ESG investing to become mainstream soon, say top funds


ENVIRONMENTAL, social and governance (ESG) investing is becoming part of mainstream investing amid growing awareness of its importance, and companies need to respond in kind quickly.

Retirement Fund Inc head of responsible investment Rizal Mohamed Ali said ESG investing is “obviously creeping into mainstream investments”, which calls for companies to take action fast.

“Our advice is to allocate manpower, and to collaborate and engage with the regulators and investors. But act quickly. There’s a lot to do. If you don’t act quickly, you’re going to miss the boat,” he said during a panel discussion at the Evolution of ESG Investing conference held by Bursa Malaysia and Malayan Banking Bhd in Kuala Lumpur yesterday.

Rizal added that ESG investing has now become a component expected by investors and stakeholders, and guided for by regulators.

Employees Provident Fund head of equity research Nor Azam Yahya agrees that ESG investing will become mainstream eventually.

“I think over time, it’s going to be part of the process that all fund managers have to go through,” he said.

ESG investing can be broadly defined as the integration of ESG factors into investment processes and decision-making across different asset classes, industries, geographies and fund sizes in order to enhance returns and/or mitigate risk.

While ESG investing in the past has often come with the connotation of excluding certain actions or companies, it encompasses much more as it has the power to influence the trend of things to come, BNP Paribas Asset Management CIO of Asia Pacific Alex Ng said.

He said if ESG investing becomes mainstream, it will enrich the entire ecosystem.

“It gives relevance to the corporations on why they have to report (ESG values), because their shareholders want that to evaluate what they do with their investments,” Ng said.

ESG investing has seen rapid growth over the years as investors increasingly seek to put their money into companies that display responsible behaviour, while providing long-term returns.

It’s also often associated with socially responsible investing, which goes one step further by eliminating or selecting investments according to specific ethical guidelines.

Data proves ESG investing, rather than limiting the scope, can actually provide better long-term returns compared to non-ESG-compliant investments.

At home, the FTSE4Good Bursa Malaysia Index — which supports investors in making sustainable investments in local public-listed companies — now has 71 constituents compared to 24 upon its launch in 2014.

The index also outperformed the benchmark FTSE Bursa Malaysia KLCI by 4.62% for the period of Dec 31, 2013, up to June 30, 2019, as per Bursa Malaysia data.

Globally, some US$31 trillion (RM127.41 trillion) worth of assets under management (AUM) are invested using sustainable strategies — an increase of 35% in just two years, data compiled by Bursa Malaysia show.

Signatories of the United Nations-supported Principles for Responsible Investment also saw their AUM rise from US$15.9 trillion in 2016 to US$29 trillion in early 2019, according to RAM Rating Services Bhd.

Although there isn’t a definitive timeline as to when ESG investing will become completely mainstream, the trend is encouraging.

“Moving forward, more and more people will adapt ESG practices in investing, although there must be enough manpower and skills to cope,” Nor Azam said. In BNP Paribas’ case, the group appoints an “ESG champion” within each team to fully embed the ESG mindset.

“We do need some ESG specialists because it doesn’t come to mind immediately for analysts — until there is a reason.

“For Malaysia, the implementation of the sugar tax prompted greater awareness of healthcare concerns,” Ng said.

He added that having a longer-term horizon for reaping ESG returns would be more ideal, as ESG investments usually require more time to show returns.

Bursa Malaysia Bhd CEO Datuk Muhamad Umar Swift said while he is “very happy” with the growth in the number of companies on the FTSE4Good index, he would like to see greater quality disclosure.

“We’re really focused on the quality of the information given. Compliance for the sake of compliance isn’t what we want. We’re very focused on substance, rather than form,” he said on the sidelines of the conference.