As the world becomes more aware of the impact of our actions on the environment, society, and corporate governance, investors are increasingly considering Environmental, Social, and Governance (ESG) factors when making investment decisions. The incorporation of ESG factors into investment strategies is no longer a luxury but a necessity in the rapidly evolving financial landscape.
ESG considerations cover a range of issues, such as climate change, human rights, diversity and inclusion, executive compensation, and supply chain management, among others. These factors are essential to understand the long-term risks and opportunities associated with a particular investment.
For Analysts
In the current investment landscape, environmental, social, and governance (ESG) factors are playing an increasingly pivotal role in investment analysis. Analysts incorporate ESG considerations to gain a more comprehensive understanding of the risks and investment opportunities associated with a company’s securities.
While corporate governance has been long recognised as a crucial factor in a company's long-term performance, investors are now also concerned about environmental and social factors and how companies manage their resources and risk exposures related to these factors.
Mismanagement of these resources has caused numerous high-profile corporate events that have negatively impacted security prices. In this context, more stringent regulatory environments, finite natural resources, and global trends towards energy conservation and waste reduction have led investors to place greater emphasis on the management of environmental risks.
Moreover, issues such as worker health and safety policies, community impact, and marketing practices have increased the visibility of how a company manages its social capital. Investors are now recognising that a company's social capital management can have a significant impact on its long-term success. As such, incorporating ESG considerations in investment analysis is becoming increasingly important. By analyzing ESG factors, investors can gain a more comprehensive understanding of a company's risks and opportunities and thus make more informed investment decisions.
ESG investing is gaining traction as a viable approach for creating sustainable, long-term value for investors.
As sustainable investing gains momentum, the capital market holds a crucial role in shaping corporate sustainability practices. With increasing public awareness of issues like Climate Change and Environmental Impact, businesses in Malaysia are embracing the call for sustainability. A recent report by advisory firm PricewaterhouseCoopers reveals that 94% of the top 50 Malaysian Public Limited Companies (PLCs) have already implemented Environmental, Social, and Governance (ESG) plans as of December 2021. This demonstrates a growing recognition among Malaysian businesses of the importance of integrating sustainable practices into their operations. As such, capital
market players have a unique opportunity to drive innovative and market-driven solutions that can pave the way towards a sustainable future.
This indicates a shift in investor preferences towards companies that prioritise ESG factors, which are better equipped to weather sustainability-related risks and generate sustainable long-term returns.
The impact of ESG factors on financial performance has been extensively studied, and the evidence shows that companies that prioritize ESG factors have an increased possibility of outperforming their peers in the long term. For instance, a recent study by MSCI found that companies with strong ESG performance generated higher returns and experienced lower volatility than those with weaker ESG performance.
While there is high international investor demand for ESG investments in Malaysia, the opportunities are limited due to the scarcity of investable assets that are ESG-compliant. However, due to the availability of large pools of global ESG funds, more firms are likely to adopt the ESG route.
Corporate governance reforms in Malaysia started with the first publication of the Malaysian Code on Corporate Governance and have since had five updates covering corporate responsibilities, corporate social responsibilities, ethical and Islamic issues, and finally, ESG. This evolution clearly indicates the increased awareness among leading organizations, including those within corporate Malaysia, of the importance of taking a more holistic approach to managing their business strategy and risks.
These days, it seems sustainability is less about compliance and more about forward-looking leadership and this might set the right tone for a culture that facilitates the development of competencies needed to respond to market changes to ensure long-term resilience and value creation.
The incorporation of ESG factors into investment strategies has become easier with the availability of ESG data and research. Companies such as MSCI, Sustainalytics, and Bloomberg provide investors with comprehensive ESG data, ratings, and analytics that enable investors to make informed investment decisions. The growth of passive ESG investing, which seeks to track ESG indices, has also made ESG investing more accessible to a broader range of investors.
ESG investing has become a crucial component of investment decision-making, and the trend is set to continue. The increasing importance of ESG factors in investment decisions is driven by investor demand for sustainable, long-term returns and a better understanding of the impact of ESG factors on financial performance. As ESG data and research continue to improve, ESG investing is expected to become more mainstream and accessible to a broader range of investors. Investing in companies that prioritize ESG factors might not just be good for the environment and society, but also for generating sustainable long-term returns for investors.
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