KUALA LUMPUR: The Employees Provident Fund (EPF) will wholly embrace the environmental, social and governance (ESG) concept in its investment decisions from now.

       Its newly launched EPF sustainable investment policy will guide the provident fund in making better informed and holistic investment decisions by integrating ESG considerations into its management processes.

       The move will ensure the EPF’s relevance and enhance investment returns for members moving forward, according to chairman Tan Sri Ahmad Badri Mohd Zahir.

       “Traditionally, the EPF has always been a socially-conscious investor, applying negative screening criteria to filter through securities and excluding those that are categorised as unethical or socially irresponsible such as alcohol, tobacco, gambling and weaponry,” he said at the launch of the policy here yesterday.

       “We will be incorporating ESG factors into our investment due diligence and decision-making process, given its potential to enhance return while reinforcing our existing risk management framework,” he added.

       Following this development, the 16 external fund managers of the EPF had signed the sustainable investment pledge to solidify their commitment to include ESG considerations into their investment decision-making processes.

       The portfolio managers will be communicating the new expectations to its investee companies and external fund managers, EPF said in a statement.

       The EPF’s sustainable investment framework will provide the basis for ongoing and future engagements to discuss, assess, and manage ESG risks as well as capitalise on value creation opportunities, it added.

       Chief executive officer Datuk Seri Amir Hamzah Azizan said there has been a gradual rise in awareness on sustainability and shareholder activism globally and with this, the Malaysian capital market has seen its fair share of ESG issues impacting the domestic investee companies.

       “As such, it is imperative for institutional investors to play an effective stewardship role in driving and raising the standards of the ESG agenda in Malaysia’s capital market,” Amir Hamzah said.

       “The launch and the pledges from the external fund managers will mark an important milestone for the EPF as we see sustainability as something that should be normalised and embedded as part of the day-to-day operations,” he added.

       Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz said, in his opening address, that the country is facing an increased scrutiny on its labour practices, particularly in the treatment of foreign labour by corporate Malaysia.

       “These issues have a tangible adverse impact not only on business profitability, but also on the country’s reputation as a whole. As a result, it is undeniable that sustainable or ESG investing is becoming increasingly important, and is no longer limited to developed countries,” Tengku Zafrul said.

       “As global scrutiny on labour standards gradually increases, we are confident that the EPF’s workers’ wellbeing policy will further strengthen labour practices among Malaysian corporates, while also serving as a testament to the country’s commitment to strive for better workers’ wellbeing,” he added.

       Other than the government, institutional investors also have a role to play in assisting the government in mainstreaming the sustainability agenda across as many sectors and industries as soon as possible.

       “The Finance Ministry has already begun budget-tagging specific measures to ensure that various ministries spend in accordance with our sustainability expectations.

       “To maintain the momentum of this mainstreaming process, institutional investors must share key data on how each industry in their ecosystem has ‘shaped up’ in terms of sustainability,” he said.

       “This will enable future policies to be tweaked accordingly to improve Malaysia’s climate adaptation and crisis mitigation strategies as quickly as possible,” Tengku Zafrul added.

       Amir Hamzah said the EPF had developed its own policy and this is supplemented by climate change and workers’ wellbeing issue policies, as well as six priority sector policies that will cover the palm oil, oil and gas, mining, power generation, banking and construction industries.

       “These sectors were chosen based on the EPF’s exposure to these sectors and the inherent ESG risks in them. Given the differences in materiality between these sectors, the EPF has developed sector-specific ESG expectations aligned to global standards, local commitments and nuances, and peer investors’ practice,” the fund said.

       The EPF noted its Sustainable Investment Policy is grounded on four key guiding principles, among them are to: take an active leadership role in ensuring investments within the EPF’s portfolio transition towards ESG compliance, and identifying relevant ESG priorities and targets for the EPF that will benchmark it to local and global goals and taking into account the fund’s portfolio exposures.

       It also includes recognising internal capability building as a key priority in the EPF’s sustainable investment approach to further its transition towards becoming a leader in sustainable investing, and integrating ESG in the EPF’s investment decision-making process to provide a robust and comprehensive investment process.

       The fund said the launch yesterday marks its evolution from being an ethical to a sustainable investor as it aspires to become fully ESG compliant by 2030 and climate neutral by 2050.