LAST week, G20 finance leaders gathered in Venice and for the first time, collectively endorsed carbon pricing as one of the tools to tackle climate change.

       The irony of Venice as the venue of the G20 gathering was lost on few. Just three weeks before, Unesco announced that it is considering a proposal to put Venice on its endangered list – due in part to the effects of climate change on its vulnerable lagoon ecosystem.

       I am hopeful that the G20’s recent decision, and its broader official commitment towards climate action, is a signal that the world’s largest economies are taking seriously, the threat to the world and civilisation as we know it.

       We hear repeatedly that time is running out for the global community, including the financial sector, to effect real change. This real change has to come about now or we could see irreversible damage to our planet.

       The pandemic has driven home the point that borders are man-made and collective action is essential for us to overcome the existential challenges we face.

       For climate change, this collective effort must include the financial sector. As I have emphasised previously, finance is key to a sustainable future.

       By mobilising savings to the right investments, it can steer the direction of our economies towards a sustainable path.

       In this regard, the importance of better Environmental, Social, and Governance (ESG) integration into investing criteria cannot be underestimated. This is especially true for large institutional investors that can play an instrumental role in realigning investments and driving corporations to transition towards a low carbon economy and responsible corporate behaviour.

       While large institutional investors, such as pension funds in the Scandinavian countries, have long embedded ESG in their mandates, others are playing catch up. Nevertheless, it is heartening that ESG adoption amongst institutional investors has increased from 61% in 2019 to 72% in 2021.In addition, within a year since the breakout of the pandemic, a hundred more institutional investors have joined the over 4,000 signatories of the Principles for Responsible Investment (PRI).

       SC executive chairman Syed Zaid Albar

       These signatories collectively control more than USD100 trillion (RM4.1 trillion) of assets under management. In Asia, the world’s largest pension fund, the Japanese Government Pension Investment Fund (GPIF), signed up to the PRI and published its responsible investment principles in 2015, but its ESG journey has accelerated since 2017 when it allocated funds into three ESG indices - the FTSE Blossom Japan Index, MSCI Japan Select Leaders, and the MSCI Japan Empowering Women Index. The GPIF is also driving shareholder activism in accordance with Japan’s recently revised stewardship code for institutional investors, which puts a much stronger emphasis on the integration of ESG. It is also urging asset managers to become signatories of the PRI, and wants fund managers to give careful consideration to ESG issues when exercising voting rights.

       With the rise in shareholder activism, there is increased pressure on corporations to divest and reduce their dependence on fossil fuels. Increasingly, corporates are also expected to consider their inputs and outputs, with clear emission reduction targets, aligning their business practices to the Paris Agreement targets.

       This can be seen as a growing trend towards exerting greater pressure and demanding accountability from corporations to implement change and advocate better ESG policies and disclosures.

       BlackRock, the world’s largest fund manager, for example, has been exercising their voting powers and using their considerable heft to hold their investee companies accountable for ESG compliance. In 2020, BlackRock has voted against the appointment of 64 directors of numerous carbon-intensive companies and warned several others to “demonstrate significant progress in the management and reporting of climate-related risk, including their transition plans to a net-zero economy”.

       In Malaysia too, institutional investors are placing greater importance on sustainable and responsible investments (SRI) and driving the sustainability behaviours of their investee companies. There are a few leaders of the pack, such as the Employee Provident Fund (EPF), Retirement Fund Incorporated (KWAP), and Khazanah Nasional Berhad, all of whom are members of the PRI, and actively engage with their investee companies.

       Khazanahlogo

       However, more needs to be done. While there has been much emphasis on governance issues in shareholder activism in Malaysia, more weight needs to be put on social and climate issues.

       Similarly, the Malaysian Code on Institutional Investors (MCII) that was first released in 2014 to promote leadership in governance and responsible ownership by institutional investors, can be further enhanced.

       Given the influence institutional investors has to spur the sustainability agenda further, it is an opportune time for the Institutional Investors Council to revisit the principles and recommendations in the MCII to provide greater emphasis and stewardship surrounding climate change and sustainability considerations.

       It is clear that institutional investors have and must play a critical role to influence and shape their investee companies’ corporate behavior.

       In so doing, institutional investors can force the issue – companies that are not already considering ESG factors seriously, will do so at their own peril. Equally, companies that have already embarked on strategies that will shift the needle in the right direction, will be recognised.

       It will take such efforts to support Malaysia’s journey in transitioning to a low carbon economy. It is time we set our sight on a sustainable future and invest in it boldly. Datuk Syed Zaid Albar is the executive chairman of the Securities Commission Malaysia. The views expressed here are the writer’s own.