Keep Your Portfolios Sustainable via ESG Investing

Source: 4EJournazine, Vol 23, No 4, 4Q2023 (pg 28-29)

Download: Keep Your Portfolios Sustainable via ESG Investing


Explore the expanding landscape of ESG investing in Malaysia, including insights into the upcoming national framework and collaborative efforts that present potential benefits for investors.

When discussions revolve around ESG (Environment, Social, and Governance) or sustainable development, the typical associations often include thoughts of increased government regulations and environmental protests. So, only governments and environmental NGO groups come to mind.

Indeed, before exploring discussions about ESG, it is pertinent to begin with a foundational understanding of “sustainable development”. This term refers to development practices that address current needs without jeopardising the capacity of future generations to fulfil their own requirements. In 2015, a global consensus was reached as 193 countries established the Sustainable Development Goals (SDGs). These SDGs encompass 17 overarching goals, 169 specific targets and 248 indicators, collectively aiming to pave the way for a more sustainable and improved future for all.

Sustainable development requires businesses to be aware that their daily activities impact the environment, economy and society, including human rights. They must actively manage these impacts and engage in responsible conduct. Today’s businesses face a strong need to meet changing ESG expectations from various stakeholders, including investors. According to the i-ESG Framework from the Malaysian Ministry of Investment, Trade and Industry, around 89% of investors prefer the mandatory use of consistent global standards for reporting ESG performance.

Ethical investing started with investors who follow ethical principles in their investment criteria, directing investments only to companies that meet these standards. This type of investing continues, along with a growing number of investors following ESG standards. Therefore, ESG investing involves directing investments exclusively to companies and portfolios that meet established ESG criteria.

HOW DOES ONE MEASURE ESG PERFORMANCE?

HOW DOES ONE MEASURE ESG PERFORMANCE?


The idea is that any socially responsible business contributes to sustainable development by enhancing environmental, societal or governance wellbeing. Investors gauge a portfolio’s adherence to sustainability standards by assessing how much the company issuing its securities contributes to these aspects.

In Malaysia, sustainability reporting is mandatory for listed companies1, while unlisted ones are encouraged to do so, especially if they plan to go public soon. Regarding ESG adoption, individual companies decide whether and how they contribute to sustainability. Listed companies, regardless of ESG adoption, must report their sustainable performance in corporate disclosures.

Investors interested in securities from listed companies can theoretically monitor ESG performance. However, companies choose which specific ESG standards to adopt. For instance, a company may provide financial aid to employees facing bankruptcy, but this effort might not be the company’s ESG goals because they do not see this effort as their ESG goals, causing uncertainty for investors who value this goal.

This raises the question of how easy it is for investors to track ESG data. It’s challenging, but there are ESG rating professionals that specialise in ESG ratings. An example in Malaysia is the FTSE4Good Bursa Malaysia (F4GBM) Index. Investors may refer to ESG rating indices or consult agencies to gain insights into a company’s ESG performance.

THE 17 UN SUSTAINABLE DEVELOPMENT GOALS
1. No Poverty
2. Zero Hunger
3. Good Health and Well-Being
4. Quality Education
5. Gender Equality
6. Clean Water and Sanitation
7. Affordable and Clean Energy
8. Decent Work and Economic Growth
9. Industry, Innovation and Infrastructure
10. Reduced Inequalities
11. Sustainable Cities and Communities
12. Responsible Consumption and Production
13. Climate Action
14. Life Below Water
15. Life On Land
16. Peace, Justice and Strong Institutions
17. Partnerships For The Goals

Source: United Nations

WHAT IS IN IT FOR MALAYSIANS TODAY?

WHAT IS IN IT FOR MALAYSIANS TODAY?


In April 2023, MITI Minister Tengku Datuk Seri Utama Zafrul publicly announced that the Malaysian government is currently developing a national ESG framework2. This initiative stems from the trend of regulators worldwide requiring companies to comply with ESG standards to remain in business. Additionally, exporters must meet ESG standards to access these markets, making it essential for Malaysian exporters to ensure their revenue stream from exports stays intact.

While ESG investing offers numerous benefits, the most crucial for Malaysian investors is the effective reduction of ESG non-compliance risks. Malaysia’s global trade exposes us to the risk of financial loss due to non-compliance in other countries. Engaging in ESG investing enables Malaysian investors to mitigate the risk of ESG-related fines affecting their investment portfolios or experiencing a decline in revenue due to import permits being denied on ESG
non-compliance grounds.

Another significant, albeit indirect, advantage of ESG investing is the positive branding companies receive by adopting ESG standards. With issues like climate change gaining global importance, consumers prefer to support companies contributing to sustainable development. Therefore, companies with good ESG performance can command a premium by offering sustainability as a value to consumers, ensuring that investments remain sustainable.

WHERE DO MALAYSIANS GO FROM HERE?

WHERE DO MALAYSIANS GO FROM HERE?


A national ESG framework is expected to be ready by the end of 2023. Although ESG investing might be new to many in Malaysia, it’s not a new concept globally. Bursa Malaysia has already ventured into ESG investing by partnering with FTSE Russell to create an ESG index. This presents a favourable opportunity for investors to start contemplating the inclusion of ESG standards in their investment preferences.


ABOUT THE AUTHOR


Mr. Lam Kwai Soon

Mr. Lam Kwai Soon

COO & Tax Managing Director, Cheng & Co Group

Mr. Lam is the Group Chief Operating Officer of Cheng & Co Group of Companies.

He is an experienced tax agent, a professional accountant and a qualified financial planner.

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