Push from government-led ESG initiatives

Malaysia's ESG drive is being actively advocated by the government to ensure that the nation develops sustainably in line with global trends.

Environmental, social and governance (ESG) investing in Malaysia took off in the early years after much encouragement by large funds such as the Employees Provident Fund (EPF) and Khazanah Nasional Bhd.

Regulators including the Securities Commission Malaysia (SC) also helped push the ESG agenda through issuances of guidance notes and taxonomies to guide the domestic development of ESG investing.

The Malaysian Investment Development Agency (Mida), as the principal investment promotion agency of the country, also targets ESG-driven investments in its promotion activities.

Mida facilitates companies in the manufacturing and selected services sectors towards adopting and adapting technology and automation, incorporating green and sustainable processes, as well as undertaking higher value-added activities such as research and development.

Setting ESG targets

Since it became an active investor in 2004, Khazanah had always incorporated an ESG focus into its investments; it is now setting targets on sustainability and focusing its efforts on material business issues that impact its investee companies and portfolio.

Within the environmental pillar, it aims to achieve net zero emissions by 2050, and will be working towards carbon-neutrality for its business operations by 2023.

On the social front, Khazanah will work towards ensuring that 30% of the boards and senior leadership positions at its key portfolio companies are held by women by 2025.

On governance, it will enhance board competencies in sustainability at its portfolio companies by 2024, disclose its voting principles at company annual general meetings by 2022, and include ESG-linked key performance indicators for key positions for its portfolio companies by 2023.

Within its existing portfolio, it will emphasise on embracing net-zero targets, setting clear gender diversity targets, as well as the importance of effective governance at the board and management level, and voting transparency.

More insightful measurements and metrics will be emphasised to gauge the impact of its investments.

On new investments, Khazanah is taking the lead, under its Dana Impak mandate for catalytic sectors, in assessing various projects within ESG-linked themes such as clean energy, climate technology and social inclusion.

“As a responsible investor, Khazanah looks to influence positive change and ensure a responsible and equitable impact through managing ESG risk and identifying value creation opportunities,’’ said Khazanah managing director Datuk Amirul Feisal Wan Zahir.

Khazanah’s ESG aspirations are aligned with its long-term strategic imperatives of Advancing Malaysia in shaping the ESG landscape in Corporate Malaysia.

On trade-offs between environmental and social issues, especially on the reduction of carbon emissions, Khazanah will continue to champion a just transition.

This is where the global need to combat climate change is balanced against the needs of emerging economies to provide affordable, equitable and reliable access to basic necessities such as electricity and transportation.

While companies that perform well on ESG factors are viewed favourably, it will look for opportunities to improve those with poor performance linked to ESG factors, with respect to their long-term sustainability.

A dedicated team on ESG

To spearhead its sustainable investment agenda, the EPF has established a dedicated team at the Sustainable Investment Centre (SIC), that conducts independent assessments of all new investment proposals.

This is to evaluate their level of compliance against ESG expectations as set out in the EPF Priority Issue and Sector Policies, based on publicly available information, company engagements and external ESG rating platforms.

The integration of ESG has enabled the EPF to better identify potential risks and opportunities in its investments, said EPF chief strategy officer Nurhisham Hussein.

The EPF continues to apply negative screening that excludes potential investments related to controversial business activities.

The existing Controversial Activity List excludes companies that engage in the production, distribution and/or trade in weapons, tobacco, alchoholic beverages, adult entertainment and gambling.

For externally-managed assets, all of the 16 external fund managers have signed the Sustainable Investment Pledge on March 31, 2022, to include ESG considerations into their investment decision-making processes.

The ultimate aim is to achieve a fully ESG-compliant portfolio by 2030 and a climate neutral portfolio by 2050.

The EPF Sustainable Investment Policy, Priority Issues Policies and Priority Sector Policies was launched in March 2022, to guide the EPF in making informed and holistic investments with ESG factors incorporated into its decision-making.

Following the launch, the EPF has started to actively engage with its investee companies, to communicate its ESG expectations based on the policies, as well as to better understand their progress and plans of their sustainability journey.

The standards of these policies have been anchored in the local and regional context, to ensure that ESG expectations are relevant and effective in uplifting sustainability standards in the capital market.

Various relevant stakeholders, including government-linked investment companies, investee companies, regulators and external fund managers were consulted and engaged, as part of the validation process.

This is to ensure that the EPF establishes a set of policies that is pragmatic and aligned with local realities.

The EPF was a signatory in 2019 to the United Nations-supported Principles for Responsible Investment, that promotes the incorporation of ESG factors into investment decision-making.

Tracking projects, investmentsCompanies are encouraged to invest in harnessing renewable energy (RE) sources which include including solar, biomass, biogas and mini hydro, to use energy efficiency (EE) equipment and other qualifying green projects.

Green service providers play an important role in facilitating the uptake of green technology.

There are many untapped opportunities for, among other things, services-related to RE, EE, support services for electric vehicles (EV) such as services for EV charging stations, operation of EV charging stations and maintenance, certification and verification, as well as green townships.

The green investment tax allowance (GITA) and green income tax exemption (GITE), which have been extended till Dec 31, 2023, have continued to receive overwhelming response from the industrial and commercial sectors.

From 2017 to March 2022, MIDA has approved investments related to green projects and green services amounting to RM15.4bil with 2,496 projects.

A total of 61 green services companies with proposed operational expenditure of RM327.3mil under the GITE, had been approved for RE, EE, green buildings, as well as green certification and verification.

In 2021, a total of RM3.69bil of investments was approved for green technology; green projects accounted for investments of RM3.67bil with 882 projects, creating more than 700 jobs.

“Advocating ESG is a key driver of sustainability for industries. Large companies are at the forefront of ESG implementation, where else small and medium enterprises (SMEs) are urged to embrace ESG to speed up recovery in the post-pandemic era, integrate into the international supply chain and gain access to a wider market,’’ said Mida CEO Datuk Arham Abdul Rahman.

Malaysia adopts a selective approach in attracting quality and high impact sustainable investments into the country.

These projects are also knowledge and skills intensive, provide high income, as well as generate strong linkages with domestic industries and have significant multiplier effects.

With its 20 overseas centers and 12 regional offices, Mida intensifies its promotional efforts via investment mission programs, specific project missions, domestic seminars, supply chain and start-up programs as well as the Invest Series held widely in different states around Malaysia and overseas.

Through its circular bioeconomy unit, Mida also develops and facilitates circular bioeconomy projects, explores business opportunities and connects stakeholders towards embracing the circular concept and sustainable elements in project development and investment.

Sustainable investment funds on the rise

Malaysian asset owners are increasingly committed towards sustainable investment; several large institutions have launched their own sustainable investment frameworks.

Increasing interest among individual investors will further boost sustainable investments and the growth of socially responsible investing (SRI) funds.

As at end-December 2021, a total of 34 SRI funds have been launched, with a combined net asset value of RM5.07bil, offering wholesale and retail investors the opportunity to invest in conventional and shariah-compliant ESG-focused funds.

Individual investors are showing growing interest in sustainable investments; areas of concerns include addressing climate change, reducing carbon footprints and the increasing demand for ESG credentials and products.

The SRI Roadmap, which was launched in 2019, provides strategic direction and recommendations to drive the development of the SRI ecosystem and position Malaysia as an SRI centre in the region.

These include widening the range of SRI instruments, increasing the SRI investor base and establishing a strong SRI issuer base.

Instilling strong internal governance culture and designing an information architecture in the SRI ecosystem are also important.

“We are encouraged by the progress made in this area, notably, in the increasing number of large, institutional investors that have committed to pursuing sustainable investments, as recommended by the SRI Roadmap.

“This sends a strong signal that that our largest investors are increasingly allocating capital into sustainable investments, motivating corporate Malaysia to step up their sustainability practices,’’ said SC chairman Datuk Seri Dr Awang Adek Hussin.

Going forward, public listed companies (PLCs) should improve the quality of their sustainability practices and emphasise more on substance rather than form.

“We observe some PLCs approach sustainability with a compliance mindset rather than embracing its underlying philosophy,’’ he added.

As sustainability and climate change concerns become more pressing, companies must speed up their transition to low carbon emission activities in order to remain relevant.

The SC will continue to focus on the recommendations outlined in the SRI Roadmap, such as the need to strengthen sustainability disclosures of PLCs and promote the adoption of sustainable business practices, including disclosure for smaller businesses.

Government agencies are actively involved in promoting ESG investing and SRI funds, with emphasis on improving ESG standards as well as the quality of sustainability practices and disclosure.

The momentum for positive change is gathering pace.

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