The Employees Provident Fund (EPF) aims to have a fully environmental, society and governance (ESG)-compliant portfolio by 2030 and also achieve a Climate Neutral Portfolio by 2050.
This may mean that Malaysian companies that are not deemed to be ESG-compliant, may lose their status of eligibility for investing by the pension fund.
Presently, there are only 80 companies in that FTSE4Good Bursa Malaysia index out of the 970 listed companies on Bursa Malaysia.
The FTSE4Good Bursa Malaysia index is seen as the “ESG” index for stocks on Bursa Malaysia.
As of March 2, 2022, the amount of money that EPF has in domestic equities, amounts to 15% of the market value of stocks in the FBM KLCI.
EPF's domestic investments presently amount to RM639bil.
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Meanwhile, the pension fund has stated it will be increasing investments in various domestic assets in 2022, as it believes that "the re-opening of economies and businesses, as well as various initiatives under the National Economic Recovery Plan, would provide fertile ground to increase its investment efficiencies and leverage on the opportunities that a recovery brings."
Regarding concerns about whether EPF's returns from its investments will be impacted by being an ethical investor, Datametrics Research and Information Centre Sdn Bhd managing director Pankaj C. Kumar pointed out that markets also place premiums on companies that are perceived to have good ESG practices.
"On that basis, EPF is on the right track. The ESG theme has been around for a while now, and gained further traction recently. More companies are now aware that they need to be socially responsible, practise good governance and not damage the environment," he said.
Pankaj also pointed out that the notion that a company that is not ESG compliant makes more money, may not hold true.
"Today, companies have to satisfy all stakeholders, not just shareholders. While profit maximisation is always the objective of a shareholder, stakeholders have other claims," he said.
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Bank Islam Malaysia Bhd (BIMB) chief economist Dr Mohd Afzanizam Abdul Rashid said increasingly, large asset managers are subscribing to the ESG theme.
"This is very long-term. Looking at the empirical evidence, ESG portfolios tend to outperform conventional portfolios in the long-term," he said.
In October 2021, Bank Islam CEO Mohd Muazzam Mohamed had said the group's five-year roadmap (2021 to 2025) is aimed at it becoming a prominent offeror of shariah-ESG total financing solutions by end-2025.
An asset fund manager said: "If you look at it from a holistic point of view, ESG issues like climate change, ethical labour practises and good corporate governance are real."
"What the EPF and Bursa appreciate is that if you do not talk about ESG, then funds are being applied in terms of businesses that will be detrimental to the environment, and ultimately in the long run, it's going to be bad for the world at large. They want to make sure that the money goes into businesses that have a positive impact on the world," he said.
As for the returns on investments in ESG businesses, the fund manager pointed out that the valuation for ESG-compliant companies will rise in tandem with higher demand from investors.
"So, in theory, fewer investors will want to buy the stocks of companies with weak ESG profiles, and their share prices would not see premium valuations," he noted.
Sunway University professor of economics Dr Yeah Kim Leng also concurred that ESG-compliant companies are expected to thrive better in a global environment whereby investors, financiers, producers and consumers are increasingly demanding goods and services that meet various ESG standards.
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"Although there are exceptions, ESG-compliant companies tend to perform better in sustaining earnings performance given that their business models and practices are based on sustainability principles," he said.
Yeah noted that given the fast changing investment landscape driven in part by the shift towards fulfilling sustainable development goals, EPF will have to enhance its investment management capabilities and capacity and take the lead in driving socially responsible and sustainable investing in the country.
UOB Kay Hian Malaysia head of research Vincent Khoo said investing in ESG investable stocks is a global trend which EPF must also adhere to.
"However, it must be emphasised that the list is inclusive of companies which may not yet be compliant today, but have clear road maps towards becoming ESG compliant," said Khoo.
Centre for Market Education research fellow Dr Liew Chee Yoong said certain studies have shown that ESG investments do not result in superior returns, compared to returns from investing in stock indexes.
"According to a certain past research, in some cases, ESG investments can also result in lower risk-adjusted returns. I agree that in certain situations, EPF's ESG investment returns can be adversely impacted. However, in general, it cannot beat the market," said Liew.
Dr Geoffrey Williams, an economist and specialist in higher education management and finance at the Malaysia University of Science and Technology added that for the EPF, the ethical investor role is not so much about risks and return on the portfolio because ESG stocks in Malaysia have underperformed the conventional stocks in recent years.
"The importance is EPF'S role as an active investor that can use its leverage to promote ESG change in Malaysian equities and in particular companies.
It is hoped that having EPF as a leader in ethical investment will improve the overall quality of Malaysian stocks and this could help to attract international funds. But we still have to see EPF's ESG approach and it must be benchmarked against international standards," said Williams.