Guide to Building an ESG Portfolio

In an era where Environmental, Social, and Governance (ESG) factors have become a key consideration in investment decisions, it is imperative for Malaysians to not only understand ESG principles but also to actively integrate ESG investing into their portfolios. In this article, we delve into the challenges and strategies to build an ESG portfolio.

While there have been notable improvements over the years, many investors still feel uncertain when they are trying to diversify their portfolios in harmony with ESG standards. This uncertainty can be attributed to a few key reasons:

1. Limited Availability of ESG Investment Products: In comparison to developed markets such as Europe, Malaysia offers a limited selection of robust investment products with an ESG focus. This scarcity curtails investors' options for diversifying their portfolios while adhering to ESG criteria.
2. Awareness: While interest in ESG investments is on the rise in Malaysia, the level of awareness among some investors remains in its infancy. Some Malaysians either lack knowledge about ESG or simply do not prioritize it. Even those with a basic understanding of ESG may struggle to differentiate genuinely ESG-aligned investments from others.
3. Misconceptions About Returns: There is a worldwide belief that ESG portfolios generate lower returns. While debates on this topic continue, the persistence of this misconception may dissuade investors from reallocating their funds toward ESG-aligned assets. (https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing)
4. Data Accessibility and Reliability: Even when companies share details about how environmentally, socially, and ethically responsible they are, understanding and using that information can be challenging for less experienced investors. This poses difficulties for investors who are trying to make wise choices when investing in such companies.
5. Cultural and Economic Priorities: In contrast to wealthy and advanced European countries or the United States, particularly in developing nations, the drive to make profits out of their investments quickly can overshadow the importance of long-term environmental and societal wellbeing. Investors in these regions may lean towards immediate financial gains over what is best for the planet in the years to come.

These challenges can be disheartening for both novice and experienced Malaysian investors as they navigate their ESG investing journey. Nevertheless, it's reassuring to witness the Malaysian government taking proactive steps to enforce transparency requirements, revamp the regulatory framework, and introduce up-to-date guidelines (https://www.ey.com/en_my/take-5-business-alert/bursa-malaysia-enhanced-sustainability-disclosure-requirements)

Strategic Approach to ESG Investment Planning

While the Malaysian government lays a supportive groundwork for ESG investing, the onus still lies on investors to build an effective ESG portfolio. This requires meticulous planning and establishing clear goals, ensuring financial goals are in harmony with ethics and societal benefits. Here is a simple guide for investors on how to navigate this process:

1. Understanding Your Motives: Recognize why you want to include ESG elements in your portfolio. This could be for diversification, a commitment to environmental issues, or aligning with your moral compass.
2. Selecting an ESG Strategy: In ESG investing, options range from negative screening to avoid companies with poor ESG practices, to positive screening for those with high ESG scores. Utilizing ESG ratings and providers can significantly streamline this process, helping you make more informed decisions in line with your ESG criteria.
3. Investment Planning: Once your ESG strategy is clear, incorporate these principles into your investment plan. This might involve choosing ESG-focused funds or embedding ESG considerations in wider investment analysis. Understanding the fund's objectives and ensuring its ESG claims are genuine is crucial.

This strategic approach to investment not only aligns with personal values but also addresses critical global issues. Whether it is combating climate change through renewable energy and conservation, promoting social justice and equality, or improving healthcare access and research, your investment can significantly impact these essential areas.
 

Implementing ESG Investment Strategies with Screening and Ratings

How can you effectively implement your investment priorities? Many investors often opt for a combination of exclusionary and screening strategies, but it is essential to note that screening requires diligent effort, wherein businesses are assessed based on their ESG risks after undergoing a comprehensive evaluation.

MSCI USA and Sustainalytics are pivotal players in the ESG ratings arena, with MSCI assessing over 8,500 global firms through a distinct scoring system that grades companies from CCC to AAA based on their potential impact. Sustainalytics extends its reach over 13,000 companies, using a proprietary model to gauge a firm's ESG risk exposure.

In contrast, the FTSE4Good Bursa Malaysia Index, a collaborative effort between FTSE Russell and Bursa Malaysia, holds special relevance for Malaysian investors. This index plays a crucial role in promoting responsible business practices and identifies Malaysian companies that demonstrate exemplary ESG practices. It serves as a practical guide for investors seeking to integrate sustainability with financial performance. 
The FTSE4Good methodology rigorously evaluates companies on various ESG parameters, including environmental management, efforts in combating climate change, adherence to labor standards, and anti-corruption protocols. Firms that make it to the FTSE4Good Bursa Malaysia Index are recognized not just for their sectoral leadership but also for their staunch commitment to high corporate responsibility standards.

For investors, the FTSE4Good Index considerably simplifies ESG research. It offers a vetted list of companies that excel in ESG, acting as a benchmark for ESG standards and enabling quick identification of leading ESG performers across sectors. This aids in comparative analysis and helps in keeping abreast of ESG trends, thereby streamlining research efforts and aiding in risk mitigation. Crucially, for those committed to sustainable and responsible investing, the FTSE4Good Index emerges as an indispensable tool, aligning investment portfolios with broader values and sustainability objectives.

(https://theedgemalaysia.com/article/ftse-esg-scores-now-available-all-public-listed-companies)
 

Available Products

Having explored the challenges Malaysian investors encounter in aligning equity portfolios with ESG standards and learning how to utilize ESG ratings and providers to streamline their research, coupled with establishing a solid framework of rules and objectives, we are now ready to explore the diverse range of ESG investment options that are presently accessible to investors in Malaysia.

Most investors can enter the world of ESG investing with relatively little risk by using ESG mutual funds and ESG ETFs. The roles offered by the funds are varied, and several have proven records of success.

A list of every position in the fund can be requested by investors who want to learn more, and doing so frequently indicates the fund's priorities and commitment to ESG.

Malaysian investors seeking to engage in ESG investing have a wealth of options. A range of local funds, including the BIMB ESG Sukuk Fund, Public e-Islamic Sustainable Millennial Fund, and Maybank Global Sustainable Equity-I Fund, provide diverse investment opportunities aligned with sustainable practices. Furthermore, Bursa Malaysia plays a pivotal role in guiding ESG investment strategies by introducing specialized ESG-themed indices. These include the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Index (FBM100LC) and the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Shariah Index (FBM100LS), which set benchmarks for sustainable and low-carbon investments in accordance with global ESG standards.

By integrating ESG investments into their portfolios, investors can not only pursue financial returns but also contribute to positive societal and environmental impact, fostering a more sustainable future for generations to come. As ESG investing continues to grow, investors have the opportunity to make a meaningful difference while achieving their financial goals.