Helping investors make better decisions with integrated ESG research

N 1998, when the Asian Financial Crisis hit, Bertram Lai was just one of many consultants who saw several years of work go down the drain. Lai had been working on the restructuring of an Indonesian bank, trying to reengineer its business for longer term sustainability. But overnight, the crisis turned his client insolvent.

Since June last year, all research produced by CGS-CIMB has carried an ESG rating. Functioning as more than an appendix to the research report, the ESG rating is incorporated into the target prices and calls that the brokerage makes.

IN 1998, when the Asian Financial Crisis hit, Bertram Lai was just one of many consultants who saw several years of work go down the drain.

Lai had been working on the restructuring of an Indonesian bank, trying to re-engineer its business for longer term sustainability. But overnight, the crisis turned his client insolvent.

“This was a wake-up call for me, to the power of capital,” Lai says. “That event has since been my motivation: to help capital flow to good companies and investments and away from bad companies or investments, and thus build sustainable and inclusive economies.”

Two decades on, Lai feels the industry is finally heading in the right direction – thanks to a commitment by his employer CGS-CIMB Securities to environmental, social and corporate governance (ESG) principles.

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As Group Head of Research and ESG at one of Asia’s leading securities firms, Lai oversees a team of more than 70 research analysts who filter their research with an ESG lens.

Since June last year, all research produced by CGS-CIMB has carried an ESG rating. Functioning as more than an appendix to the research report, the ESG rating is incorporated into the target prices and calls that the brokerage makes.

CGS-CIMB was among the first brokers in the region to introduce this change, and has even published a preferred ESG portfolio consisting of the best ESG performers among the 1,000-plus Asian companies under its coverage.

To support this initiative, Lai has made sure all the company’s analysts and sales force have received training on the ESG investment framework. Today, the brokerage is even getting inquiries from clients asking how they should best react to new regulations.

A head start

CGS-CIMB started down this ESG research path from the moment it was formed in 2018 as part of a joint venture between CIMB Group and China Galaxy Securities. 

Lai, who had been with the CIMB Group since 2004, assumed the role of Group Research Head.

“I was given the freedom to hire our first ESG Specialist, which culminated in our inaugural ESG report ‘Doing Good Pays Off’ published in May 2019,” Lai says. 

The analysis suggested an opportunity to generate outperformance in a portfolio by investing in companies that were not yet highly rated in ESG but were taking the right actions to become a strong ESG performer in future years.

“We found that investing in future ESG performers generated a 14 per cent improvement in returns over the underlying index,” Lai says.

There was also likely to be greater room for outperformance in Asia, as ESG investments accounted for just 27 per cent of assets under management in the region versus over 50 per cent in Europe.

The report convinced Lai that CGS-CIMB’s analysts needed to adopt ESG as an investment framework across the board – for each company and report.

“Analysts need to understand the ESG issues affecting the industry and business model, understand the company’s response to those issues, provide discrete cash flow forecasts for those responses, and valuation discounts or premiums based on the company’s success in navigating ESG challenges,” Lai says.

“The approach by some research houses to have ESG analysts separate from the fundamental analyst teams was just an organisational bridge to the real change needed.” 

Response to this inaugural ESG report was lukewarm at first, Lai says.

“Our report was six months too early. While European clients were very interested in the report and our ESG Specialist made 2 marketing trips in the following months, Asian investors were less interested.”

Most investors were still in a “wait and see” mode – waiting to see if ESG was just another investing fad. 

From this experience, CGS-CIMB decided to train not only its analysts but also its sales team – so it could position the research correctly for clients.

Lai says CGS-CIMB now regularly engages its institutional clients with ESG analysis. Retail clients still remain at the “adoption threshold”, and the education journey continues. But the company is focused on staying ahead of its peers. 

Total commitment 

The investment in an ESG-trained research team and sales force would not have been possible without management buy-in, Lai says.

Fortunately for him, the company’s Group chief executive officer Carol Fong was not difficult to convince. In fact, Fong had in 2020 launched a group-wide five-year vision strategy that included a commitment to ESG and Corporate Social Responsibility as part of CGS-CIMB’s business strategy.

This included the launch of CGS-CIMB’s Financial Literacy programmes for youths and young adults, along with the introduction of the firm’s Islamic Services, catering to the needs of both the Muslim investor and investors who wish to support green companies that are listed on some of the world’s global exchanges.

Additionally, the firm had pledged at the beginning of 2022 to gift S$1 million to Community Chest through Change for Charity, the SHARE programme and donations over a three-year period. And to support youths in both their study and personal lives, CGS-CIMB had agreed to participate in both the Ministry Of Education’s UPLIFT programme and the UN Global Compact’s Young SDG Leaders Award. 

“Once the direction had been set from the top, we have been fortunate to be able to move swiftly with our aggregate experience and necessary investment in resources,” Lai says. 

Fong says ESG principles have resonated with her on a “personal level”.

“I have always held the belief that we at CGS-CIMB have a duty of care to go beyond doing well and doing good. There is no point in churning out profits year after year and to have the best talent if there is no planet,” she says. 

CGS-CIMB has committed to a ‘3E Framework’ that is aligned with the United Nation’s Sustainable Development Goals.

The 3 Es are:

• Environment – Integrating ESG data in policies, framework and research analysis to help investors make prudent decisions for a better tomorrow. Education – Equipping millennials, women and the underserved with knowledge on financial planning and investing, to transform lives. Enterprise – Creating a more equitable world through offering full and productive employment and decent work opportunities for all.

Fong shares that while the company won FinanceAsia’s 2022 Best Social Impact Award, challenges still remain. 

“The challenge is to walk the talk,” she says.

Lai sees the meeting of this challenge as necessary for any company’s survival.

In his 20 years of working in Research, he says, he has pitched and sold many stories that were short term in nature.

As the Chinese economy was industrialising, for instance, companies were growing fast and there were many great businesses. 

But as the Chinese government realised the negative effects of pollution, regulations were introduced quickly and these same companies saw their business models disappear.

CGS-CIMB is not very different from any of the companies its research analysts cover, and will be subject to the same regulatory pressures as ESG awareness grows. 

“There is still a lot to do, including ensuring that our own governance reflects the highest standards expected of an ESG organisation,” he says.

“But having set the direction, the firm from top to bottom is now focused on execution.”