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)
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
