This article first appeared in The Edge Malaysia Weekly on August 2, 2021 - August 8, 2021

ENVIRONMENTAL, social and governance, or ESG, investing — particularly the “E” and “S” components — is fast taking centre stage in Malaysia as the general public as well as investors are starting to view companies’ responsibilities as extending beyond profits, and including environmental and social concerns as well.

For Kumpulan Wang Persaraan (Diperbadankan), ESG is certainly not a new concept. In fact, KWAP started its ESG journey as early as 2009 with a focus on governance.

This year, the pension fund introduced new ESG criteria in its investment decision-making process under its environmental and social pillars.

“We aim to further enhance KWAP’s ESG integration by adopting climate-related investment beliefs and integrating climate change into our decision-making process. We are also including social responsibility towards employees and the community, which comes under the social pillar of ESG.

“During the pandemic, we realised that some companies are not treating their employees as well as they should, so we have included that as well [in the criteria],” says KWAP CEO Nik Amlizan Mohamed.

ESG principles are not just ideals KWAP values as an organisation, but also something that Nik Amlizan feels strongly about.

For her, ESG is about “lifting all ships”, assisting and encouraging the listed entities that KWAP invests in to embark on reporting that is in accordance with the best practices available.

“From an investment perspective, we are refining our investment strategies to be agile and proactive, which is important given the volatility of the current market conditions. It is about the resilience of the portfolio.

“At the same time, we are intensifying the integration of ESG practices into KWAP’s investment decision-making process, which [is in accordance with] our plans for a more sustainable fund. Eventually, we want a KWAP with a fully ESG-compliant portfolio,” she explains.

The emphasis the pension fund has placed on ESG is backed by the strong belief that investing in companies with good ESG practices can contribute to delivering sustainable risk-adjusted returns, which will then enhance shareholder value over the long term.

The institutional fund has made great strides in its ESG journey since 2009. It first introduced voting guidelines in 2012 with a focus on the listed equity in its portfolio.

Four years later, KWAP introduced its own internal ESG rating and established a responsible investment team, which looks into all matters related to ESG. It was the first institutional fund in Malaysia to introduce its own ESG rating.

“During that time, many ESG index providers were knocking on our doors, [asking us] to subscribe to their indices but we decided to do it on our own. The reason for that was, we found that their interpretation of ESG — as far as Malaysia is concerned — was a cookie-cutter, one-size-fits-all solution,” says Nik Amlizan.

External index providers function on an exclusion basis in their one-size-fits-all interpretation of ESG, meaning that sizeable industries such as plantation or even oil and gas would have needed to be excluded. This is not sustainable for institutional investors such as KWAP that invest heavily in the domestic market.

“If we follow the international or external ESG ratings, they would prefer us to exclude a big chunk of our listed equity investments. If we did that, we wouldn’t be able to assist the local companies in adopting best practices as far as ESG matters are concerned,” she stresses, adding that having its own ESG rating means that KWAP will be able to help lift the ratings of all of its listed investee companies.

“We tell them our expectations as an investor, from an investor’s point of view, and how we can help them. It is easier for us to assist them where they require assistance when they follow appropriate ESG reporting parameters.”

While ESG may be just starting to gain traction in Malaysia among investors and companies, global funds have embarked on this journey much earlier.

“Global funds are looking at these [ESG] matters quite closely. A good case in point is when one of the world’s largest funds decided to let go of a certain sector of investment due to the negative ESG factors.

“For us, we have to assist our companies to move towards that expectation and to get them ready. We have to be attractive enough for foreign investors as well. This was also our intention when we embarked on our ESG journey,” says Nik Amlizan.

She adds that there have been improvements in ESG practices among KWAP’s listed investee companies in Malaysia, based on the pension fund’s internal rating. She believes, however, that the companies can do a lot better.

Although KWAP will continue to engage with its investee companies to encourage them to adopt best practices, Nik Amlizan is quick to add that the pension fund is not in the business of running companies. “What we can do is engage with them and tell them our expectations. But if they remain difficult, we have to review or include that as part of our assessment.”

Nevertheless, if the fund believes an investee company does not have the potential to do well in the long term and is not sustainable, it will sell out from the investee company. “We have no qualms about selling. We have no interest in investing in companies that will not be there for the long term,” she stresses.

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