Malaysia’s Khazanah highlights challenges in driving alpha under transition models

The Malaysian sovereign wealth fund believes that the 'G' in ESG is critical if sustainability is to drive alpha going forward.
Malaysia’s Khazanah highlights challenges in driving alpha under transition models

Khazanah Nasional Berhad have concerns about whether portfolio companies' low-carbon transition can drive alpha in the short term, but believes that having the right funding is critical to driving an ESG makeover.

The Malaysian sovereign wealth fund believes governance, or “G”, is the strongest force in driving alpha for the portfolio.

“’G’ is very important, because you have to have the right boards to understand issues of sustainability and make sure that your companies are ready for climate change,” said Keat Siang Goh, investments director at Khazanah Nasional Berhad during a panel discussion at AsianInvestor’s 12th Southeast Asia Institutional Investment Forum last week.

Keat Siang Goh,
Khazanah Nasional Berhad

Goh stressed that it is crucial for everyone in the investment community to respond to environmental impact.

“But then, when it comes to fundamental earnings of a company, I do have concerns [about 'E' in drivign alpha], partly because, in the short term it will actually be quite expensive to transition properly. You need to put in the right capital spending and so on. So, that is going to be quite tricky,” Goh said.  

He said whether ESG could really drive alpha was a complicated issue that needed to be seen from different dimensions, including assessing each factor independently.

It also depends on the time horizon used to measure the return perspective, he noted.

“If you look at quite a short horizon, some of the investment that we need to make for responsible energy transition might not be reflected in the short run,” Goh said.

He referred to research that showed if “G” were taken out of ESG from a rating or scoring perspective, the conclusion would be less convincing that ESG could yield positive returns on a historical return basis.

“But if we believe climate change is real, then we cannot use historical returns as an indicator of what will happen in the future,” Goh continued. “I’m sceptical that we should be doing that.”

Khazanah has RM134 billion ($29.9 billion) of assets under management as of the end of 2021, through one commercial fund and one strategic fund. Over 50% of its investments are domestic.

It has a $1.2 billion impact fund, which is not limited to investing in ESG themes, but also to catalyse sectors in Malaysia that can increase inclusion in the society and help climate transition.

Goh called for a just transition that considers the social impact of climate transition on developing countries.

If a society, especially a developing country, transits to a more sustainable way of manufacturing and operating, even if most people and companies adapt to the change and move on, there would be, for example, some 10% that will be unable to adapt, Goh noted.

“I guess that's where we need to think about the right safety nets and re-training and education that could address this,” he said.

One breakthrough the recently concluded 2022 United Nations Climate Change Conference, or COP27, made, was the decision to establish a loss and damage fund, a transition funding platform to enhance resilience for people living in the most climate-vulnerable developing countries.

“This is a milestone move that shows countries across the world have finally reached some agreement and are willing to set up such funding,” said a Singapore-based senior investment executive of a European asset management firm.

However, it was highlighted during COP27 that the global transformation to a low-carbon economy requires investments of at least $4-6 trillion a year.

“What the conference didn’t address is who will provide that funding. If no one is willing to pay, the agreement means nothing. There’s still so much to work on. However, the current geopolitical environment makes every move rather difficult,” a Singapore-based senior fixed income manager told AsianInvestor.

More coverage on AsianInvestor’s 12th Southeast Asia Institutional Investment Forum:

Future Fund: is this the end of the line for traditional portfolio construction?

Khazanah, OMERS Asia call for ESG rating improvements

Attacking as important as defending in resilient portfolio strategy: Malaysia’s Kwap

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