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All for sustainable investments

KUALA LUMPUR: Permodalan Nasional Bhd (PNB) will widen its environmental, social and governance (ESG) practices and engage its investee companies to raise their ESG credentials as the fund looks to increase sustainable investments in its portfolio.

The institutional investor is in the midst of finalising its ESG framework, which president and group chief executive Ahmad Zulqarnain Onn said will be made public early next year.

“A lot of people talk about embedding ESG into their decision-making processes and that is exactly what we want to do.

“Also, there’s greater realisation, especially among large investors who have to remain invested in many different places, that the right thing to do is engage in the companies where they are shareholders and figure out whether this (carbon emissions) can be improved.

“So for us, as part of our equity ownership, our responsibility remains as a business owner to see what can we do, or what should these businesses do.

“If maximising shareholder value today means having the right transition plans, then that’s what we should do,” he said.

Relooking its portfolio will be crucial in bringing its emissions down.

At the moment, about two-thirds of emissions from PNB’s portfolio comes from one-tenth of its portfolio.

With Malaysia having made a net zero pledge by 2050, he said such engagements with its companies will need to take centrestage.

He pointed out that companies are valued very differently today as investors become more demanding of businesses in terms of ESG and their sustainability criteria.

Utility companies, for example, are fairly beaten down with low multiples primarily because of ESG considerations.

While it is not the only factor driving their share prices, ESG, said Ahmad Zulqarnain, is an important driver of their price multiples.

Notably, a number of local corporates have also come under scrutiny in recent times over their environmental and labour practices.

“We do see valuations being depressed as a result of ESG considerations.

“We hear and see large institutional investors dropping off shareholders lists because of this ESG screening.

“So if you are able to turn this around, the upside is fairly large.

“So money is going to flow out of one and into the other (with better ESG criteria).

“The trick, therefore, is how do you reverse that flow by upgrading the ESG credentials,” Ahmad Zulqarnain said at the 10th installment of the MIDF Conversations series webinar yesterday.

The event was hosted by MIDF group managing director Datuk Charon Mokhzani.

PNB is one of the largest fund management companies in Malaysia, with assets under management exceeding RM300bil.

PNB’s portfolio covers strategic investments in Malaysia’s leading corporates, global equities, private investments and real estate.

It is the sole shareholder of MIDF.

PNB is also drilling down on the impact of its own carbon footprint and will look into incorporating minimum living wages as a means of its social responsibility.

Apart from its ESG pathway, the fund manager also aims to further diversify its asset allocation, particularly in foreign assets, to ensure sustainable returns for its over 12 million holders amidst the low-interest rate environment and high asset valuations.

In 2020, PNB’s total international assets increased by 3.5% to account for 12% of its overall portfolio, which generated a much larger contribution of 25.5% to its gross income last year, as compared to 11.6% in 2019.

However, Ahmad Zulqarnain emphasised that the fund is not moving out of Malaysia.

“It is about getting the right asset allocation for an all-weather portfolio that gives you the sustainable returns that all of us need.

“So moving towards that diversification of the portfolio, we think that we will continue to invest abroad.”

Currently, the bulk of its international equities are in western markets, particularly in the United States and Europe.

“We have certain benchmarks that we follow.

“Typically, for these global benchmarks, today, China is not the largest component.

“Even though its economy is large, from a weightings standpoint, it is still proportionately small.

“So we follow that as well.

“But if you project 10 years from now, it is an economy that you can’t avoid,” he said.

Locally, he added that PNB will remain a substantial shareholder in large-cap initial public offerings in Malaysia as it continues to look for growth opportunities and for companies with strong ESG credentials.