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.
A 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.
“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.
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.
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.