Companies with ESG mandates earn high score among investors

EPF believes ESG has a distinct market impact in terms of profitability


BUILDING an environmental, social and governance (ESG) portfolio as part of corporate practice could help companies withstand market instability as businesses are increasingly rated based on such metrics.

Employees Provident Fund (EPF) CEO Tunku Alizakri Raja Muhammad Alias said the ESG-principled sectors are favoured by investors and fund managers, and have a distinct impact on profitability.

“From the EPF perspective — moving away from the logic, structured stock-like thinking of just looking at the balance sheet, profit and loss — we believe ESG has a distinct market impact in terms of profitability.

“According to our investment portfolio, our top social stocks went down less than 10% compared to the FTSE Bursa Malaysia KLCI, which declined more than 16%.

“ESG has shown resilience and is necessary to have,” he said during a panel session at the Invest Malaysia 2020 Virtual Series 1 in Kuala Lumpur yesterday.

Tunku Alizakri said the plantation sector is one of the sectors that would highly benefit from implementing the ESG principles due to the extra margins that could be applied for the palm oil products.

Sustainability and deforestation issues are an impediment to take these counters into the ESG Index, he added.

“The plantation sector has always been a demon to ESG. We do the sins of our fathers in terms of plantation and deforestation.

“In terms of sustainability practices, if we were able to do traceability and make sure Malaysian palm oil is certified, there is a market out there for the products as palm oil is the most productive oil-bearing crops per hectare basis,” he said.

Khazanah Nasional Bhd MD Datuk Shahril Ridza Redzuan said the sovereign fund has been spearheading the adoption of ESG standards as it was the first issuer of ESG bonds.

“ESG is not just about investing shares but could be utilised in other capital markets. Khazanah has been one of the key sponsors of the Taman Tugu Project which is a huge initiative to ensure the viability of human spaces in our city,” he said.

On EPF’s portfolio geographical diversification, Tunku Alizakri explained the present is a challenging time as the trillion ringgit fund is unable to increase its global exposure to achieve its internal target amount of global investment.

“Our strategic asset allocation keeps on suggesting a global diversification but we have never been able to achieve the amount.

“We are always playing catch up and as years go by, the number keeps on increasing and it is a high time for us to expand,” he said.

He added that EPF is actively engaging with the regulators to come up with a long-term plan on how the fund could manage and balance the need for domestic and global exposures.

Retirement Fund Inc (KWAP) CEO Syed Hamadah Syed Othman said the pension fund is also looking at international assets that match its current investment and liabilities profile.

“We have to understand the nature of (KWAP) investment in the domestic market and we remain committed to it. Anything beyond the domestic market is for the benefit of diversification and adjusting our investment risks,” he said.

KWAP’s exposure to the international market is less than 20% of its funds, he added.

“We have room to expand further, each year we invest around RM8 billion in the capital market. Of the total, RM3 billion are in new investments and RM5 billion are for reinvestment,” he said at the event yesterday.