This article first appeared in The Edge Malaysia Weekly on November 29, 2021 - December 5, 2021

PERMODALAN Nasional Bhd (PNB) will release its framework on ESG (environmental, social and governance) investing in the next few months, further affirming the rising influence of sustainable practices as a key requirement for Corporate Malaysia.

The institutional fund joins the likes of the Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (Diperbadankan) (KWAP), which have already committed to making sustainability a component in guiding future investment decisions.

Speaking to The Edge in an exclusive interview, PNB president and group chief executive Ahmad Zulqarnain Onn says the industry has hit an inflection point “where there is alignment of both the profit motive and the altruistic motive”.

“Previously, I had the question around fiduciary responsibility, which is to maximise returns for unit holders. I understood the altruistic motive — but how do you make a decision where it’s not so clear that this is in the best interests of PNB unit holders?

“I think we’ve passed that point. It [ESG] is now good for business. You cannot underestimate how powerful this force is in driving asset prices.

“Investors’ perception of a company’s commitment to ESG will drive the valuation of that company, in addition to earnings and cash flow. It’s not just the earnings and cash flow anymore.

“In a couple of months, PNB will disclose for the first time its ESG framework, which will be tabled to the board soon.”

Sustainability is already playing a bigger role in delivering profit for investors. S&P Global reported in June that most ESG exchange-traded funds it tracked outperformed the S&P 500’s 10.8% gain in the January to May 2021 period, some easily by more than 10%.

A recent survey by Macquarie Asset Management found that 85% of investors have greater focus on ESG compared with two years ago, with four in 10 Asian investors having already made net zero commitments. Concurrently, the market is seeing large institutions drop off shareholders’ lists very quickly, and that has put downward pressure on the prices of assets with ESG risks.

Similarly, in Malaysia, the share prices of big-cap companies have been partly hit due to ESG issues, ranging from labour, high reliance on fossil fuels and allegations of unsustainable agricultural practices.

PNB had already started its ESG journey prior to the framework’s release. For example, its flagship Merdeka 118 tower — which will be the second tallest in the world upon completion in 2022 — could be one of the greenest buildings in the country when it launches, says Ahmad Zulqarnain. It will be the first in the country to achieve triple green platinum building accreditations, namely the Leadership in Energy and Environmental Design (LEED), Green Real Estate (GreenRE) and the Green Building Index (GBI).

However, the ESG transition will be a challenge for one of the largest investors in Malaysia’s stock exchange, which has majority holdings in companies with inherent ESG risks in terms of their core businesses, including oil and gas, plantations, construction and automotive.

PNB had RM322.6 billion of assets under management at end-2020, of which 66.4% or RM214.2 billion were parked in Malaysian public equities — representing close to 12% of the total market capitalisation of Bursa Malaysia-listed companies at the time. The fund had stakes in more than 90 locally listed companies as at Nov 22.

This includes Sapura Energy Bhd, Velesto Energy Bhd, S P Setia Bhd, Sime Darby Bhd, Sime Darby Plantation Bhd, Sime Darby Property Bhd and UMW Holdings Bhd. It also has substantial stakes in utility firm Tenaga Nasional Bhd and IJM Corp Bhd, which is involved in quarrying and infrastructure concessions.

Ahmad Zulqarnain says it remains to be seen how PNB’s portfolio will transform after incorporating ESG policies. Even so, it does not mean that it will avoid everything that emits pollutants when making new investments in the future.

The institution has done its first estimate on the greenhouse gas (GHG) emissions of its portfolio by applying a percentage of ownership in its investee companies. “For PNB, two-thirds of the emissions come from a tenth of our portfolio, in terms of value. So, it is actually quite disproportionate,” he says.

“In that sense, depending on whether you are a glass half empty or half full person, it’s actually possible to start bringing this down because the number that needs to be tackled is relatively small.

“The [GHG] reduction will happen principally through positive engagement with companies in Malaysia, about their own transition plans to reduce emissions … I think what is required for any Malaysian company is actually a very serious look at sustainability issues surrounding their business.”

Ahmad Zulqarnain does not see the transition adversely impacting PNB’s performance but rather, he sees huge investment opportunities in view of upside potential from existing or new companies that are doing things in new ways.

“We are at the point where markets are looking for improvements. It is our belief that the transition play, if you can find it, will be a very profitable one,” he says.

“It’s about identifying companies that are going to improve in their ESG journey. So, when companies improve in this score, the markets will reward them from a valuation stand point.

“We also don’t think it will hit performance because as the world shifts towards greener ways of living, there will be a big shift in terms of how businesses are run and how products are sold, and what products are sold as well.”

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