Responsible Business: BIMB launches world’s first retail ESG sukuk fund

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on September 10, 2018 - September 16, 2018.
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The growing awareness of the benefits of investment products that incorporate environmental, social and governance (ESG) principles has spurred the demand for these products. However, the supply remains scarce, says BIMB Investment Management Bhd CEO Najmuddin Mohd Lutfi.

“While there is a considerable number of equity and bond funds that integrate ESG principles, there was no such sukuk product for retail investors. The typical investment amount for sukuk is RM5 million per lot,” he adds.

To fill this gap, the company has launched the world’s first ESG-based retail sukuk fund — the BIMB ESG Sukuk Fund. It is the first sukuk fund to adhere to the Securities Commission Malaysia’s Guidelines on Sustainable and Responsible Investment Funds.

The fund gives investors access to local, regional and global sukuk. The minimum investment amount is RM1,000.

To ensure that the fund adheres to ESG principles and those of the United Nations Global Compact (UNGC), BIMB uses Arabesque Asset Management Ltd’s S-Ray programme, which determines the issuer’s ESG and UNGC score. Any score above 50 will be considered for the portfolio, says Najmuddin.

S-Ray is an artificial intelligence-powered programme that allows users to see the ESG and UNGC scores of more than 7,000 companies.

Najmuddin says the fund — which aims to have RM150 million under management in the next 12 months — buys investment-grade sukuk rated at least A3 or ringgit-denominated sukuk rated at least P1 by RAM Rating Services Bhd. For non-ringgit-denominated sukuk, the fund buys papers rated at least BBB- or A3 by Standard & Poor’s, or other equivalent ratings by other rating agencies.

Malaysia is the largest issuer of sukuk in the world, with 38.7% market share, according to RAM Ratings. As the fund invests in global sukuk, most of its potential investments will be issued in this country. An indicative portfolio would include papers issued by the likes of DiGi Telecommunications Sdn Bhd, YTL Power International Bhd, Westports Malaysia Sdn Bhd, and Kuala Lumpur Kepong Bhd.

Najmuddin says that on top of capital appreciation, the fund aims to provide investors with an annual income distribution of 5%, which is higher than the typical fixed deposit rate. This will be achieved through a combination of coupon returns and trading income.

Last month, RAM Ratings released a statement saying that it was maintaining its projection of US$75 billion to US$85 billion worth of global sukuk issuances in 2018. This was based on the growth trends in sukuk issuances in Malaysia, Indonesia, Bahrain, Kuwait and the UAE in the first half of this year.

Najmuddin is confident of a huge demand for the ESG Sukuk Fund, as evidenced by the uptake of its previous shariah-compliant ESG products. “When we launched our first ESG product, the BIMB-Arabesque i Global Dividend Fund 1, we had a slow start as investors were not aware of the product and how ESG would ensure better fund performance,” he says.

“Today, the fund’s assets under management is almost RM600 million. It is the largest shariah global equity fund in the country — even bigger than most of its conventional peers. In terms of returns, it has consistently ranked No 1 on the Lipper Fund Table, beating its peers by a large margin.”

According to Lipper data (as at Aug 24), the BIMB-Arabesque i Global Dividend Fund 1 delivered returns of 4.91%, 9.79% and 12.54% for the past three months, six months and one year respectively. By comparison, the average return of Lipper’s Equity Global (Islamic) category was 2.29%, 4.58% and 3.73% respectively. The fund also outperformed its conventional peers, which delivered an average return of 1.87%, 1.58% and 2.19% respectively.


Quantifying the intangibles

What is keeping the other fund houses from introducing a similar fund? Najmuddin points out that while some fund houses may have the expertise, they do not have a technology like the S-Ray programme to give them the necessary information to make investment decisions.

“If you want to launch something like this, you need to have the capability to explain your screening process to investors to assure them that they are indeed investing in an ESG product. In our case, we are using S-Ray, which churns out information from 50,000 sources across 15 languages using big data technology to provide the relevant scores. Of course, we also have the expertise — our fund manager has more than 12 years of experience managing fixed-income funds,” he says.

According to Gabriel Karageorgiou, partner at Arabesque, the S-Ray screening is important to complement the credit risk analysis for the sukuk fund. The problem with credit ratings, he says, is that it is purely based on financial information. So, investors may not get the full picture of the issuer’s ability to service its liabilities.

With S-Ray, investors can determine whether the company is being managed prudently as well as the probability of it remaining solvent, says Karageorgiou. “Usually, when companies go bankrupt, it is not because their sales are down. It is because something related to things like human rights, labour rights or environmental corruption has happened,” he adds.

“To prevent their reputation from being compromised, the companies would have to spend a lot of money on litigation purposes, which severely impacts their cash flow. This is one of the main reasons companies go bankrupt. The UNGC score is able to detect the probability of this happening to a company.”

By providing users with the UNGC score, S-Ray effectively provides different layers of risk management to ensure that the company has the ability to deliver the sukuk yield. It is a risk management tool that allows investors to align their beliefs with normative principles,” says Karageorgiou.

He adds that there are a lot of misconceptions surrounding ESG. For one, some investors associate it with tree huggers, although it is not necessarily the case.

“For us, ESG is not about exclusion. We are not saying that a company operating in the oil and gas industry is not sustainable while a company that operates in the renewable energy sector is sustainable. What we are saying is that in both industries, there are companies that can and cannot be considered sustainable,” says Karageorgiou.

“What defines sustainability is how the companies are managed, how they handle short-term risk and what they do with long-term opportunities. This is something we are trying to detect with S-Ray.”

S-Ray also tries to quantify and price intangibles on a company’s balance sheet to help investors with company valuations, he says. He points out that more than 50 years ago, intangible assets only accounted for 5% to 10% of a company’s valuation. Today, almost 80% of an S&P 500 company’s valuation are its intangible assets such as goodwill or the value of its brand name.

Now that BIMB has launched a full suite of products with Arabesque, the next step is to introduce a financial technology (fintech) product that can sell other products in the form of customised portfolios, says Karageorgiou. This product, which may be launched early next year, will provide investors with different allocations of BIMB’s ESG funds according to their risk appetite, investment horizon and goals.

Najmuddin says this product is aimed at enabling more Malaysians to invest, especially those who did not have the financial capability to do so before. “When we look at the statistics, we find it quite alarming that 60% of the Malaysian workforce earns an average of RM2,000 per month. If you are earning that much, it is very difficult to invest in any of the funds we have launched.

“We know the traditional distribution channels cannot cater for this group because the entry point is high. So, we are fortunate that developments in technology have enabled us to deliver a product that can do this at a low cost.

“We think that with this product, we can even lower the minimum investment amount to double digits. This is a project we are working on to give back to society and hopefully give more people access to our wide range of ESG products.”