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PETALING JAYA: As the spotlight on environmental, social and governance (ESG) compliance gains ground the world over, especially in regions where multilateral agencies such as the World Economic Forum hold significant sway, it is worth taking a look at how this parameter affects investment decisions.
The secular trend is particularly pertinent in developed countries and areas like Malaysia, where corporate entities are making every effort to recover from the lockdowns imposed over the Covid-19 pandemic years and return to healthy expansion.
Furthermore, as revealed by audit and accountancy firm Grant Thornton Malaysia a couple of days ago, the country is considered far ahead of its regional peers in terms of ESG reporting, scoring even higher than Singapore and Hong Kong at certain metrics.
Tradeview Capital fund manager Neoh Jia Man said the focus on ESG issues varies greatly among retail and institutional investors in the country.
Based on his customer engagement experience, he found most Malaysian retailers do not place any importance on the ESG focus while institutional investors are increasingly bound by the tightening regulatory requirements and demands from their customers.
“This is particularly true for institutions who are managing funds for large government-linked companies (GLCs) or corporations with ESG mandates. In turn, fund managers who are working for those institutions have been pressured to adopt ESG considerations in their investment process as well,” he explained.
Neoh acknowledged that for most Malaysian retail investors, there appears to be a tendency of them shying away from ESG-thematic products, as there is what he termed a “prevailing misconception” that such products offer an inferior return relative to conventional investments.
Conversely, he observed that such behaviour is not a common trait among fund managers, at least publicly, due to the growing industry trend towards ESG adoption.
Neoh believed companies that have given adequate considerations to both ESG risks and opportunities could optimise returns to shareholders.
Despite recognising that locally, ESG investing is still in its nascency, he pointed out that this would offer opportunities for investors to position themselves ahead of market participants who could be slow in adapting to the rising trend.
Grant Thornton Malaysia country chief executive officer Kishan Jasani said many local companies are putting purpose first before profits across their business operations.
“Many corporations are meeting ESG standards and I think they’re quite well aware of what needs and should be done. There is a common language spoken among corporations and investors when it comes to ESG standards, which contributes to a shared understanding of the expectations.
“I think Bursa Malaysia’s role in talking about metrics like FTSE4 Good and its benefits is going to be a game changer in the way corporations define their ESG standards and also how they will achieve it,” he said.
To clarify how ESG thematic funds outperform their peers, iFast Capital Sdn Bhd research analyst Kevin Khaw said investors need to view them from a “risk” perspective instead of a “return” perspective.
“While most ESG funds may not deliver the best absolute returns compared to the top-performing peer, they can still be a viable option for investors to capture returns with lesser risk exposure.
“We believe the ESG segment will continue to demonstrate resilience and sustainability in the long term. In a nutshell, we see ESG investing as a remarkable paradigm shift,” he told StarBiz.Khaw anticipates ESG thematic funds to have a performance similar to global peers in the short term, but to outshine the peer average in terms of risk-to-reward performance in the long term. Money also continue to flow into such funds.
Year to date, iFast, an adviser-assisted wealth management services provider, has onboarded eight ESG funds on its platform and believe this trend will continue in the near future as more fund houses focus on embracing ESG elements in their investment universe.
“With climate change becoming an increasingly menacing and pressing issue, ESG investment will continue to remain in the spotlight. This can be seen from the sizeable ESG-thematic fund sizes despite recent macroeconomic challenges,” Khaw added.
At the same time, Rakuten Trade head of equity sales Vincent Lau is of the opinion that at the end of the day, a company’s performance would matter most to investors, although he noted that ESG compliance is a box “that must be ticked” for many companies.
“All things being equal in terms of profit and outlook, the one with higher ESG rating may prevail but some investors may still choose the most profitable company that may have a slightly lower ESG rating,” he said.
Lau recognised that ESG compliance may incur costs that could affect the profitability of certain companies.
However, to keep up with trend, he said it is beneficial for corporations to make an effort, at least from a corporate social responsibility perspective, to abide by ESG guidelines.
It is perhaps interesting to note that in a “free” country like the United States, there has been a divide among the Republicans and the Democrats – as on many other issues – about the true purpose of ESG.
For example, Florida governor Ron de Santis, who famously fully reopened his state while many others were under lockdown to resuscitate the economy back in September 2020, had labelled ESG as a type of “woke” capitalism that prioritised liberal goals over investor returns, harming companies deemed insufficiently progressive and in turn hindering the wider economy.
Nevertheless, Kishan said many investment firms, including Robeco and other major institutional funds, have adopted a clear mandate to exclusively invest in companies that adhere to ESG standards.
“There is also a growing emphasis on ESG within the banking sector, where banks now require some businesses to submit ESG reports and disclose their ESG footprint. Maybank, for instance, has stopped financing coal industry,” he said.
He added that some banks have the understanding that a company or business that is more ESG compliant often equates to having a more resilient business.
“This understanding stems from the fact that when such companies review and revamp their processes, they gain a comprehensive view of their operations.
“Many business owners frequently overlook the actual impact of their operations but by becoming more ESG compliant, they are now in a position to thoroughly reassess their entire business landscape,” he said.
Concurrently, the initiative looked to have been taken wholeheartedly by Malaysia’s unity government, Bursa Malaysia and the Securities Commission.
According to Abrdn Islamic Malaysia Sdn Bhd chief executive Gerald Ambrose, the country has prioritised sustainable or ESG investing as a means of adding to local capital markets’ attraction, while ensuring that Malaysian corporations transition to more sustainable business models to remain “future fit”.
“Of course, institutions and retail investors have to prioritise performance as opposed to ESG qualifications.
“But as long-term, bottom-up investors, we believe that ESG qualities – the awareness of the sustainability risks and adaptation to overcome them, good overall governance including covering sustainability as well as human rights considerations – are integral to companies’ long-term profitability.”
Echoing the sentiment of Tradeview’s Neoh, Ambrose highlighted that interest in ESG-thematic, sustainable funds remains strong among institutional clients, adding however that there has been a slight pullback in retail demand due to a number of “greenwashing” cases across the world.
He explained that greenwashing is the claim by fund managers to be “green” and environmentally friendly, but are actually not.
“Corporate entities and fund managers are now aware of the reputational risk of being found to be greenwashing, so it looks likely that sustainability will continue to be the trend of a lifetime,” he said.
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