As fund houses take a more active stance on sustainability and good governance, retail investors could see more products being offered along these lines in the next few years.

“We want to build our internal and external management capabilities in the area of environmental, social and governance (ESG) funds and investments. We will expand slowly regionally, into Southeast Asia and then Asia-Pacific, hopefully starting next year,” ValueCap Sdn Bhd director Wan Kamaruzaman Wan Ahmad tells digitaledge Weekly.

ValueCap is an investment firm jointly owned by Kumpulan Wang Persaraan (Diperbadankan) (KWAP) (33.34% stake) and Khazanah Nasional Bhd and Permodalan Nasional Bhd with 33.33% each. It operates via its two subsidiaries VCAP Asset Managers Sdn Bhd (VCAP) and i-VCAP Management Sdn Bhd (i-VCAP).

It has been mandated by KWAP to launch a RM1 billion retail fund based on the globally benchmarked FTSE4Good Bursa Malaysia ESG Index.

The fund, earlier slated for launch in mid-2015, should make its debut this September, says Kamaruzaman, who is also CEO of KWAP.

Based on studies, he says that the ESG Index has consistently outperformed the FBM100 Index by 3% to 6%.

“ESG will be the flavour for KWAP for the next few years. At least 5% of our fund size is mandated towards ESG, but if they perform well, we will top up this number every year,” says Kamaruzaman.

KWAP’s total fund size is about RM115 billion, meaning that RM5.75 billion has been allocated for ESG products. Kamaruzaman says the sum will be shared out across domestic ESGs (2%), Asia-Pacific ESGs (2%) and Southeast Asia ESGs (1%).

ValueCap has over RM5 billion assets under management and is targeting RM7.5 billion by end-year.

Bursa Malaysia, which launched the FTSE4Good Bursa Malaysia ESG Index last December, is also working on the creation of more structured products linked to the index.

“We have the FTSE4Good Bursa Malaysia ESG Index as a start, and [fund] companies like BlackRock Inc can produce that [structured product],” Bursa Malaysia CEO Datuk Tajuddin Atan told reporters after the Global Sustainability and Impact Investing Forum on July 23.

There is huge room for growth, with sustainable investments in Asia accounting for less than 1% of total assets managed in Asia, according to BlackRock data.

In 2013, Malaysia’s sustainable assets grew at a compound annual growth rate (CAGR) of 23%, making up the highest share of the Asian market at 33.6%, BlackRock managing director Marc Desmidt revealed at the forum.

By market share, Malaysia is followed by Hong Kong with 25.2% of the market (24% CAGR) and South Korea with 18.8% (16% CAGR).

Last year, four new ESG indices were launched by the SIX Swiss Exchange, Taiwan Futures Exchange, TMX Group and Borsa Istanbul, according to the World Federation of Exchanges (WFE).

Another five exchanges are planning to launch their respective ESG indices soon.

The Europe, Middle East and Africa grouping has the most sustainability-related indices (41%), according to a survey by the WFE dated July 23, 2015. It is followed by Asia-Pacific and the Americas with 32% and 27% respectively.

“Sustainability is an industry that is growing. The exchanges that we surveyed were getting more requests from investors [about ESG-related products]. Investors are much more focused on sustainability and ESG issues in the companies they invest in,” WFE CEO Nandini Sukumar says in an interview with digitaledge Weekly.

According to the WFE survey, 39%, or 22 of the 56 respondent exchanges, indicated they had received ESG-related queries from investors, with 10 of them saying that such queries were on the rise.

Currently, the FTSE4Good Bursa Malaysia ESG Index, the first such index introduced in Asia, has 24 constituents (see table), which accounted for 12% of the top 200 Malaysian stocks in the FTSE Bursa Malaysia Emas Index. The companies were screened in accordance with transparent and defined ESG criteria.

ESG information remains on a voluntary disclosure basis for the FTSE4Good Bursa Malaysia ESG Index.

Based on the WFE survey, 18 out of 21 exchanges surveyed in Asia-Pacific had ESG disclosure requirements while the other three did not.

“We have all flavours of disclosure — some markets believe in mandatory disclosure and, for some, it is voluntary,” says Nandini. “Fifty-seven per cent of respondents (32 out of 56) mentioned that listed companies on their markets were required to disclose some ESG information beyond corporate governance. Among the 32 who mentioned having requirements in place, nearly half of them (15) said that both the regulator and the exchange required ESG disclosure in some form.”

In Asia-Pacific, a whopping 86% (18 out of 21) indicated ESG disclosure requirements, in contrast to none at all.

Regulators in general seem to be taking a tougher stance on listed companies, with 70.6% (12 out of 17) requiring mandatory ESG disclosure.

Some 43% of listed companies were expected to make their ESG disclosures in full, while 13% were expected do so in part.

For cement maker Lafarge Malaysia Bhd, which is a constituent of the FTSE4Good Bursa Malaysia ESG Index, disclosure requirements are just the launch pad for more sustainable businesses all round.

“To a certain extent, you see the FTSE4Good Bursa Malaysia ESG Index putting peer group pressure in place in a form of regulation. To change initial behaviours, regulations make that first step. But it is not enough to get you to where you need to be,” Lafarge chief executive Bradley Mulroney tells digitaledge Weekly.

In 2014, Lafarge published its first sustainability report, a standalone from its annual report. As part of its sustainability initiatives, alternative fuels made up some 14% of its manufacturing process last year, a percentage it hopes to raise to 50% by 2020.

Each Lafarge quarry also has its own specific rehabilitation plan in order to preserve biodiversity.

“My personal belief is that [regulation] is never enough. You need people to feel passionate. You can have a corporate like Lafarge, but if the individual leaders in the individual businesses aren’t passionate about what they do, then that can work its way down in an organisation very fast,” says Mulroney.

“It has to be more than compliance and peer group pressure. It often starts with that, but I’d like to see people properly engaged in the sustainability of their business,” he says.

This article first appeared in Capital, digitaledge Weekly, on August 3 - 9 , 2015.