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KWAP’s journey with ESG investing

IF it’s one thing that the Covid-19 pandemic has thought investors is that they need to be concerned about the survival of companies they invest in, when the latter are faced with unprecedented shocks.

Local institutional fund Kumpulan Wang Persaraan (Diperbadankan) has been early to adopt environmental, social, and governance (ESG) criteria in its investment strategies. KWAP CEO Nik Amlizan Mohamed shares some of her thoughts about asset management, ESG adoption and the pandemic.

StarBizWeek: How has the Covid-19 pandemic changed investment strategies?

Nik Amlizan: The pandemic has exposed the fragility of concepts that we once may have viewed as concrete. It continues to show us the cracks in our businesses, particularly from an ESG perspective, while highlighting the importance of resilience and adaptability.

Investor appetite and expectations have certainly shifted with accelerated demand for the adoption of ESG best practices as investors are increasingly integrating these factors into their decision-making processes.

This could be considered a silver lining due to the Covid-19 pandemic, given that ESG will drive greater improvements for society as a whole and for corporations in their engagements with the communities in which they operate.

A few salient benefits that corporations will need to move faster on would be reversing the degradation of the environment, improving social compliance and most certainly conducting business with more principles and governance.

According to the International Institute of Sustainable Development, in 2018, global sustainable investments amounted to about US$30 trillion (RM125 trillion). By 2036, that number is expected to reach over US$150 trillion (RM625 trillion) signifying a 433% increase.

MSCI data confirms that companies with high ESG performance relative to their sector peers have done well and have continued to attract capital even during the pandemic. Bursa Malaysia announced earlier this year that companies with better ESG practices were more resilient during the pandemic.

How does ESG criteria impact investment decisions and portfolio construction at KWAP?

At KWAP, ESG is a given and it is embedded in our DNA when it comes to investing. Eventually, we foresee a fully ESG-compliant portfolio. Hence, we had asked for improved compliance with ESG practices from our portfolio of companies.

It is not just about the bottom line performance, it is about how businesses operate.

Climate change, debt bondage and corporate fraud are just a few of the negative outcomes in relation to poor ESG practices. Companies must raise the bar on how they conduct their businesses.

As a major investor with a portfolio of RM150bil in assets under management, KWAP must take the lead to ensure that the ESG journey is accelerated in the country. To do this, we are focused on active shareholder engagement.

We look into sustainability, impact on the environment, workers’ rights, employee living conditions, adherence to international labour standards and much more. We are mindful that there is no one-size-fits-all approach to ESG compliance.

For example, some of our neighbouring nations do not need to depend on foreign labour while we do to a certain extent. Dependency on foreign labour exposes these companies to the risk of unsavoury practices by foreign agents.

As part of our engagement with our portfolio companies, we also emphasise the need for them to ensure good ESG practices across their supply chain, be it their suppliers or outsourcing partners.

ESG is a journey and we will continue to see evolving expectations and new benchmarks set. What might have been acceptable ESG practices in 2020 might not be so now and what is acceptable right now may not be next year.

What strategy should corporations impacted by the Covid-19 pandemic be thinking about as they restructure to stay afloat?

A key consideration should be future-proofing their business. We are living through the devastating impact of the pandemic and it is not difficult to imagine how much more severe the impact of climate change will be on society and the global economy. Businesses that are not future proof will not be viewed favourably.

Automation and digitalisation will have to be accelerated and this needs to be accompanied by specific improvements to efficiencies. This applies to any sector and any nature of business.

It would be imprudent to presume that such key areas of change need not be pursued on the premise that the pandemic will fade away.

Asset owners expect investee companies to address their financial risk, reputational risks as well as threats and opportunities.

The Covid-19 pandemic will very likely be considered an endemic and this will come with its fair share of challenges.

Hence, companies and sectors must strengthen processes and indeed have a mindset change on how they prepare to manage their businesses future-forward.

What opportunities have become apparent in this crisis?

Covid-19 also provides new opportunities. Clearly, new growth areas are opening up as a result of this pandemic such as renewable energy, low-carbon technologies, water, health, ageing population and sustainable agriculture.

One of the areas we are also looking at is how businesses need to pivot in terms of strengthening their network in the value chain particularly if they are export-driven.

As we have seen recently, there has been a pragmatic move by major global manufacturers to move their manufacturing hubs away from traditionally preferred geographical locations in order to be less dependent on one particular geographic area to support their supply needs.

This provides opportunities for entrepreneurs. As a long-term investor, KWAP sees this upside potential especially for Malaysia to benefit from such adjustment.

Has Covid-19 sharpened investors’ focus on sustainability, ESG factors and digitalisation?

Our ESG journey started as early as 2009 and it was triggered by our focus that investing in companies with good ESG practices can contribute towards delivering sustainable risk-adjusted returns and therefore enhance shareholder’s value in the long run.

This remains true, even in the post-Covid-19 world.

In terms of digitalisation, for the last few years, we have been encouraging our investee companies to adopt digital solutions. Unfortunately, the take-up rate has not been quick enough.

However, the pandemic has played a part in fast-tracking the adoption of digitalisation, arguably due to necessity as companies clamber to adjust to the new norm in order to continue their operations and remain competitive.

As highlighted earlier, companies have no choice but to strengthen their infrastructure in terms of digitalisation and this must be executed in tandem with cultural changes for companies, given that staff will need to be engaged in a more conscious and considerate manner to ensure that staff are better prepared for this new age of conducting business.

Will this focus on sustainability last? ​​

If there are any lessons that we need to take from this pandemic it is that we can never revert to the previous status quo.

The focus on sustainability will only gain momentum.

We will see more regulatory demands as governments strive to meet their sustainability goals including climate change-related goals, we also expect demands from consumers to increase and of course, investors will continue to focus on ESG compliance.

Based on Bloomberg data released in July 2021, ESG assets are on track to exceed US$50 trillion (RM208.57 trillion) globally by 2025 compared to US$35 trillion (RM146 trillion) in 2020, US$30.6 trillion (RM127.65 trillion) in 2018 and US$22.8 trillion (RM95.11 trillion) in 2016.

There is also an increasing number of asset owners and asset managers who have integrated ESG into their investment decision making by becoming to the United Nations Backed Principles of Responsible Investment (PRI).

KWAP became a signatory to the UN-backed PRI in 2018.

As of July 1, 2021, PRI assets under management stood at US$121.2 trillion (RM505.59 trillion) based on 3,404 investor signatories, representing an increase of US$17.9 trillion (RM74.67 trillion) from US$103.4 trillion (RM431.33 trillion) at the end of March 2020 (17% increase).

This long-term formal commitment is a strong indication that sustainability is here to stay.

The pandemic was a turning point for corporations locally and globally. We need to ensure that we do not regress to the past.

KWAP is focused that there is a permanent shift to incorporate sustainability into our organisation’s DNA and become part of our culture.

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