ESG Investing is a form of responsible investment that prioritises Environmental, Social and corporate Governance (“ESG”) considerations alongside a company’s financial gains.
It comes from a growing awareness of how ESG matters can impact a company’s performance, posing both risks to its sustainability as well as opportunities to drive growth.
Factors such as how a company utilises natural resources in its business process, what kind of emissions it generates, its employment and human rights practices, as well as how it governs the operations of the company, are considered material to a company’s performance, and can be measured to assign a monetary value to its impact.
Drivers of ESG Investing
In recent years, ESG metrics are increasingly becoming a mandatory requirement of financial reporting in many countries, Malaysia included, with regulators requiring disclosures and data transparency on ESG factors.
This shift is primarily driven by institutional investors, who have for years recognised the interdependencies between ESG issues and a company’s Economic performance.
The COVID-19 pandemic further amplified this point – being a disease originating from an Environmental biodiversity issue, impacting health on a global Social scale, which has tested the Governance structures of companies and countries, and ultimately impacting the Economic performance of each.
ESG issues are also championed by the younger generation of investors, employees and customers, exercising stakeholder capitalism to influence market and companies’ performance like never before.
Benefits of ESG Investing
It’s no accident that the clarion call for ESG investing rings louder now in the post pandemic world.
The number of companies that have folded since the pandemic began in 2020 has hit home the importance of and urgency for ESG management in ensuring the resiliency of businesses and the world we live in.
While some investors and fund managers are motivated purely by ESG metrics’ ability to hedge portfolios against a wider set of known and unknowable risks, others are betting on forward-thinking companies set on societal and environmental change for the better as long-term winners.
Findings from empirical research has shown that funds that factor in sustainability considerations have outperformed regular portfolios, showing a higher rate of survival as well as more competitive returns.
Case in point, Bursa Malaysia’s ESG-driven FTSE4Good Index has consistently outperformed the benchmark index of FTSE Bursa Malaysia KLCI by 3 to 4% between 2013 and 2021, while research by US financial services firm Morningstar found that 77% of ESG funds have survived over a 10-year period compared to only 46% of traditional funds.
Hence, integration of ESG management in a company’s business strategy greatly enhances investors’ confidence in its viability and potential, providing additional lens with which the company can mitigate its exposure to risks and spot and prepare for opportunities in the longer-term horizon.
Future of ESG Investing
While ESG awareness and sustainability adoption are still in the nascent stage of development in Malaysia, particularly among SMEs, investors and regulators globally have recognised its value for quite some time now.
Already it is the dominant force shaping capital allocation decisions of Boards, executives and asset managers of the biggest names in the world.
It has become a fundamental precept of business going forward, moving from being a best practice recommendation to a mandatory requirement for listed entities to disclose their ESG performance data, with pressure mounting to expand disclosure to include all subsidiaries and vendors across each company’s entire value chain.
Efforts are also ongoing towards the integration and harmonization of sustainability disclosure requirements and scoring systems to ease investors’ decisions, proving that ESG is not fad, but a mainstay of the future of investing.
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