Tag: ESG

  • Everything you need to know about “Sustainable Finance”

    Everything you need to know about “Sustainable Finance”

    What is ‘sustainable finance’?

    Sustainable finance is any form of financial activities and processes in the financial sectors that takes Environment, Social and Governance (ESG) into consideration.

    • Environmental factors – Involves climate change mitigation and adaptation, the environment in general, such as biodiversity preservation, pollution avoidance, and the circular economy.
    • Social factors – Comprises issues of inequality, inclusion, labour relations, human rights problems, investment in human capital and communities.
    • Governance – Includes public and commercial organisations, including management structures, employee relations, and executive compensation, which plays a crucial role in ensuring that social and environmental factors are included in the decision-making process. 

     

    Impact investing

    This is a form of investment made in businesses or organisations that seeks to generate both financial returns and positive social or environmental impacts. Impact investors often focus on sectors such as renewable energy, affordable housing, and education. Impact investments are a type of responsible and sustainable investing, in addition to environmental, social, and governance (ESG) risks to operational or financial performance.

     

    Sustainable finance regulation

    Governments and regulatory bodies around the world are increasingly implementing policies and regulations to promote sustainable finance. These policies can include requirements for financial institutions to disclose their ESG practices and performance, as well as incentives to encourage investment in sustainable projects.

     

    What do the regulations entail? 

    Taxonomies, product standards, disclosures, and labelling; management and disclosure of climate risks; management and disclosure of ESG risks; ESG in stewardship, and green bond rules are the main subjects in sustainable finance regulation around the world. 

    All regions of the world view sustainable finance regulation as essential for boosting market openness and minimising the possibility of greenwashing. The nations of the European Union continue to dominate in terms of the depth and breadth of regulatory efforts. While Asia has accelerated their pace of new initiatives, North America and Australia have also substantially boosted regulatory activity. Additionally, the United Kingdom has the most extensive regulatory structure of any country outside the EU.

     

    Green regulatory landscape in Malaysia

    Several sustainable finance guidelines addressing environmental and social (E&S) concerns have been published and these include:

    Financial institutions are expected to handle climate-related risks in accordance with Bank Negara Malaysia’s Climate Risk Management and Scenario Analysis guidance (BNM) and Value-based Intermediation Financing and Investment Impact Framework (VBIAF) sector guides.

    Financial institutions in Malaysia are also obligated to disclose information in accordance with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), the Climate Change and Principle-based Taxonomy (CCPT). Management of this risk would need increased deforestation- and conversion-free commitments from financial institutions and enterprises, and also a categorization system (taxonomy) based on risk for sectors and assets susceptible to biodiversity degradation. This system would potentially assist in the reallocation of capital flows from biodiversity negative to positive initiatives.

    Additionally, the Joint Committee on Climate Change (JC3) is in the process of developing a data catalogue to map accessible climate data sources. This catalogue will aim to enhance disclosure and data accessibility for more openness and harmonisation, which in turn promotes improved decision-making and risk management.

    BNM’s participation in the Central Bank & Supervisors Network for Greening the Financial System (NGFS) and other worldwide platforms is a driving factor for the expansion of excellent regulatory and supervisory practices. Central banks and financial regulators however would need to expedite the full deployment of their monetary policy, regulatory, and prudential powers to enable a quick and orderly transition.

     

    What is ‘greenwashing’?

    Greenwashing is a complicated and broad phenomenon that may arise at any level of the financial chain, resulting in firms being able to create misleading sustainability statements about their operations and policies to make their goods becoming more environmentally attractive. It was initially started in the 1960s, when the hotel industry faced a reduction in their laundry expenses, as they demanded that guests reuse their towels to conserve the environment. Today, brands and products have gone through multiple greenwashing processes, as they are rebranded and repackaged as eco-friendly to persuade and promote consumers on the firm’s sustainability actions.

     

    How is Greenwashing relevant in today’s world?

    According to Diab (2022), although many corporate firms will readily commit to reducing their carbon emissions, they will not react now, and this puts future generations at risk. The government’s absence of regulation and monitoring is an advantage to firms in fulfilling their green objective by maximising their green brand image at the lowest possible financial and operational cost, unfortunately resulting in insignificant environmental effects on the Earth. Apart from maximising profit, firms tend to practise greenwashing to pursue a high trajectory of business growth and shareholder value maximisation, which is unfavourable for our environment.

    To illustrate, Chanel, known for its luxury fashion, has been keeping pace with the changing trends and doing its part in fighting climate change with its climate strategy, Chanel Mission 1.5° (Chanel, 2020). According to Rocha et al. (2022), Chanel borrowed €600 million from its investors by offering its sustainability-linked bonds (SLBs) with certain conditions in 2020. Its Chief Financial Officer sees SLBs as a perfect opportunity to integrate its finance strategy with its corporate strategy based on its sustainability ambitions. Investors were promised that if Chanel did not fulfil specific climate targets, extra returns had to be paid as a penalty for not meeting the targets.

     

    Consequences of Greenwashing

    Greenwashing is detrimental to both consumers and the environment. Consumers may be misled into purchasing environmentally unfriendly products that are advertised. This can lead to a waste of money as well as a loss of consumer trust in environmentally friendly products. Furthermore, by engaging in greenwashing, businesses may be able to avoid making necessary changes to their operations, which can have a negative impact on the environment. A company that claims to be environmentally responsible but continues to use hazardous chemicals in its products, for example, contributes to environmental degradation.

     

    Ways to identify Greenwashing

    Consumers must be able to recognise fraudulent or deceptive environmental claims in order to avoid being taken advantage of by greenwashing. There are several methods for detecting greenwashing, such as looking for vague or unsupported statements. A claim that a product is “eco-friendly,” for example, is ambiguous and impossible to verify, so it should be approached with caution. Another method to help avoid one from falling prey to greenwashing is to look for third-party certifications from organisations such as the Forest Stewardship Council or the Rainforest Alliance. Finally, readers of news stories or visitors to websites that track a company’s environmental performance can learn about its track record of success. Consumers can better educate themselves about which products are truly environmentally friendly and which are simply greenwashed by following these actions.

     

    SDGs behind prevention of Greenwashing

    Companies can meet at least a few of the Sustainable Development Goals (SDGs) by adopting the 6-Steps Approach that refers to the guidance from Ernst and Young Global (2017) provided in contributing and aligning their business towards the SDGs. The 6-Steps Approach are:

    1. Identify and commit
    2. Develop targets and KPIs
    3. Align sustainability and corporate strategy toward targets
    4. Create business opportunities
    5. Collaborate
    6. Measure, assess, document and communicate

    In order to contribute and meet the SDGs, the companies must first realise and identify which SDGs they can commit to through their businesses. The business opportunities and interests of a company can be linked to the existing SDGs and a company’s particular choice of SDGs could form a positive loop, creating a win-win situation for both sides. Companies can start taking a strategic approach and align their corporate priorities with the relevant SDGs. This practice allows them to explore all the opportunities and come up with plans to achieve the mutual goals between the companies and SDG 17.

    Second, companies can develop their targets and KPIs. They should set their own clear targets and key performance indicators (KPIs) to monitor and communicate progress towards SDGs from time to time. The companies should also adjust any existing corporate targets as well as monitoring and measurement methods to meet these new SDG targets and KPIs.

    The next step is to align the sustainability and corporate strategy of the companies toward SDGs. Companies need to reassess how well existing practices are in line with the issues and targets by adjusting the business models, products and services, supply chains, and sustainability strategies towards the SDGs. Also, companies who support the SDGs can start by reducing the link between economic growth and intense use of energy, water efficiency, and lower carbon emissions.

    Through proper alignment of strategies, these companies who set themselves on the path of SDGs are able to create and spot new business opportunities. This, in turn, helps the companies to grow themselves as they create more resilient and prosperous communities, enabling an expansion of their markets and a growth in consumer bases. 

    The fifth step is to collaborate; it is unlikely for a single company to solve any of these problems on its own, and collaboration, both within sectors and across different industries, is crucial to put the puzzle together. The companies can identify collaboration opportunities with the government, peers, customers, suppliers, academia and nonprofit organisations across various industries to achieve mutually beneficial solutions for all. 

    Lastly, the companies should closely measure, assess, document and communicate their actions and results to the public in order to play their part in achieving SDGs. Companies should develop a transparent system that integrates the management of SDGs’ issues into everyday business decision-making and report their accomplishments by issuing a sustainable report to communicate to the public.

    The measurement of a company’s commitment towards the SDGs is dependent on each company as they tend to evaluate themselves based on their own achievements. However, referring to independent organisations such as GRI (Global Reporting Initiative) by the UN will provide a holistic and transparent view of the companies’ progress in pushing the SDGs initiatives.

     

     

    Reference

    Bakken, R. (2021, August 9). What Is Sustainable Finance and Why Is It Important? Harvard Extension School. https://extension.harvard.edu/blog/what-is-sustainable-finance-and-why-is-it-important/

    Broom, D. (2022, January 20). What is sustainable finance & how it is changing the world. World Economic Forum. https://www.weforum.org/agenda/2022/01/what-is-sustainable-finance/

    Chanel. (2020, March). Chanel Mission 1.5°. https://www.chanel.com/my/climate-report/

    Chater, J., Kernoghan, H., & Sigauke, G. (2022, September 21). Greenwashing – a hinderance to sustainable finance. Penningtons Manches Cooper. https://www.penningtonslaw.com/news-publications/latest-news/2022/greenwashing-a-hinderance-to-sustainable-finance

    Diab, K. (2022, March 5). Why do corporations greenwash? Al Jazeera. https://www.aljazeera.com/opinions/2022/3/5/why-do-corporations-greenwash

    Ernst & Young Global. (2017, March 9). Why Sustainable Development Goals should be in your business plan. Ernst & Young. https://www.ey.com/en_my/assurance/why-sustainable-development-goals-should-be-in-your-business-plan

    GRI. (2022, January 17). Most companies align with SDGs – but more to do on assessing progress. Global Reporting Initiative. https://www.globalreporting.org/news/news-center/most-companies-align-with-sdgs-but-more-to-do-on-assessing-progress/

    Hayes, A. (2022, November 8). What Is Greenwashing? How It Works, Examples, and Statistics. Investopedia. https://www.investopedia.com/terms/g/greenwashing.asp

    NatWest. (2021, January 14). Sustainable finance a success story of change. https://www.natwest.com/corporates/insights/sustainability/sustainable-finance-a-success-story-of-change.html

    Rocha, P. A., Rathi, A., & Gillespie, T. (2022, October 4). Empty ESG Pledges Ensure Bonds Benefit Companies, Not the Planet. Bloomberg. https://www.bloomberg.com/news/features/2022-10-04/greenwashing-enters-a-22-trillion-debt-market-derailing-climate-goals?leadSource=uverify%20wall

    UNEP FI. (2017, June 6). The Evolution of Sustainable Finance –. United Nations Environment Programme – Finance Initiative. https://www.unepfi.org/news/timeline/

    World Business Council for Sustainable Development [WBCSD] & World Resources Institute [WRI]. (n.d.). A Corporate Accounting and Reporting Standard (Revised Edition). Greenhouse Gas Protocol. Retrieved December 15, 2022, from https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf

     


    Written By:  Sylvia Chen Weng Yan, Alex Chong, Yeoh Jia Xin, Muhammad Hafizuddin Hakim Bin Ruzlisham and Sherilynn Ngerng Siew Fong

    Edited By:  Julia Yazid

  • What is ESG, and how is Malaysia doing on the ESGfront?

    What is ESG, and how is Malaysia doing on the ESGfront?

    Right off the bat, ESG stands for Environmental, Social and Governance which refers to standards that define a company’s behaviour and are utilised by socially responsible investors to evaluate possible investments.

    Recently, news & media publishers have repeatedly discussed ESG investing and many APAC (Asia Pacific) businesses have adopted ESG practices. Businesses listed under Bursa Malaysia such as Genting Malaysia, KLCC Property Holdings, and Astro Malaysia Holdings are companies which practise ESG reporting, to name a few. 

    In light of the rising demand for sustainable assets and investments, the capital market is in a significant position to strongly influence how businesses conduct their sustainability efforts. As issues such as the Climate Change and Environmental Impact affect the public conscious more, Malaysian businesses are responding to the need for sustainability. Currently, 94% of the top 50 Malaysian PLCs (Public Limited Companies) have ESG plans in place, according to a December 2021 report by advisory firm PriceWaterHouseCoopers. 

    But what does this all mean? This article seeks to enlighten readers by exploring ESG investing and its relevance in Malaysian capital markets, as well as determine its viability of being a profitable investment.

    Source: Positioning Corporate Malaysia for a sustainable future (pwc.com)

    What is ESG?

    ESG investment has many labels; socially conscious investing, impact investing, sustainable investing, and socially responsible investing (SRI). ESG is defined as a method for assessing how much a company contributes to social goals on top of maximising profits for its shareholders. 

    ESG investors strive to ensure that the companies they support are responsible environmental stewards, decent corporate citizens, and led by accountable managers.

    In simple terms, the environmental criteria considers a company’s environmental efforts such as corporate climate change policies. The social criteria are applied to the management of relationships with customers, suppliers, employees, and the communities in which the company operates. Finally, governance encompasses topics such as leadership, executive compensation, audits, internal controls, and shareholder rights.

    Content 1: How to measure ESG performance

    To further elaborate on each ESG criteria: 

    Environmental

    Corporate climate policies, energy use, waste, pollution, natural resource conservation, and animal treatment are all examples of environmental criteria. This criteria can also be used to evaluate any environmental hazards that a firm may face, as well as how those risks are managed. The hazards in question include direct and indirect greenhouse gas emissions, while risk management revolves around the areas of resource management and the firm’s overall resilience to physical climate threats such as climate change, flooding, and fires.

    Social

    Social criteria look at the company’s relationships with stakeholders. Other factors that a firm may be measured against include its impact on the communities in which it operates and on supply chain partners, particularly those in developing economies where environmental and labour standards may be less stringent.

    Governance

    Governance is the term used to describe the direction and management of a business. ESG governance guidelines ensure that a company uses accurate and open accounting practices, chooses leaders with integrity and diversity in mind, and is accountable for its shareholders.

    ESG investors may demand guarantees that businesses do not appoint conflicted board members and senior executives, do not use political donations to gain preferential treatment, and do not engage in illegal activity.

    Putting Things Into Context

    To put these criteria into context, in 2014, the FTSE4Good Bursa Malaysia Index featured companies that practised good ESG practises. The index was developed in collaboration with the Financial Times Stock Exchange (FTSE) Russell, a well-known organisation that specialises in providing analytics and data solutions Since the ESG ratings and data model of this index use Pillar and Theme Exposure and Scores, which cover around 300 variables to generate an overall rating out of 5 (5 being the highest), the FTSE Russell ESG ratings are typically compatible with global frameworks.

    Source: ESG Ratings | FTSE Russell

    This means that investors may consider a company with a low ESG score to be an unsustainable asset. Keep in mind that the scores are provided by internationally recognized external experts, making them credible to investors.

    ESG ratings have become an important factor in the decision-making process for investors. Some people use these scores as a foundation for their investment strategies, enabling them to quickly determine companies that meet their criteria. The ratings can also be used to supplement financial analysis and gain insight into specific companies. These insights are used by investors to delve deeper into the sustainability risks that affect business performance.

    Content 2: ESG integration in Malaysia 

    According to PWC’s report regarding Malaysia’s sustainable future, Malaysia is still in the early stages of its ESG journey but is already ahead of the rest of ASEAN, trailing only Singapore in terms of the indicators listed in the table below. In contrast to more developed nations, developing economies like Malaysia will require more time to achieve net zero emissions. How does Malaysia intend to accelerate its ESG journey?

    Source: Positioning Corporate Malaysia for a sustainable future (pwc.com)

    Securities Commission Malaysia

    Initially Malaysia’s Securities Commission (SC) introduced the SRI Sukuk Framework in 2014, laying the groundwork for the country’s journey toward sustainable and responsible investment (SRI).

    Sukuk is essentially a bond, but is shariah compliant (meaning it adheres to Islamic Principles).

    Since then, the SC has continued to support numerous initiatives aimed at fostering a sustainable capital market in Malaysia, such as the implementation of the Sustainable and Responsible Investment Roadmap for the Malaysian Capital Market (SRI Roadmap). Another example is the publication of the fifth edition of the Malaysian Code on Corporate Governance (MCCG) in 2021, which will strengthen the board’s oversight of sustainability.

    Furthermore, one of the key drivers in strengthening Malaysia’s position as an Islamic Capital Market (ICM) leader is the promising growth of Shariah-compliant assets, from RM1.1 trillion in 2010 to RM2.3 trillion at the end of 2021. To meet the growing demand for Shariah-compliant investment products, the SC will work to improve investor access to Shariah-compliant companies that practise good ESG practices.

    Source: SC: Size of Islamic capital market rises to RM2.31 tril in 2021 | The Edge Markets

    Recognizing the potential for development in the Islamic social finance sector, the SC will also look into expanding the use of the ICM framework and its products and services to fund this sector. Various opportunities, such as the integration of impact assessments with Islamic social finance instruments, could be unlocked, allowing investors to determine whether the capital invested achieves the desired impact objectives.

    Bursa Malaysia

    Similarly, Bursa Malaysia and its index partner, FTSE Russell, have been evaluating the ESG practices and disclosures of publicly traded companies to match business sustainability initiatives with investors (PLCs). This led to the aforementioned FTSE4Good Bursa Malaysia (F4GBM) Index which was launched in 2014 as a result of these collaborative efforts.

    Moreover, Bursa Malaysia recently unveiled a new three-year sustainability roadmap to realise its vision of becoming ASEAN’s leading, sustainable, and globally connected marketplace. This sustainability roadmap demonstrates how Bursa Malaysia is integrating sustainability into the company and marketplace, which is one of the priorities in the Bursa Malaysia Strategic Roadmap 2021-2023.

    Source, Sustainability Roadmap: Integrated_Annual_Report_2020.pdf (listedcompany.com)

    Content 3: Is it a worthwhile investment? 

    Lastly, in order to determine whether ESG investing is a viable approach, Steve Rogers, a writer for FinMasters, collated real studies of returns from ESG and non-ESG portfolios in US capital markets, which had conflicting results. Here are some of the statistics: 

    • In 2020, “sustainable equity funds” outperformed conventional funds by 4.3% points, according to a Morgan Stanley analysis.
    • Reuters reports that falls in the technology sector were mostly to blame for the ESG funds’ 9.2% drop in January 2022, compared to the S & P 500 with a 5.3% decline.
    • “ESG funds have neither systematically higher nor lower raw returns or risk than the broader market,” according to a Vanguard Funds analysis.
    • Fidelity (a financial services corporation) found that ESG Funds slightly outperformed the market, but they warn that this is not a given to continue.

    Source: Sustainable Investing During Coronavirus | Morgan Stanley

    Source: Analysis: Investors back ESG stock funds even as tech slide hurts returns | Reuters

    From Malaysia’s perspective, an interview done by Maybank with Malaysian company directors last year (Sept – October 2021) revealed competitive returns such as Principal Asset Management Berhad for example:

    Source: 01-72•SI_SeptOct_2021.indd (maybank-am.com)

    Public Mutual Fund Berhad is another business that has mentioned competitive returns. The Public e-Islamic Sustainable Millennial Fund (PeISMF) was their first ESG-compliant fund launched in November 2019 to invest in Shariah-compliant stocks of companies globally that incorporated sustainability considerations in their business practices. The fund has since seen an increase in its net asset value (NAV) of RM184 million with a return of 56.48% since its start on November 25, 2019, up till July 30, 2021.

    Conclusion

    In conclusion, ESG has recently been a hot topic in Malaysia due to its increased integration in Malaysian capital markets. Looking at plans from both the SC and Bursa Malaysia, it would thus be a step in the right direction to become a greener country as a whole. As for the business perspective, companies should make it a point to emphasise prudency in their ESG reporting. This is because transparency in ESG reporting demonstrates to investors that a company is capable of reducing risks and producing long-term, sustainable financial rewards.

    References

    Positioning Corporate Malaysia for a sustainable future (pwc.com)

    Integrated_Annual_Report_2020.pdf (listedcompany.com)

    Feb_22_Market_Updates_-_A_Total_of_USD143_billion_of_ESG_Funds_Invested_in_Bursa_Malaysia__FINAL_.pdf (bursamalaysia.com)

    What You Need to Know About ESG Ratings – Azeus Convene

    Environmental, Social, and Governance (ESG) Criteria (investopedia.com)

    01-72•SI_SeptOct_2021.indd (maybank-am.com)

    Malaysia moves forward in ESG practices and journey to net zero (pwc.com)

    Malaysian companies’ ESG practices to come under more scrutiny | The Edge Markets

    Accelerating ESG integration in Malaysian banks (pwc.com)

    What You Need to Know About ESG Ratings – Azeus Convene

    Environmental, Social, and Governance (ESG) Criteria (investopedia.com)

    What Is ESG Investing and Is It Profitable? (finmasters.com)


    Researcher(s): Darryl Yeow

    Reviewer(s): Muhammad Bahari, Julia Yazid

    Editor: Julia Yazid

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