Costly ESG scoring among major hurdles for sustainable investing in Asia
Kelly Ng
ONLY a tenth of companies listed on the Indonesia Stock Exchange – or 80 out of 788 companies – are scored for their ESG (environmental, social, and governance) risks, the exchange’s director of business development Hasan Fawzi revealed on Thursday (Jun 23).
Hasan, who was speaking at a panel on ESG and Shariah investing organised by CGS-CIMB Securities, said the dearth of good ESG data due to high scoring costs has been a major hurdle for investors in Asia.
“We are not working to score all of the listed companies, because it’s too costly, and not all of our investors are trying to get the small, micro-cap companies. That’s why we are focusing on the 80 biggest companies first as an example for all our listed companies to increase their ESG practices,” he said.
The exchange is working with Sustainalytics, an ESG ratings and analytics firm, to score the companies. An ESG score is a rating that helps investor assess how sustainably a company is conducting its business.
The exchange is also looking into creating a stock index that combines both Shariah-compliant and ESG-compliant securities, Hasan said, noting investors’ growing interest in ESG investing. It plans to launch the index this year.
Companies in Indonesia also lack expertise in formulating sustainability reports, Hasan said. The exchange is therefore working with global standard setters and framework providers to improve companies’ skill in making proper disclosures, he said.
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Fellow panelist Mohd Ekmal Mohd Zazi, regional head of Islamic wholesale banking at CIMB, said the allure of ESG or Shariah-compliance may not be sufficient if these investments lag in delivering returns.
He cited how returns from a Shariah-complaint fund launched in 2017 by the Employees Provident Fund, Malaysia's largest pension fund, would be 25 basis points to 50 basis points lower than conventional schemes.
“Just relying on Shariah (compliance) being the highlight in investing may not be sufficient, right? At the end of the day, I think we need to also deliver the dollars and cents. Once we are able to showcase that capability, that is when the adoption would become faster,” he said.
Ekmal said how the Malaysian bourse has pushed the agenda for Islamic investing over the years could be a model for facilitating ESG-compliance. Close to 80 per cent of listed securities in Malaysia are Shariah-compliant, he noted.
His bank is working with the exchange, Bursa Malaysia, to help listed companies improve their sustainability performance and ratings for inclusion into the FTSE4Good Bursa Malaysia index, which recognises companies with good ESG practices.
Bertram Lai, CGS-CIMB Securities global head of research and ESG who moderated the panel, pointed out that recently published research have shown that the correlation between ESG ratings of different agencies stands only at 0.3.
“This is a challenge for the ESG data itself. (When) you add in another data set, which is Shariah, the correlation probably becomes a lot smaller, and you are looking at a very small universe,” Lai said.
A recent study by financial services firm Morningstar and management consultancy zeb found that Europe holds 83 per cent of global sustainable funds' net assets, and that the continent remains the key driver behind sustainable finance.
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