukuk are invested in the energy, green buildings and transport sectors, according to the report on ‘Trending: Sustainable Responsible Investing in Malaysia and the Region’ by EY, in collaboration with Capital Markets Malaysia and Sustainable Investment Platform.
Nearly two-thirds (61%) of power sector investments are allocated to RE, which is anticipated to attract an annual average investment of US$50bil over 2025 to 2030.Uneven progress across the region
Progress made in collaborating across sectors and geographical locations is slower in Malaysia compared to peers globally, added Chan of PwC Malaysia.
In Singapore, cross collaboration efforts can be seen in the Temasek-BlackRock decarbonization investment partnership.
Temasek and ecosystem players in the aviation sector pilot the use of sustainable aviation fuel (SAF) through the launch of SAF credits.
There is also a slower focus among local investors in relation to stimulating ESG growth sectors, for example, plant-based proteins and nature-based solutions.
Compared to Asia and global peers, a lower percentage of Malaysian companies have made net zero commitments, said Ong of RHB.
There is plenty of room for improvement if we were to benchmark ourselves against developed countries, said Ismitz of MAAM.
To enhance the nation’s ESG ecosystem, there needs to be collaboration between regulators, asset managers, listed companies and other stakeholders.
In terms of quality ESG reporting and disclosure, it will boil down to ESG data transparency, availability and accuracy.
It is going to be a long but worthwhile journey for Malaysia in ESG investing.> P8: Push from government-led ESG initiatives
In particular, there have been strong commitments from Malaysian financial institutions on sustainability and climate issues, while Malaysian firms have been integrating ESG considerations into their corporate framework.
Malaysia is closely following global ESG investment trends, said Jigar
Progress made in collaborating across sectors and geographical locations is slower in Malaysia compared to peers globally, said Chan.
Kenanga Investors Berhad executive director and chief executive officer Ismitz Matthew De Alwis is one of the speakers for the Star Wealth Summit 2021.
Maximisation of returns is not necessarily the primary ESG goal for investors, as broader measures of ESG are increasingly recognised as a barometer of a company’s worth over the medium to long term.
