KWAP plans to step up impact investments
The Malaysian pension fund Kumpulan Wang Persaraan (Diperbadankan), also known as KWAP, is making a push to do more impact investments to maximise its focus on environmental, social, and governance (ESG) standards.
“We want to move forward beyond ESG and envisage more in impact investing. In October 2022, we invested in our first impact fund, and have increased our impact investments since then,” Hazman Hilmi Sallahuddin, chief investment officer at KWAP, told AsianInvestor.
The pension fund for federal employees in Malaysia made the first impact investment with a private equity impact fund that invests in global buyout and growth assets focusing on several key sectors such as climate, education, financial inclusion, healthcare, as well as food and agriculture.
Furthermore, KWAP has also made an investment in two Malaysian companies, both with a focus on increasing digital adoption, whilst levelling the playing field for small businesses and providing job opportunities for Malaysians.
“This is on top of our investment in a regional aquaculture company, aiming to solve the food security issue, as well as an investment in a local higher education company that improves the local talent pool,” Hazman said.
KWAP’s total assets under management (AUM) was MYR184.5 billion ($38.5 billion) as of July 2023.
MANAGING RISK
For KWAP, the efforts to increase impact investing is also a tool to manage risk. At the same time, impact investing holds value for long-term investors, Hazman pointed out.
“There is no point in getting all good returns now and then, say, five years down the road, when some if not all of the systemic risks are realised, you end up jeopardising your returns. We need to think about how we can sustain good returns in the long term,” he said.
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While some impact investors might not be able to meet general return requirements for an asset class, KWAP is looking into whether ESG-related or impact investments could be tested in small-scale as a separate asset class.
As KWAP’s return requirement is an internal rate of return (IRR) of 15 for private equity investments, this might be difficult for some private equity impact investments to achieve. However, if the impact investment return can generate, for instance, 12% IRR, then there is still a good return well above the fund’s overall return target.
By separating ESG-related or impact investments into an asset class of its own, the overall asset class thresholds can be less of a hindrance.
INCREASING INFORMATION
To showcase its work within ESG and impact investment, KWAP intends to publish its ESG frameworks later this year. The plan is to publish the frameworks together with an inaugural sustainability report to supplement the traditional annual report.
“When we talk about ESG and impact, some will ask us if that means we are compromising on returns. We have observed that attractive returns can be made as an impact investor, so that is a narrative that we hope to change,” Hazman said.
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To further highlight this step, KWAP is considering hosting a sustainability conference with its publications. Still in the works, the objective of the conference might be an emphasis on the “S”, or social, part of ESG, where Hazman mentioned a need for increased awareness to match the focus on the “E”, or environmental, part of ESG.
A revamp of KWAP’s strategic asset allocation in November 2022 changed the split of domestic and overseas assets from 80/20 to 70/30. It also brought the portfolio target balance between public and private assets to 80/20 from 90/10.
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