Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on April 18, 2022 - April 24, 2022

THE Employees Provident Fund (EPF) will be introducing an alternative savings option based on environmental, social and governance (ESG) factors, giving members the choice of managing their nest egg according to their personal values.

This is in line with the retirement fund’s commitment to sustainability, said its chief strategy officer Nurhisham Hussein, at a roundtable discussion hosted by The Edge and BNP Paribas on March 17.

He revealed that the savings option, which is on track to be launched by the end of the year, will allow its 15.2 million members “to allocate their funds to a sustainability fund”.

“This is the first step, we will be including more options later on. This is so that you [EPF members] can put [their] money into what [they] believe in.

“[We are doing this] because there’s no point in members coming to us saying ‘we want [more] sustainable [options]’ but we don’t give them that choice. I think it’s important to have that option,” said Nurhisham.

As the sustainable fund option is still in its preliminary stages of planning, there is little information on its portfolio structure.

Nevertheless, this is in tandem with the EPF Sustainable Investment Policy (SIP) — launched on March 31 — which is to guide the fund in making informed and holistic investment decisions by integrating ESG considerations in its investment management processes, said EPF.

The SIP, along with the supplementary Priority Issues Policies and Priority Sector Policies, marks the evolution of EPF from an ethical to a sustainable investor in its pursuit to become fully ESG-compliant by 2030 and climate-neutral by 2050.

According to data provider Morningstar, inflows into ESG funds hit a record US$3.9 trillion by the third quarter of last year. Full-year inflows into sustainable funds in Malaysia stood at US$263 million, said Morningstar, which is 1.6% of the Asia ex-Japan universe.

Global total ESG assets, however, are poised to reach US$41 trillion (RM173 trillion) by the end of this year, Bloomberg Intelligence estimates. The growth has been spurred by record-breaking fund inflows amid concerns about climate change and other societal issues, it added.

Currently, EPF members can choose to have their retirement fund managed according to a conventional or shariah portfolio.

On March 2, EPF announced a dividend rate of 6.1% for Simpanan Konvensional, with a total pay-out of RM50.45 billion; and 5.65% for Simpanan Shariah, with a total pay-out of RM6.27 billion, bringing total disbursement for 2021 to RM56.72 billion.

The returns for Simpanan Shariah, which was launched in 2017, trailed slightly behind the conventional portfolio partly because shariah assets are not invested in any of the global conventional banking systems, including insurance companies.

“If you really care about [ESG], then you have this option. At the moment, the focus is still on returns, at least for the majority of our members. But as the demographic of our members changes, that will change as well,” he said.

Nurhisham was commenting on the heightened demand for sustainable investment options, which is being driven, in part, by millennials and Gen Zs who prefer to invest in alignment with personal values.

According to a 2019 demographics breakdown by EPF, more than 5.1 million of its 7.6 million members then were made up of Gen Zs and millennials, between the ages of 16 and 40.

Considering the significant growth of the sustainable investing universe, especially since the Covid-19 pandemic struck, Nurhisham warned that businesses risk demise if they continue to ignore rising concerns about sustainability.

“There is this question of whether sustainable investments actually provide superior returns, but from what we see, if you are not ESG-compliant, you are not going to be able to provide returns at all.

“They [investee companies] will simply not get the capital and [investors] will not get their returns. People just won’t invest in you,” he asserted.

This trend will not just affect public listed companies, Nurhisham added, but private markets as well.

“[The sentiment] is filtering down to the entire financial ecosystem and if you’re not on board, from an investment perspective, there isn’t going to be any foreign interest and your business isn’t going to be able to function because you will have no access to capital.

“At EPF, our target is that we need to be 100% ESG-compliant by 2030. So, every proposal that goes to the investment panel also has to have that ESG assessment. There are instances where we turn something down because the ESG risk is too high.

“We are also currently going through our investment universe and doing that assessment for existing investments. ESG is not going to be a feature anymore — it’s going to be part of the system. And if you’re not on board, you’re going to be left out,” he reiterated.

 

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