Environmental, social and governance (ESG) standards are moving to the forefront of investment strategies for Malaysian pension fund Kumpulan Wang Persaraan (KWAP) and Permodalan Nasional Berhad (PNB), the government-owned asset manager for all Malaysians and the wealth of the country's Bumiputera community.
Together with sustainability, the ESG factors are being integrated into both existing portfolio and future investment decisions, the audience heard at AsianInvestor’s Malaysia Global Investment Forum in Kuala Lumpur on November 7.
“As an institutional investor serving more than 13 million customers, we have a fiduciary duty to maximise shareholder value. We believe ESG is becoming mainstream, and we see risk, opportunity, and moral imperative as three key reasons why it is important for PNB as well," Dinagaran Chandra, head of ESG investments at PNB, said on stage.
In April 2022, the asset manager published its sustainability framework outlining 10 ESG commitments. This includes a commitment to invest MYR10 billion ($2.1 billion) into green and transition assets by 2030. Furthermore, PNB aims to achieve net-zero portfolio emissions by 2050.
PNB had assets under management (AUM) valued at RMY341.6 billion as of end-2022.
AN EXPENSIVE ENDEAVOUR
At KWAP, the process towards ESG integration started in 2009 with establishing active shareholder guidelines.
Fast forward to today, and the pension fund has integrated ESG guidelines specified for each asset class. After creating an in-house rating methodology for equity in 2016, KWAP launched a similar in-house rating for credit in 2022.
“Of course there is temptation to subscribe to the usual ESG vendors, but the premise and aspiration of our board and management is to try and do it by ourselves first. And mind you, these efforts don’t come cheap, and that makes it paramount for us to deliver on integrating ESG on an in-house level,” Nazaiful Affendi Zainal Abidin, senior director of portfolio strategy and research department at KWAP, said on stage.
During 2022 and 2023, the pension fund further increased momentum for ESG internally, developing a sustainability and risk framework.
Abidin pointed out that KWAP designs all of its strategies to match mandates and objectives as well as risk. The pension fund looks at asset classes in terms of how it then deploys capital, knowing very well that the deployed capital must generate impact as well as returns.
“We don’t want to do it for the sake of doing it. We need to debunk the myth and make sure that we can do ESG investments without the expense of financial returns. We believe these objectives can co-exist,” Abidin said.
KWAP’s total AUM was MYR184.5 billion ($38.5 billion) as of July 2023.
As ESG standards get implemented into investment strategies, they unavoidably influence investment preferences and decisions.
For instance, PNB looks at the carbon exposure of new investments to ensure that any investment made is aligned with the asset manager’s long-term emission trajectory.
“PNB as an organisation has a commitment to reduce our financed emissions intensity by 30% by 2030, so any new investment we make cannot materially increase our carbon exposure,” Chandra said.
The asset manager also looks for sector-specific ESG issues that can affect company performance in the long run.
For existing investments, Chandra gave the example of an auto manufacturer that doesn’t have an electric vehicle (EV) strategy in place. This creates the possibility that the manufacturer’s products will be displaced in the next five to 15 years, given that markets in the UK and EU have already outlined a clear phase-out ban for internal combustion engines.
Recently, PNB also updated its voting guidelines to strengthen the understanding of ESG expectations for investee companies.
Starting January 2025, PNB expects investee companies to have a net-zero ambition. One year later, the asset manager requires companies to publish a net-zero strategy outlining their plans and initiatives to decarbonise by 2050. Furthermore, the companies should also set interim emission reduction targets.
“It is not only important to have a net-zero commitment by 2050 if you are not showing results during the 27 years until then. Companies failing to do this within that stipulated timeline, we intend to vote against the chairperson of the company or the chairperson of the sustainability committee,” Chandra said.
“We hope that when we set such strong and robust shareholder expectations, it can really be a needle-mover for many of these companies,” he added.