Guided by ESG factors
Environmental, socal and governance criteria influencing bond investors
PETALING JAYA: Environmental, social and governance (ESG) factors are high up on international bond investors’ radar as more local institutions gear up to enter the responsible investment space.
Bond analysts said more investors are making in-depth considerations for ESG factors before investing in sukuk and bonds to better manage risks to ensure sustainable investments amid a tough and volatile investment climate. Industry experts have acknowledged that these factors are paramount for the long-term stability and health of capital markets.
They foresee investors and institutions in the country following the path taken by Retirement Fund Inc (KWAP) and Khazanah Nasional Bhd to integrate ESG factors into their investment decisions.
An asset class which is designed for responsible investment seeks to enhance the long-term economic performance and reduce the financial risks associated with the environmental and social practices. Responsible investment incorporates ESG factors into investment processes and decision-making.
RAM Consultancy Services Sdn Bhd CEO Promod Dass told StarBiz that global bond and sukuk investors are increasingly considering ESG factors and sustainability as part of best practice in investment due diligence and capital allocation.
“This is because ESG signals are beginning to be used not only for risk management, but also to target investment opportunities. Internationally, the surge in assets under management from US$15.9 trillion in 2016 to US$29 trillion currently held by investors that are signatories to the United Nations-supported Principles for Responsible Investments (PRI) is a clear signal that ESG-sensitive investment is fast gaining traction,” he added. In Malaysia, Islamic finance, sustainable responsible investment (SRI), ESG-focused investing and green finance have found some common ground and this provides a foundation for further growth, Dass noted.
On Feb 1, 2017 and Feb 7, 2018, respectively, Khazanah and government pension fund KWAP became PRI signatories, which he described as an important signal and catalyst for further market development.
This marks a tipping point for ESG investing in Malaysia, and may prompt many other domestic institutional investors and entities to follow suit.
In July 2018, KWAP reported that a total of RM3.8bil had been set aside for the pension fund’s ESG investments. The move by KWAP and Khazanah, he said, were examples of market leadership and may prompt other investors and institutions to follow suit.
Dass also observed that some fund managers are already designing products with ESG-related themes. In July 2015, VCAP Asset Managers Sdn Bhd launched the Malaysian ESG Opportunity Fund. BIMB Investment Management Bhd, a wholly owned subsidiary of Bank Islam Malaysia Bhd, on Nov 12, 2015 launched the BIMB-Arabesque i Global Dividend Fund 1, Malaysia’s first multi-currency syariah and ESG-compliant global equity fund, in partnership with global asset manager, Arabesque Asset Management Holding Ltd. In August 2018, BIMB Investment launched the BIMB ESG Sukuk Fund - the world’s first ESG sukuk fund and the first syariah sukuk fund in Malaysia approved under the Securities Commission‘s (SC) Guidelines on SRI Funds introduced in December 2017.
“The combined efforts of Bank Negara, the SC and Bursa Malaysia since 2014 have laid a strong foundation for responsible investment and sustainable finance. Malaysia’s success in sustainable finance was catalysed by regulators that have championed Islamic, green and ethical finance, leading to further market development,” Dass said.