A sustainable lifestyle reflects personal values, focusing on daily choices that reduce environmental impact — such as energy use, waste and pollution — while enhancing overall quality of life. In sustainable investing, companies are evaluated not only on long-term financial performance but also on their commitment to environmental, social and governance (ESG) practices, including ESG and socially responsible investment (SRI) strategies.
Generally, ESG factors comprise:
- Environmental: Stand on carbon footprint, clean energy, waste and water in the supply chain;
- Social: Impact on human rights, employee health and safety, racial diversity and engagement with society; and
- Governance: Management quality, disclosure transparency, stand on graft and executive compensation.
ESG investments are assessed relative to peers using both positive and negative screening. Positive screening includes sectors or companies that perform well on ESG principles. Negative screening excludes those involved in activities such as sin products, gambling or human rights violations. ESG disclosures are typically non-financial, focusing on data-driven and qualitative reporting aligned with established accounting and regulatory frameworks.
The interpretation of ESG disclosures remains unclear, however, as does how they translate into business or shareholder value. For example, how do we assess a company strong in social and governance factors but weak in environmental performance? Moreover, ESG criteria continue to evolve and are often subjective, making consistent evaluation challenging.
SRI is related to ESG but has additional screening for controversial products such as tobacco, firearms, alcohol, addictive drugs, labour violations and environment degradation.
The International Valuation Standards Board suggests that the impact of ESG practices be embedded in corporate valuation methods. The market approach is suggested by comparing ESG disclosures within peers and incorporating these into assessments of risk through the discount rate or by adjusting cash flows (via incorporation of carbon footprints and/or costs of social impact activities). Valuations could condense ESG strategies into an intrinsic value that would allow capital market investors to better match their values with their investment choices. For this to happen, however, there need to be credible information and robust valuation methods. In reality, evidence linking good ESG practices to profitability is weak and the direction of causation is uncertain, that is, are good ESG firms more profitable or are more profitable firms better able to be selected as good firms? Besides, the payoffs between the environmental, social and governance dimensions can be different.
Challenges and opportunities for financial planning in Malaysia
As at December 2023, Malaysia had 69 sustainable investment funds valued at RM7.7 billion. Globally, Morningstar reported US$16 billion in sustainable fund inflows in 4Q2024. On the equity front, the FTSE4Good Bursa Malaysia Index, launched in December 2014, included 147 constituents as at December 2024. In the bond market, total SRI green sukuk issuances approved by the Securities Commission Malaysia reached RM27.3 billion from 2017 to July 2024. ESG momentum is growing as businesses increasingly recognise sustainability as a competitive advantage and a way to avoid negative scrutiny, attract investors and future-proof operations.
The challenges in ESG financial planning are as follows:
- Varying levels of awareness and preparedness: Businesses, asset managers and investors differ in their readiness for ESG investing. Larger corporations and institutional managers often have the expertise and resources to meet global standards. Retail investors — especially Gen Z — may show strong interest but lack the sophistication and awareness to fully embrace ESG investments in reality. Many also lack the ability to connect social concerns, such as labour violations, to ESG;
- Subjectivity in ESG standards: Existing baseline frameworks are not intended as gold standards for sustainability reporting. Assessing the quality of ESG practices remains largely subjective;
- Limited local investment options: ESG investment choices in Malaysia remain narrow, limiting diversification. In addition, owing to cost constraints, many fund managers rely heavily on third-party ESG screening and rating tools, which introduces another layer of risk; and
- Risk of greenwashing: Overstated or misleading sustainability claims can erode investor confidence and compromise long-term investment value.
However, the financial planning industry has numerous opportunities to grow and add value through sustainable investing, including:
- The ability to provide and further strengthen the commitment to holistic financial planning by aligning services with the client’s long-term ESG values, which are intrinsically personal;
- Educating the public and potential clients about sustainable investing, empowering them to conduct their own research, understand long-term triple bottom-line benefits, and guard against greenwashing;
- Financial planners should use their knowledge of the grassroots to engage with their peers, investment firms and regulators to develop practical frameworks that motivate public interest in ESG; and
- As retirement funds increasingly adopt sustainability principles, financial planners can help clients understand screening processes, governance standards and diversification strategies to align with ESG goals.
Ultimately, sustainable investing should align what we believe with what we do.