In August 2020, the Financial Times reported that investors injected record sums into sustainable investment funds, largely based on environmental, social and corporate governance (ESG) principles, during the Covid-19 pandemic, with net inflows of US$71.1 billion globally between April and June 2020. This raised assets under management in such products to a new high of over US$1 trillion, FT wrote, citing information from data provider Morningstar.
Investors favouring businesses with strong ESG practices have been driving the growth of ESG funds in recent years as they are regarded as being more resilient and sustainable in the long term. But it was the unprecedented disruption brought by the Covid-19 outbreak that sped up the segment’s growth like never before, as investors looked for sustainable business models that can better withstand market shocks.
In this article, we have interviewed Bursa Malaysia CEO Datuk Muhamad Umar Swift and Helena Fung, FTSE Russell’s head of sustainable investment for Asia-Pacific, to talk about how FTSE Russell, a pioneer in sustainable investment, works together with Bursa Malaysia to build a resilient ecosystem.
Within the Malaysian context, the increasing relevance as well as importance of ESG considerations are also becoming more apparent to public-listed companies, according to Bursa Malaysia. For instance, the troubles that have beset some of Malaysia’s companies recently over the issue of workers’ welfare, for example, make a compelling argument for the consideration of ESG criteria within investment decisions.
More than anything, there is increasing realisation that sound ESG practices are no longer something “nice to have”. Rather, they are “must-haves” if one is attempting to build a business that is resilient, responsive and future-ready, says Datuk Umar.
And Bursa Malaysia believes that ESG considerations will continue to move up the corporate agenda as various internal and external stakeholders, from institutional investors to regulators and NGOs, demand more effective management of such matters.
In Malaysia, Bursa Malaysia prides itself as a strong proponent of the sustainability agenda, with the aim of establishing itself as Asean’s leading, sustainable and globally-connected marketplace.
“We are also looking to collectively collaborate with ecosystem players to raise availability and appreciation of sustainable investment products, to make the Malaysian capital market more attractive to investors worldwide,” says Datuk Umar.
To do so, it is currently focusing on two priority areas in the marketplace: build capacities of market participants and support a vibrant and sustainable marketplace; and drive growth by enhancing the sustainable and responsible finance ecosystem through new investment products and high standards of sustainability practice and disclosures.
“Our ultimate aim is to build a capital market ecosystem that is characterised by a strong culture of ESG. In addition, we would like to elevate our PLCs to be regional leaders in this area,” says Datuk Umar.
To make this a reality, Bursa Malaysia has played an instrumental role, devoting significant efforts to improve PLCs’ ESG-related practices and disclosures, and to encourage other capital market stakeholders to play a more proactive role in championing ESG.
The FTSE4Good Bursa Malaysia Index, which was launched in December 2014, has played an important role in recognising companies that have taken steps to improve their ESG practices and disclosures over time. The ESG index adopts a “best in class” positive screening approach and its framework is derived from key global initiatives such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) and Taskforce For Climate Related Financial Disclosures (TCFD). The number of constituents in the index has grown to 75 as at December 2020 compared to just 24 in 2014 and is a testimony to the exchange’s efforts that have yielded positive results. FTSE’s transparent ESG methodology, available to companies assessed for eligibility to the index, also provides companies with a basis for understanding how their ESG disclosures are assessed and what information investors need to see on ESG performance. In addition, FTSE4Good ESG data is currently being used by several local financial institutions locally as a basis for their sustainability-linked financing products.
While Datuk Umar acknowledges that PLCs have made collective progress, from establishing the relevant governance structures to implementing a host of relevant policies and making more comprehensive disclosures, other challenges have surfaced as they face increasing scrutiny and pressure from a diverse range of stakeholders to enhance ESG practices and disclosures.
“One such challenge is in enhancing the availability, quality as well as comparability of ESG data to further facilitate investor decision-making. Some asset owners and asset managers are still formulating their internal ESG framework, and find it challenging with the various global standards and best practices available,” says Datuk Umar.
With the surge of investment interest in ESG products, there has been a notable shift globally towards greater alignment on ESG reporting frameworks and standards, says Fung.
“This works in our favour since the FTSE4Good framework is already mapped to other global standards and fits in well with Bursa’s initiative towards ESG standardisation for the market,” she says.
“Regulatory convergence around particular frameworks, most notably TCFD, has garnered broad support from regulators, investors and corporates. This reflects both a growing focus on climate change and the need for standardised and quantitative reporting metrics that provide a basis for comparative analysis on companies’ material ESG risks. In the past year, we have seen a number of important standard-setting bodies commit to work together to help create consistent frameworks for the benefit of both companies and investors.”
“There are several key elements in FTSE Russell’s approach and methodology, which contribute towards this objective. We place an emphasis on being very transparent on both the inputs to our ESG ratings and the specific criteria and indicators that companies are assessed against. We publish the full methodology to both subscribers and to the companies we assess and this forms an important tool in our engagement discussions with companies,” she says.
“Sustainable investing incorporates a range of dynamic issues which have the ability to impact how companies operate. As frameworks change, the ESG methodology is updated. We will continue to engage with companies in Malaysia and to make the assessment framework available both to investors and to companies who want to build on their current practices.”
Responding to the challenges, Bursa Malaysia is exploring ways to enhance the quality as well as comparability of ESG disclosures by PLCs in the coming year. This would undoubtedly spur deeper integration of ESG considerations among institutional investors (both foreign and domestic). Cognisant that there needs to be some standardisation to spur better acceptance and adoption of ESG among domestic institutional investors, Bursa Malaysia intends to facilitate this through its data and index subsidiary, Bursa Malaysia Information, by compiling, consolidating and disseminating ESG data to stakeholders.
“This approach is ideal as Bursa Malaysia Information is already providing market data, analytics and stock market index services and solutions to the industry. A broadened ESG dataset will serve to complement and enrich the exchange’s data offerings, which is in line with our strategic positioning to expand our auxiliary services to the market,” adds Datuk Umar.
The Institutional Investors Council Malaysia is also keen to work on a standardised set of ESG criteria or indicators to streamline how IIC members evaluate the ESG performance of their investee companies, says Datuk Umar.
On that note, Bursa Malaysia plans to obtain more in-depth insights into IIC’s collective ESG data requirements, which will enable Bursa to work towards an ESG framework that can cater for the industry’s common priorities, he adds.
“This entails the team engaging with institutional investors and IIC members to determine the importance or relevance of each of those ESG indicators that will help facilitate their investment decisions. This would form one of the essential building blocks to unlocking the potential for customised products, such as customised ESG indices,” says Datuk Umar.