KUALA LUMPUR (Feb 24): There are plenty of opportunities for investors who take advantage of the low-carbon transition and take a stake in companies that are going from “brown to green,” said the speakers at Amundi Asset Management’s recent conference in Kuala Lumpur. 

Titled “Corporates Malaysia, transforming from brown to green: Stepping up your game to attract investors”, the conference speakers highlighted Malaysia’s pathway to net zero, how institutional investors are assessing portfolio companies on environmental, social and governance (ESG) efforts, and how Malaysian companies can embrace sustainability.

“The world is not yet fully on the net zero pathway. To achieve this goal, the world needs better collective mobilisation in the form of stronger international cooperation and firm commitments from the financial and industrial sectors, rapid technological innovation and, finally, widespread social acceptance,” said Haizan Johari, the managing director of Amundi Malaysia.

In 2021, Amundi collaborated with Boston Consulting Group and WWF-Malaysia to publish the report “Securing our future: Net zero pathways for Malaysia”, which highlighted the different strategies that Malaysia must take in order to reach net zero by 2050. 

Dave Sivaprasad, the managing director and a partner of BCG, presented updated figures of greenhouse gas emissions data from Malaysia, as reported in the latest biennial update report to the United Nations last December. There is a high level of uncertainty on the future emissions trajectory, as emissions have increased in the post-Covid recovery. 

However, the government has been taking actions to reduce emissions by introducing the Voluntary Carbon Market and the new National Energy Policy 2022-2040, among other things. 

“The actions to get towards net zero are still the same. Electrify transportation, decarbonise energy, ensure the integrity of natural assets, mobilise emissions reduction efficiency in industries...the priority remains the same but the challenge may be harder now, with the recovery from Covid,” said Sivaprasad.

There is a net positive impact for the country to go towards net zero. An expected 243,000 jobs can be created in this transition, for instance.

As this is ongoing, however, businesses will have to pay heed to the physical impacts of climate change like flooding and extreme heat, which will impact their bottom lines. 

“We worked with a highway operator in Europe and their physical risk was impacting almost 20% of their cash flow. That’s how material the impact was,” said Sivaprasad. 

Businesses that are prepared to face these physical and transition risks tend to have higher revenues, efficiency and lower cost of financing, he added. “There are opportunities for companies to take the lead and for investors to invest in these companies and make higher returns.”

Institutional investors like Amundi are already integrating ESG considerations into their investment approaches and picking the best companies. For instance, it has voting policies that are focused on how the board is considering ESG factors and putting in place climate strategies. 

“Votes are a very powerful tool to push companies to improve its governance, [as well as from] the environmental and social angle,” said Caroline Le Meaux, the global head of ESG research, engagement and voting at Amundi.

“We have a 20% opposition rate [in our votes] because we ask corporates to have ESG key performance indicators in their remuneration. It’s quite standard in some countries but not in [some], like the US.”

The firm has a 38% opposite rate on compensation, and it voted in favour of 87% of climate shareholder resolutions. 

“We do our own analysis on anything related to the social [pillar]. We define some laggards. If a company is defined as a laggard, we will vote against the renewal of some of the board members. When we do that, we tend to alert and engage with the company to say why we are doing it. It’s important to give the company a chance to improve or understand our point of view,” said Le Meaux.

They are also actively engaging with portfolio companies to do better in climate, biodiversity, social impact and human rights protection, among other things. 

“When we are engaging, we look at two things. It’s defined as the double materiality angle...we look at what affects a company from outside in or what affects the company directly. [This could be their] profits and loss and cash flow. Then you have the second [factor], which is how the company affects the outside [environment]. It’s really important, even from an asset price perspective. If there is a controversy, it could affect your share price and, finally, it could also affect your profit and loss at some point,” said Le Meaux.

For instance, “There was a major flood in Thailand in 2010. In the next quarter, GDP (gross domestic product) of Japan fell, and it was clear that [it was] because through the supply chain, Japan was hurt by the flood in Thailand.”

For companies that do not act even after the engagement, Amundi will escalate the issue through votes during annual general meetings. The ESG score of the company could be lowered, and it would reduce the exposure its fund managers have to the company. 

“On the positive side, we usually ask the company, when they improve, to make it public. We don’t want to be the only ones to know...the ESG credential of the company will improve as it is assessed by others…we truly believe that it will at some point, it will have an impact on the share price or level of risk the company has,” said Le Meaux.

WWF-Malaysia’s conservation director Dr Henry Chan shared the non-governmental organisation’s (NGO) Sabah Landscapes Project as an example of how corporations, NGOs and the government can work together for conservation. 

It has been working with plantation companies and local authorities to build forest linkages in Sabah, and hopes to expand the programme to other parts of Malaysia to protect endangered animals like tigers. Chan emphasised the need to protect the biodiversity in Malaysia and meet the government’s goal to keep 50% of land under forest cover. 

“We support the companies, the smallholders and communities to go for the Roundtable on Sustainable Palm Oil and Malaysian Sustainable Palm Oil [certifications]. When companies and plantations are involved in these certifications, they understand the principles of sustainability. They know the problem…the solution is to reconnect the fragmented forests…the land that has been identified for restoration will be planted back as a forest. This is how plantation companies can support conservation,” said Chan.

He also suggested companies to adopt two systems when managing forested lands. If it has high conservation value — which means it could be home to endangered species like the orangutan — they should manage it. 

“The second approach is called high carbon stock. [Companies can] look at satellite imagery and look at the carbon content,” said Chan. If the area is assessed to have high biodiversity value, the land should not be converted.

This collaboration between different parties is important, as the different policies, road maps and action plans by various ministries in Malaysia should also be linked by climate change considerations. There could be a body that has the power and influence to implement these policies, said Dr Gary Theseira, a council member of Climate Governance Malaysia, at the panel discussion.

For instance, the climate implementation arm in the UK was called the Department of Business, Energy and Industrial Strategy. “You see that their reach is not just broad but reaches down to key sectors,” said Theseira. 

Regardless, the private sector have an obligation to green their supply chain, said Bursa Malaysia Bhd chief executive officer Datuk Muhamad Umar Swift in his ending speech. 

“The private sector can encourage the government. And the biggest [influence from the] private sector is each of you as an individual and your buying decisions,” said Muhamad Umar. 

He added that the regulator will be introducing the Taskforce on Climate-related Financial Disclosures calculator for banks and companies. The tool is currently in beta testing.