Trials and Tribulations in Sustainability – How Do We Create Real Impact?
Role of capital providers to steward responsible investing.
Both EPF and CIMB have taken a journey to implement sustainability into their businesses.
ESG journey has started under different acronyms. For EPF, this started with its Ethical
fund, excluding usual sin sectors from its portfolio. For CIMB, this sustainability started
with its philanthropic activities.
Financial institutions play a key role as capital providers.
It is important to identify within portfolio high ESG risk cases to mitigate systemic risk. For CIMB, this has meant that 1% of high-risk clients in Malaysia and Indonesia are excluded and the other clients are assessed based time-bound action plans.
Stakeholder engagements to reduce ESG risk.
EPF and GLICs own large part of the domestic capital market, which include sectors that are vulnerable to ESG risks. EPF is coming up with a framework targeted to six sectors that mitigates this. CIMB’s own CEO action network also allows for collective commitments among thought leaders.
ESG needs a change in narrative and more policy intervention to penalise failure of market in pricing externalities.
Current ESG narrative in the market not making real impact.
Depriving a high-risk ESG sector from capital and investing into ESG products only serves to benefit asset managers and doesn’t create real impact. This is because current win-win narrative of ESG is misleading. The current system focuses more on dollar value rather than social value.
Principle agent problem between stakeholders.
The problem with ESG lies in its integration of short-termism of CEOs and the reward structure of capitalism, which does not take into consideration long-term social and environmental impacts. Current setup for firms to engage in ESG is like having good sportsmanship without a referee.
Short-coming of markets needs to be remedied with policy.
Investors have fiduciary duty to score a goal (making money), and Governments need to be the referee and regulate as ESG-related action tends to be slow. Policies must be systemic and mandatory similar to the Covid-19 response worldwide.
ESG risk is value-destroying and mitigating this risk comes at a cost.
There is usually a conflict of interest between purpose and profit.
Implementing ESG comes at a cost where sacrifice must be made by investors and corporates. For a private enterprise like GoTo, initiatives on sustainability are often voluntary at a cost to the company instead of passing it on to consumers, partner drivers or micro merchants.
Investors are exposed to climate-related risk.
Among the risks are stranded assets as a result of the transition to a low carbon economy besides common emission issues. Other social issues which have been highlighted by the Covid-19 pandemic include forced labour, health & safety and remuneration.
The future of the ESG narrative would need to be more honest.
Current ESG implementation cannot continue as it is because underlying system is faulty. Businesses and key stakeholders must focus on finding solutions and advocating for behavioural changes.