Malaysia’s EPF adopts Net Zero in overhaul of ESG policy

Changes also cover labour standards, an area in which Malaysia's finance minister warns global scrutiny could make the country less competitive.

Malaysia’s $240 billion Employees Provident Fund (EPF) will be required to decarbonise its portfolio by 2050 and become ‘ESG compliant’ over the next decade, according to its newly adopted sustainability policy.

The public pension scheme – which is among the top 10 retirement funds globally by assets – unveiled the policy last week. It includes two standalone provisions covering climate change and labour standards, in addition to ESG policies for palm oil, oil and gas, mining and three other key economic sectors for the country.

Details of the underlying policies have not yet been made public, but the fund said it will soon communicate its “minimum sustainability standards and thresholds for investments, and the necessary metrics and indicators for performance tracking” to its 16 external fund managers – all of which signed off on the policies during the launch event.

The EPF has indicated that it will expand its list of exclusions based on ESG considerations across asset classes, and will seek alignment where possible with global standards such as the UN Global Compact, UN Guiding Principles, International Labour Organization Standards and SASB sector frameworks.

The fund will have until 2030 to implement its sustainability policy, which also covers the power generation, banking and construction sectors.

The development and monitoring of the policies will be headed by the fund’s newly created Sustainable Investment Centre.

The move was announced by Malaysia’s Ministry of Finance, which has overall responsibility for the fund’s management. “On the social front, Malaysia is facing increased scrutiny of its labour practices, particularly the treatment of foreign labour by corporate Malaysia,” the country’s finance minister, Tengku Zafrul Aziz, said during the launch event. “These issues have a tangible adverse impact not only on business profitability, but also on the nation’s reputation as a whole.”

Despite being a relatively small economy, the South East Asian country is a major exporter of key commodities such as palm oil and petroleum products, in addition to being a key manufacturing hub. However, the country has faced longstanding allegations of widespread forced labour practices and poor environmental standards, which has resulted in import bans from key buyers such as the US and EU.

At the same time, Malaysia has tried to position itself as a regional leader on sustainable finance – the country is among only a handful piloting a national taxonomy for eligible ‘green’ investments akin to that pioneered under the EU’s Sustainable Finance Action Plan, in addition to supporting the development of a ASEAN taxonomy.

Malaysia has also rolled out a series of incentives and resources aimed at encouraging both issuers and investors to integrate sustainability factors into their decision-making.