Kumpulan Wang Persaraan (Kwap) is working on new environmental, social and governance (ESG) guidelines for investing in private equity and property, the civil service pension fund's chief executive officer Wan Kamaruzaman Bin Wan Ahmad has told AsianInvestor.

The move by Malaysia’s second-largest pension fund, which underlines the country's growing status as an Asian hub for socially responsible investing, follows its development of similar ESG guidelines for investing in company shares and, more recently, fixed income assets.

It also comes as Kwap signs up to the United Nations-supported Principles for Responsible Investment (PRI), which could yet hasten the pace at which other large investors in Malaysia and the wider Asean region expand their own ESG initiatives.

Driving the change within Kwap is its responsible investment (RI) team, a dedicated three-person unit that works with the pension fund's various investment departments to jointly devise and update internal ESG guidelines and frameworks.

“We are proud to be the first pension fund in Malaysia to establish a dedicated responsible investment team [to spearhead] Kwap shareholders’ activism initiatives,” Wan Kamaruzaman said in an email outlining the pension fund's ESG push.

media report dated February 8 notes that Kwap hopes to have 70% of its $32 billion portfolio (at the end of September 2017) ESG-compliant. Currently, between 50% and 60% of the assets are ESG-compliant, it said.

POSITIVE PEER PRESSURE

Kwap’s decision to sign up to the UN-backed PRI makes it only the second pension fund in Asean to do so (PT Asabri, the pension fund for Indonesia’s military and police personnel, added its signature last July) and it is seen unlikely to be the last, given Malaysia's growing SRI ambitions.

Malaysian sovereign wealth fund Khazanah Nasional Berhad signed up in early 2017.

With key principles of Islamic finance recognised as an important pillar of socially responsible investing, Muslim-majority Malaysia is a major player in the SRI industry. It is currently the largest SRI funds market in Asia (excluding Japan), with 30% of the region’s $52 billion in SRI fund assets, according to the Securities Commission of Malaysia. It is also the world's second-largest Islamic funds market (by domicile), accounting for 29% of the $56 billion assets under management globally.

Some ESG industry experts believe Kwap’s PRI move will exert “peer pressure” on other Malaysia and regional investors, citing precedents elsewhere in Asia.

“When Japan’s Government Pension Investment Fund (GPIF) signed up for PRI in 2015, it really moved the Japanese market, with other institutions following,” Fiona Reynolds, managing director of the PRI Association, told AsianInvestor. Based in London, the PRI Association promotes responsible investing and manages the UN's PRI initiative, which was launched in 2005.

Only six Japanese institutional investors had signed up to PRI in the 10 years before behemoth GPIF, the world's largest pension fund, did so. But in the two years since, eight further groups have signed up, the most recent ones being Japan Post Insurance (October 2017) and Nippon Life Insurance Company (March 2017).

Kwap’s decision to sign up could yet have a similar trailblazing effect on the Asean region, Reynolds hopes.

“Over the next 12 to 24 months, we will see more institutional investors across the region become more involved with ESG factors as well as PRI,” she said.

ADOPTION CHALLENGES

One of the biggest barriers to faster adoption is concern around the impact embracing an ESG framework could have on investment returns.

“When you exclude certain companies and they account for a significant portion of a well-known benchmark, investors are concerned that such actions could negatively impact investment performance,” Jessica Ground, global head of stewardship at Schroders, said.

But using exclusionary policies—which remove certain companies from the investment universe—are not the only way to become ESG-compliant, she told AsianInvestor.

Ground, who is also based in London, said there were other ways to incorporate ESG principles without compromising on returns and that the asset management industry needed to work harder to address these concerns. 

Other ways of applying an ESG investment framework include tilting portfolios towards companies with ESG attributes that investors want exposure to or harnessing ESG information and integrating into the investment process through, say, standardised ESG ratings or scores for companies.

Another hindrance for Asian investors is the fact that implementation of ESG strategies is relatively easier with equity portfolios, where the data and research needed is extensive. In the case of Asia most institutional investors are heavily invested in fixed income, where data and research is much more limited.

Nevertheless, attitudes towards ESG are changing rapidly among Asian investors and the drive towards greater adoption seems set to continue, according to experts.

Lau Ka Shi, managing director and chief executive of BCT, a leading mandatory provident fund product provider in Hong Kong, believes having ESG policies in place is increasingly about prudent risk management.

“If a company is polluting the environment, for instance, it could be penalised by regulators down the line. That will affect its stock price; if an investor does not take ESG principles into consideration, they could be, in fact, taking more risk than they realise with their investments,” she told AsianInvestor.

Having a dedicated in-house RI team can help offset that risk.
 
For example, at Kwap the RI team monitors the ESG ratings of its investee companies and provides regular updates to senior management on their progress as well as any ESG issues that may arise, Kamaruzaman said.  Kwap also meets with at least 25 investee companies annually, which offers the opportunity to raise concerns including ESG-related issues directly to the investee companies’ senior management. 
 
At  the end of 2016, Kwap's recommended strategic asset allocation was 46% fixed income, 40% equities and 14% alternative investments. Its ESG guidelines for equities were initially devised in 2011 and later updated in 2014, while for fixed income they were created in 2017. 
 
"Guidelines for other asset classes—private equity and property—will be formulated in the future,” Wan Kamaruzaman said in his email.

AsianInvestor is hosting an ESG Investment in Asia in Hong Kong on March 13. For more details, contact Terry Rayner via email or on (+852) 3175 1963.