Once and when the bubble does burst, we want Malaysian institutions to be the ones sitting ahead of the curve

IN THE almanac of bad investments, 2022 would go down in history as the year when the cryptocurrency bubble burst, and the ESG ratings got caught.

The crypto exchange FTX’s debacle highlighted the fundamental element that we had suspected all along — that the ESG valuations given to companies were merely window dressing to justify greedy capitalists’ (fund managers, investment bankers, you name it) idiotic imagination of value, versus the good old-fashion due diligence on real businesses and commercial operations.

You can read it in the news — despite the inane structure of its board of directors and management hierarchy, FTX was given an unnaturally high score by ESG rating companies. One of them, Truevalue Labs, rated FTX higher than multinational corporations and Forbes 500 companies such as ExxonMobil.

The crypto exchange’s CEO Sam Bankman-Fried was feted as a wunderkind billionaire, sympathetically profiled as a deeply “moral” person, who aimed to achieve goodness through benevolent acts and philanthropy.

Apparently, Bankman-Fried, currently persecuted for fraud, was the second-biggest donor to the US Democratic party funds. (The biggest being the scoundrel of a currency trader, George Soros.)

Such was the credibility of the ESG ratings, that despite the crypto exchange’s lack in any semblance of fiduciary governance, FTX was valued at US$32 billion (RM141 billion) in January 2022 and boasted shareholders such as BlackRock Inc and Softbank Group.

FTX has only three-conflicted-interests persons on its board — Bankman-Fried, who is also, conveniently, its biggest shareholder; former head of sales Jonathan Cheesman; and an unnamed lawyer from Antigua & Barbuda.

Heck, even pension funds, the most boring and supposedly safest of all funds, invested in FTX.

Charmed by ratings, including its ESG ratings no doubt, Ontario Teachers’ Pension Plan put US$95 million into FTX.

And so did professional fund managers. Tiger Global invested US$38 million despite hiring Bain & Co as a consultant to conduct “due diligent” on FTX, while Sequoia Capital plonked US$214 million despite catching Bankman-Fried playing video games during his presentation.

The reason that the ridiculous crypto rush went on for more than a decade preceding the bubble (the first cryptocurrency, Bitcoin, was introduced in 2009) was hot money from the property bubbleburst in 2008 got addicted to instant profits and kept lapping up opportunities to make a fast buck.

And the next opportunity is already here. The hot money is already in. Love it or loath it, ESG investment is already bubbling and priming to grow.

According to Bursa Malaysia, there are 235 ESG-mandated global funds already invested in the local bourse, holding shares worth RM631.3 billion or US$143.5 billion. Majority of the funds originated from North America (44%), followed by Europe (27%), Asia (26%) and the Middle East (3%).

In the meantime, the local ESG-mandated funds — the Employees Provident Fund, Permodalan Nasional Bhd, Khazanah Nasional Bhd, Retirement Fund (Inc) — hold another US$118 billion worth of stocks with good ESG ratings.

Now, for global hot money circling around for a place to call home, the potentials of a developing nation with a legacy as one of the tiger economies of the East having a new, more stable, outward looking and business-friendly government, wouldn’t Malaysia be a prospect too hard to resist?

We, nonetheless, need to learn from our own mistakes in the past. The CLOB (Central Limit Order Book) debacle and currency speculation taught us fallacies of self-regulation. And the crypto fallouts taught us that capitalists can only be trusted to protect their interest. We cannot trust the ESG funds to self-regulate.

For the time being Bursa is monitoring, according to the local bourse. But Bursa is the market promoter, whose natural main objectives would be centred around profits.

A smart hand of the government, as proxy to the nation, need to be formed very quickly to ensure that our national institutions would not only be participating, but also benefitting from the approaching onslaught. The brightest among us need to put their heads together to find the best way on how to tap into this.

The ESG bubble may soon be building up, and it is in our interest to keep it bubbling as long as it would. It is a behemoth of a wave that cannot be stemmed.

The main and most critical point is a no-brainer. Once and when the bubble does burst, we want Malaysian institutions to be the ones sitting ahead of the curve.

Asuki Abas is the editor at The Malaysian Reserve.

• This article first appeared in The Malaysian Reserve weekly print edition