This article first appeared in The Edge Malaysia Weekly on February 20, 2023 - February 26, 2023

Tradeview Capital Sdn Bhd, a boutique asset management firm, launched its first sustainability wholesale fund last November. The fund has an exposure to micro-, small- and mid-cap companies with good environmental, social and governance (ESG) practices. 

The Tradeview Sustainability Fund is qualified as a Sustainable and Responsible Investment (SRI) fund by the Securities Commission Malaysia. Currently, it is the only SRI wholesale fund that has a focus on this segment of companies. 

These smaller companies with solid fundamentals could be included in ESG indices moving forward, says Nixon Wong, chief investment officer of Tradeview Capital. By getting into these companies earlier, investors could be rewarded with higher market valuations and share prices in the future. 

“We believe there are a lot of opportunities in the small- to mid-cap space. There are companies with good sustainability practices but are not included in major sustainability indices, partly because they are smaller in size and are not rated by rating agencies and index providers,” says Wong.

“So, we have developed a proprietary ESG rating method to evaluate these companies and take a position in them to ride the ESG trend.”

According to its fund fact sheet as at December last year, the top five holdings of the fund were solar company Sunview Group Bhd, conglomerate Sime Darby Bhd, industrial rubber hose manufacturer Wellcall Holdings Bhd, natural gas distributor Gas Malaysia Bhd and premixed instant powder beverage producer Power Root Bhd.

Other companies in its portfolio are solar company Samaiden Group Bhd, renewable energy plant operator Mega First Corp Bhd and Focus Point Holdings Bhd, which operates one of the largest optical retail chains locally.

Wong says the fund invests in these companies over the medium to long term as they would take time to improve on their sustainability practices and attract the attention of ESG index providers and rating agencies.

As the fund was launched only in mid-November last year, it has a fund size of about RM4 million. Tradeview Capital is aiming for RM10 million by the end of this year by showing good investment results.

The minimum investment amount of the fund is RM50,000. According to the product highlight sheet, it has a sales charge of up to 3.5% and an annual management fee of 1.8%. There is also a 20% performance fee with a hurdle rate and high-water mark of 6%.

There are many different types of SRI and ESG funds. When evaluating such funds, investors would ask how the fund manager screens and evaluates companies with good sustainability practices. How do they rate smaller companies that are still catching up on ESG disclosures due to limited resources?

Neoh Jia Man, Tradeview Capital’s portfolio manager and the main person in charge of the firm’s ESG rating methodology, says the firm developed its proprietary rating system by referring to existing international standards, including the Sustainability Accounting Standards Board (SASB).

“We are doing it ourselves instead of relying on existing methodologies and standards because most of them only rate large-cap companies as they receive a lot more interest from major investors,” says Neoh.

“But for us, our fund size is small and we look at smaller companies. We also want more flexibility in terms of the kind of companies we can invest in.”

When there are information gaps, the firm would reach out to the management of the companies to fill them in.

Neoh says the firm first applies a negative screening process to screen out companies that are involved in industries that are widely accepted as non-ESG compliant, including tobacco companies, weapons manufacturers and those involved in gambling activities.

After that, it would rate remaining companies using its proprietary scoring system that evaluates their performance on the three pillars of ESG. 

“We assign E, S, and G materiality weighting to each company based on their industry classification. For some industries, like banking, their environmental score is less important than another company in the oil and gas industry. We assign a higher weight to a bank’s social pillar instead,” says Neoh.

“Under the social pillar, there are a few components that we look at, including how a bank safeguards its customers’ funds and personal data.”

Neoh says fund managers would need to review each of the components under the three pillars to come out with a final ESG score for these companies.

“There’s a process that we need to follow by going through those components line by line. We have to look at the companies’ disclosures, mainly from their annual reports,” says Neoh.

“In the case of the micro-, small- and mid-cap companies, there might not be enough info in their annual report. What we do is to engage with the key management of the companies. They would disclose more information and give us a picture of whether they are moving towards the direction we would like them to.”

The company with the best ESG practices would be accorded 10 points while the worst would have one. 

However, the fund does not invest in companies based on the absolute number. It compares each individual score against the industry peer group average score, and invests in those with ESG scores higher than their peer group average, adds Neoh.

So far, the firm has scored about 30 companies in several peer groups and industries and is gradually increasing the number of companies under its coverage.

“We don’t have the resources to rate every company in the same industry. So, we came up with a peer group system, where some peers in the same industry are compared. We try to compare companies in a similar business and within the same geographical location,” says Neoh. 

Wong believes that the ESG trend will pick up faster this year as more regulations are introduced that require asset management firms and public-listed companies (PLCs) to focus more on sustainability matters.

One of them is Bursa Malaysia’s collaboration with the London Stock Exchange Group (LSEG) in November last year to assign an ESG score to all PLCs on the Main Market and ACE Market in Malaysia. The LSEG owns multi-asset index and benchmark provider FTSE Russell.

“Definitely, with that kind of initiative, it would provide more visibility to the world on how smaller companies are faring on the ESG front. For those that do well, their re-rating might not come so soon, but it would come faster with Bursa making the first step.”

Neoh concurs with Wong’s view. In fact, he has witnessed first-hand how the share prices of oil and gas companies in the European Union have been trending downwards in the past years despite earnings growth that beat analysts’ expectations.

“I was an equity analyst at CFRA Malaysia (formerly known as Standard & Poor’s Malaysia) looking at European firms. Over the long term, I realised that the share price and valuations of their oil and gas companies kept falling. It was only later that I realised it was because their ESG policies were not favoured by the market,” says Neoh.

“We should see this kind of valuation impact coming through the local share market sooner or later. However, there is no denying that the ESG scoring systems are still in their early days and are not perfect tools to identify the efforts companies pour into such an area and its real impact,” says Neoh.

“Frankly, reading through an annual report [for ESG assessment] is a bit like reading the label of packaged food. To determine the content inside the food, there’s a lot more we need to do and find out.

“For instance, a company says it has a whistle-blowing policy in place in its annual report. Yes, they might have disclosed it, but do they actually implement it? We don’t really know. You need to do a lot of work to find out.”

It is also still early days. “We all know that ESG rating is not very objective [at the moment as different people would look at different components]. It is akin to stock recommendations from sell-side analysts. Rating agencies are trying their best to make their methodology as quantifiable as possible. But at the end of the day, it depends on the data you choose and the data a company discloses. It is tough to have a universally accepted rating standard,” says Neoh.

“[Nevertheless,] having all this is at least a step in the right direction.”

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