Measuring and evaluating ESG performance in Malaysia

Covid-19 has undoubtedly accelerated the adoption of ESG in Asia; JP Morgan called it the first “sustainability crisis” of the 21st century. But will the changes of the last year accelerate the adoption of higher sustainability standards in Malaysia and the rest of the ASEAN (Association of Southeast Asian Nations) region?

This shift, as well as ESG reporting, regulation, and the future of sustainability in Malaysia, were all topics under discussion during a recent Bloomberg co-hosted fireside chat with Muhamad Umar Swift, CEO of Bursa Malaysia, the country’s stock exchange, and who is also advisor to the United Nations Global Compact, Malaysia & Brunei.

In conversation with Vignesh R.S., ASEAN Head of Specialist Sales at Bloomberg, Umar shared his thoughts on the general sustainability landscape, as well as Bursa Malaysia’s vision of ESG in Malaysia. “There’s been a lot of conversation around ESG assets performing better than non-ESG assets over the past twelve months,” he said. “From an exchange perspective, we started our ESG journey in 2010, when we formed our first committee around sustainability. And ESG continues to be fundamental, which is reflected in our overall vision: to be ASEAN’s leading, sustainable and globally-connected marketplace.”

As Faroze Nadar, Executive Director of the UN Global Compact Network, Malaysia, said in his opening remarks, “a year into the pandemic, today’s topic is now resonating even more. Our new reality has shaped ESG performance as the newest license to operate.”

The evolution of ESG in ASEAN

Adoption of sustainable investment practices and overall progress are only possible through education and training, ensuring decision makers understand the importance of ESG factors and how they lead to better returns. Equally critical is how motivated investors are to consider sustainability in the first place. “It’s important to identify the call to action,” Umar said. “We’ve always had a philosophy of encouraging and rewarding good behavior, rather than driving through compliance.”

Sustainability’s evolution in Malaysia, and the region at large, has progressed within different organizations at different speeds, as commitment levels shift and change. As the country’s national exchange, Bursa Malaysia aims to lead by example and provide frameworks and guidelines, while also working to level the playing field in ESG reporting between the large-, mid-, and small-cap companies. “The larger corporates appreciate sustainability. Now we need to introduce the benefits to middle markets and other entities,” Umar explained. “So much of it is about demystifying sustainability and ESG. We need to not just educate, but engage. Communicate the value, so sustainability is not viewed as a cost center. Changing that mindset, particularly with directors and owners of businesses, is crucial.”

Ultimately, Bursa Malaysia’s role within the landscape has empowered the exchange to act as a change agent. “We need to demonstrate that good behavior, as it relates to sustainable investment, is rewarded, be it through investor behavior or through ourselves as consumers,” Umar said. “All these factors incrementally build up to convince these investors that sustainability is valuable to their organizations.”

It’s also important to note that many different kinds of goals and definitions of success exist when considering ESG investing. “We have to look at goals that will move the dial for individual organizations, and they need to be important to stakeholders,” Umar explained. “It’s also important to define the rewards. These companies need to understand this is something they can do to become and remain competitive.”

Attracting assets

In the first half of 2020 alone, the Principles for Responsible Investment (PRI) signatories increased by 28%, to more than 3,000 entities, and the assets under management (AUM) grew 20%, to more than US$100 trillion. With growth of this magnitude, the question becomes: how can more of this capital flow through Malaysia and ASEAN at large?

Bursa Malaysia is in a position to work with various players to get a piece of this AUM into the country and encourage greater investment. “There are more and more local mandates that require sustainability,” Umar said. “We have to be thinking about this in a variety of ways. From a banking perspective, if there’s a move away from brown assets to green ones, is there capital relief from regulators? If so, it’s an easy decision to embrace sustainable investment. These are the kinds of themes and discussions that we want to lead at the exchange and bring to the forefront.”

Regulation also plays an important role in attracting capital to a region. The enactment of the E.U.’s Taxonomy has inspired conversation in ASEAN, even raising the possibility of its own region-specific criteria. “Ultimately, we are user driven,” said Umar. “I think the BNM Initiative is wonderful, and that’s what we’ll be moving towards, but I would like to see that as a smaller part of a worldwide framework as we move to convergence.. If we have a common language that they appreciate and understand, it makes it easier for them to invest. It’s not just ASEAN; we need to be seeking a much broader range.”

Looking ahead

When working to demystify sustainability in the region, making the case to corporates and investors is one element, but public awareness is also critically important. “When thinking about visibility to consumers, that’s where we all have a role to play,” said Umar. ”Often people don’t understand the ramifications of their actions, so we have to start surfacing that. We can then develop positive reinforcement, building a virtuous cycle of behavior.”

This change in habits and attitudes extends to Bursa Malaysia’s work in encouraging the growth of sustainable investment. “We find that management isn’t embracing ESG because they mostly see it as a compliance problem. This leads to the question: should we legislate? Should certain disclosures and actions be compulsory?” Umar asked. “Making something compulsory doesn’t drive the appropriate behavior. It does shift the needle, but ultimately leads to greenwashing and other issues. It doesn’t result in these beliefs and strategies being embedded in culture and society, and that’s what we’re looking to do. We need to lead by example and by our own conduct, showing that there is value created.” Umar concluded.