Environmental, Social and Corporate Governance (ESG), or Sustainable and Responsible Investing (SRI) is an investment approach that has grown rapidly in recent years, especially among institutional and millennial investors. This FAQ discusses the value of good ESG practices and how environmentally and socially-conscious investors can align their personal values with their investments through ESG funds.
“Sustainability is meeting the needs of the present without compromising the ability of future generations to meet their needs.”
- Our Common Future, World Commission on Environment and Development/ Brundtland Commission, 1987
- What is ESG investing?
ESG investing is a values-based investment approach that considers a company's environmental, social and governance (ESG) practices alongside its financial performance. ESG investing has gained momentum in recent years, especially among millennials, who are generally more environmentally and socially-conscious than those of earlier generations. Today, sustainability has become a key focus in a world faced with environmental and social issues such as global warming, climate change and the Covid-19 health pandemic.
Table 1: ESG Defined
Source: Adapted from Bursa Malaysia’s Sustainability Reporting Guide, 2nd edition (2018) and the Securities Commission’s Malaysian Code on Corporate Governance 2021
Fig. 1: Examples of ESG Factors
Furthermore, policymakers around the world have been actively pushing the ESG agenda, with regulators requiring listed companies to adopt more stringent ESG practices and increase sustainability reporting disclosures. Consequently, there has been an increase in demand for ESG unit trust funds, which consider ESG practices of investee companies in their stock selection process.
Source: Global Sustainable Investment Review 2020
Source: US SIF: The Forum for Sustainable and Responsible Investment
As a result, the size of sustainable investment assets has risen significantly over the past decade (Fig. 2). In the United States (U.S.), ESG-related funds accounted for about one-third of total U.S. assets under management (AUM) in 2020 (Fig. 3). The growing size of sustainable investments globally means that environmental and social practices of companies are becoming increasingly important considerations for investors.
- How does ESG investing create value for investors?
ESG funds cater to investors who wish to incorporate sustainability considerations into their investment decisions. Not only are these investors interested in the financial outcome of their investments, they are also concerned about the impact of their investments on the environment and the community.
Through ESG investing, investors play an important role in influencing the sustainability practices of the companies they invest in. For example, companies that do not adopt good sustainability practices and are rated poorly in ESG scores may be excluded from the investment universe for ESG funds.
- How can investors position their investments to benefit from ESG investing?
Unit trust investors who would like to gain exposure to investments in sustainability-conscious companies within their portfolios may consider investing in Public e-Islamic Sustainable Millennial Fund (PeISMF) and Public e-Carbon Efficient Fund (PeCEF).
PeISMF is a Shariah-compliant sustainability-focused fund with the objective of investing in companies listed on global markets that incorporate environmental and social considerations into their business practices. The equity fund uses the S&P Global 1200 ESG Shariah Index as its benchmark and stock universe.
Meanwhile, PeCEF’s investment objective is to invest in companies with efficient carbon footprints and which are components of the S&P Global 1200 ESG Index. Companies which are rated as having a ‘high carbon impact’ by S&P (e.g. in energy, chemicals and utilities) are excluded from the fund’s stock universe.
ESG unit trust funds enable investors to align their values with their investments. Socially and environmentally-conscious investors who want their investment choices to reflect their personal values can invest in ESG unit trust funds to diversify their portfolios, and thus gain exposure to companies which adopt leading ESG practices in their business operations.
Investors are advised to read and understand the contents of the Master Prospectus of Public e-Series of Shariah-based Funds dated 1 July 2020, Prospectus of Public e-Carbon Efficient Fund dated 9 February 2021 and the relevant funds’ Product Highlights Sheet (PHS) before investing. Investors should understand the risks of the funds and compare and consider the fees, charges and costs involved in investing in the funds. A copy of the Prospectus and PHS can be viewed at our website www.publicmutual.com.my. Investors should make their own assessment of the merits and risks of the investment. If in doubt, investors should seek professional advice. Please refer here for our investment disclaimer.
This article is prepared solely for educational and awareness purposes and should not be construed as an offer or a solicitation of an offer to purchase or subscribe to products offered by Public Mutual. No representation or warranty is made by Public Mutual, nor is there acceptance of any responsibility or liability as to the accuracy, completeness or correctness of the information contained herein.