Socially Responsible Investing: A Malaysian Overview
In the age of globalization and social media, there is greater awareness regarding pressing issues such as climate change, corruption and inequality. Such awareness has raised growing concerns and has made investors more conscious about their investment; and such consciousness has made the financial firms and investment managers to be more answerable in their investment activities.
In order to facilitate this growing interest, more and more financial firms and investment managers around the world have opted to engage in socially responsible investing (SRI). As at the start of 2018, the total value of socially responsible investment globally stood at US$30.7 trillion.
What is Socially Responsible Investing?
The term socially responsible investing, often interchangeable with sustainable and responsible investing, can be defined as an investment strategy and practice that encompasses Environmental, Social and Governance (ESG) consciousness in investment decisions. In light of the definition, it must be noted that there is no single common regulatory guideline that specifies what amounts to SRI. That said, there are several bodies that have tried to provide guidance and specifications on the dos and don’ts of SRI, one of which is the Global Sustainable Investment Alliance (GSIA). GSIA considers that SRI should encompass one or more of the following strategies: – (Refer to Table 1)
In contrast with GSIA’s suggested strategies, the United Nations linked Principles for Responsible Investment (PRI) had also suggested the following 6 principles to be used as a possible cause of action when implementing SRI. (Refer to Table 2)
Further, the UN Global Compact’s (UNGC) Ten Principles makes reference to how companies should operate, particularly in the areas of human rights, labour, environment and anti-corruption.
Considering all of the above, a common point that can be derived from the different varieties of strategies, considerations and practices is that SRI goes beyond merely financial returns; and it stresses on the long-term impact that an investment would have on variety of matters, ESG especially.
As food for thought, perhaps the common ground for socially responsible investments should be investments that give benefit to ESG, for example, investing in initiatives to combat climate change rather than abstaining from investing in climate change contributors. As adequately put in the introductory statement of UNGC’s Ten Principles, “Good practices in one area do not offset harm in another.”
ESG Considerations
ESG considerations are non-exhaustive and everchanging. ESG considerations may also vary depending on the location and beliefs of a particular area. Global and international common issues are of course to be considered, namely pollution, economic injustice and child labour, amongst others. As such, the Table 3 outlines the possible ESG factors to be considered when implementing SRI.
SRI in Malaysia
In Malaysia, in line with international and global sentiments, SRI is on the rise. Although many factors can be contributed to this rise, a factor which cannot be denied is Bursa Malaysia Berhad’s (Bursa) introduction of the FTSE4Good Bursa Malaysia Index.
The FTSE4Good Bursa was designed to identify Malaysian public-listed companies that meet FTSE’s ESG model and companies that demonstrate strong ESG practices. Since its inception in 2014, as it currently stands, there are a total number of 71 constituents. As a further example of Malaysia’s commitment to the SRI cause, 7 Malaysian entities became signatories of PRIvi, some of which are Khazanah Nasional Berhad (Khazanah), Employee Provident Fund (EPF) and Retirement Fund Inc (KWAP).
As such, investment policies of these companies were altered to showcase their commitment to SRI. Khazanah for example, released an Investment Policy Statement outlining their investment philosophy to include “integration of ESG considerations into investment analysis and decision-making, and asset ownership”.
Furthermore, given the popularity of SRI and in order to facilitate and encourage its growth in Malaysia, Securities Commission Malaysia (SC) in December 2017, issued the Guidelines on Sustainable and Responsible Investment Funds which enable funds under its purview to be designated as SRI funds (to date, there are 4 qualified SRI funds).
What are SRI funds?
Paragraph 3.04 of the SC Guideline states that:
“An SRI fund ‘s policy and investment strategies, including the selection, retention and realisation of its investments, must adopt one or more sustainability considerations such as– the UNGC Principles; one or more of the SDGs; or any other environmental, social or governance factors.”
Paragraph 3.04(c) of the SC Guideline gives a sense of flexibility to what investments are SRI. In this regard, guidance was given to paragraph 3.04, outlining various SRI strategies that may be adopted and practiced, as provided in the Table 3.
Perhaps, with the lack of a rigid list, companies and other entities will be more able to exercise SRI to fit their beliefs and culture, which could eventually motivate and promote SRI.
Afterall, the crux of SRI is the commitment to environmental protection, social justice, and responsible forms of governance.
Conclusion
In conclusion, in the wake of growing awareness regarding SRI, Malaysian companies and regulatory bodies are active towards facilitating this growth. It is foreseeable that in the future, if this trend continues, there will be greater growth in the commitment towards socially responsible investing.
Written by:
Syed Zomael Hussain (Director) zomael@azmilaw.com
Muhammad Noor Azman (general@azmilaw.com)
