Bursa Malaysia: Moving the dial on ESG adoption

The Covid-19 pandemic has thrust the concept of environmental, social and corporate governance (ESG) into the spotlight as companies worldwide realise the need to adopt more sustainable practices to avoid the risk of being financially impacted in the long run.

This is also the case as ESG considerations are increasingly being integrated into decision-making at the institutional investor level, putting pressure on companies to take heed of the requirement.

The world’s largest asset manager BlackRock Inc recently made a case for change when it announced to clients that companies will need to disclose their plans on what they are doing to fight climate change using scientifically established guidelines.

The firm’s CEO, Larry Fink, also asked companies to disclose business plans that will be compatible with a “net-zero economy”, where companies emit no more carbon than they remove from the atmosphere, by 2050, to help keep global warming under 2°C — a goal set forth in the Paris Climate Agreement.

In Malaysia, there is growing acceptance and acknowledgement by industry leaders of the need for stronger ESG adoption. In fact, the country’s largest pension fund, the Employees Provident Fund (EPF), recently launched its sustainable investment policy and announced it aims to have a fully ESG-compliant portfolio by 2030.

“We aim to be a climate-neutral portfolio by 2050, with net-zero greenhouse gas emissions,” says EPF CEO Tunku Alizakri Raja Muhammad Alias during a recent virtual ESG Roundtable organised by Bursa Malaysia and FTSE Russell.

The roundtable featured several industry leaders who called for stronger ESG practices to be embedded into businesses as well as having meaningful and uniform sustainability disclosures in place to help investors formulate their ESG investment strategies. Besides Tunku Alizakri, the panel was made up of Bursa CEO Datuk Umar Swift, Aberdeen Standard Islamic Investments (Malaysia) Sdn Bhd CEO Gerald Ambrose, Kenanga Investors Bhd CEO Ismitz Matthew De Alwis and London Stock Exchange Group & FTSE Russell’s Group Head of Sustainable Business David Harris.

Helena Fung, FTSE Russell’s Head of Sustainable Investment, APAC, who moderated the discussions, notes that sustainable investing is a critical topic that is becoming core to the way asset allocation and investment decisions are being made by investors on a global basis.

She says the financial group has seen sustainable investing strategies and companies with strong ESG credentials offer performance and resilience in the face of market turbulence caused by the global pandemic.

“From our research into the green economy, this is a growing space that accounts for US$4 trillion (RM16.2 trillion) worth of market capitalisation, while the fossil fuel index is by contrast, contracting,” she says.

The risks and opportunities associated with climate change and sustainability, she adds, have emerged as important drivers of capital redirection globally as investors look to companies that are better at managing ESG risks and contribute to a low-carbon economy.

Datuk Umar observes that there is now a real call to action that was not there before. And more than playing a regulatory role, Bursa wants to facilitate the market to reward good behaviour.

“Previously when we talk of ESG, it sounded like a nebulous idea. But now it’s real. We see the FTSE4Good Bursa Malaysia Index growing. We see sustainable assets outperforming. So now you have a call to action that we need to take forward,” he says.

More importantly, companies should work with institutions and fund managers to define what they need to make better-informed decisions, he adds. “As you engage business owners, [you will see that] they are not seeing these risks. One of the roles we play at Bursa for fund managers and institutional investors is to share with them [things like], ‘Here, these are real risks that you can actually see impacting share prices’.”

The exchange is also mindful of not being seen as just promoting mere compliance, says Datuk Umar, as it wants the ESG focus to be inculcated in stakeholders. “When we send the message that institutional investors, markets and consumers have an expectation, good conduct will be rewarded,” he adds.

He also notes that the larger public listed companies have already embraced sustainability. “It’s the LEAP market perhaps, where there are growth opportunities and the benefits of sustainability have yet to accrue,” he adds.

EPF’s Tunku Alizakri, meanwhile, acknowledges that ESG is a real business concern. Citing a survey done by the fund in 2018, he says it found that 78% of its members do look at ESG when they evaluate their investments. “So, we want to show that we are investing in areas that are important to our members,” he points out, adding that companies should focus on the social dividends of ESG besides the financial aspect.

“The Gen Y and Gen Z groups will make up 73% of our demographic base by 2025. If we don’t start aligning our asset base with what they want, they may say EPF has no relevance to them any more,” he adds.