Although institutions have been driving demand for environmental, social, and governance (ESG) investing in Southeast Asia ex-Singapore, there is growing retail interest, likely to be boosted by recently launched indices.

A slew of ESG fund launches have ensued, particularly in markets such as Malaysia and Thailand. While ESG funds in the region typically focus on global equity large cap, a few new technology sector equity funds and a couple of ecology ESG funds were recently launched in both countries.

Over the past year, environment-focused strategies, such as those that invest in the energy sector, have gained popularity in Thailand. Managers tend to prefer to focus their conversations with investors on the potential returns from these themes, instead of the ESG concept. In Malaysia, managers are increasingly integrating both ESG and Shariah principles into a single fund. While this combination is not entirely new in Malaysia, it has become more common in recent years. Given that investors are more familiar with Shariah investing in Indonesia, Cerulli believes that some prefer to invest in Shariah-compliant strategies as an alternative to ESG.

An interesting development seen in Indonesia and Malaysia is the launch of new ESG or Shariah indices by local bourses to help managers identify companies that have adopted ESG practices and better integrated ESG into their investments.

In December 2020, the Indonesia Stock Exchange (IDX) launched IDX ESG Leaders, a new index measuring the price performance of stocks that lead in ESG ratings. The use of IDX ESG Leaders as a benchmark would allow a fund to select 30 blue-chip stocks from the IDX80, based on the best ESG ratings by Sustainalytics. In addition, the IDX launched two ESG-based indices, the ESG Sector Leaders IDX KEHATI and the ESG Quality 45 IDX KEHATI.

In July 2021, Bursa Malaysia and global index provider FTSE Russell launched the FTSE4Good Bursa Malaysia Shariah (F4GBMS) index, the Shariah version of its FTSE4Good Bursa Malaysia (F4GBM) Index. F4GBM has recognized public listed companies that have taken steps to improve their ESG practices and disclosures, and its Shariah version could cater to the growing demand for Shariah-compliant investment tools. As the new F4GBMS index embeds Shariah principles into an ESG index, it will serve as a basis for fund managers to develop new investment products comprising a portfolio of Shariah-compliant equities, guided by sustainable investing principles.

Increasingly, more asset managers in Southeast Asia ex-Singapore are embracing ESG investing and trying to implement ESG considerations to existing funds or incorporate ESG filters in new ESG funds. “As ESG investing becomes more popular, Cerulli expects to see more funds with the ‘sustainable’ tag being launched in the region, especially those focused on global asset classes,” said Shannen Wong, senior analyst with Cerulli. “Managers in the region are expected to show interest in ESG-compliant global equity large-cap funds as this asset class gives managers a wider investment universe to invest in compared to local equities, and is an area where they could look for foreign firms’ expertise.”