Key Takeaways

• ESG-focused businesses are typically more operationally efficient and have sustainability initiatives.
• This raises shareholder value and promotes sustainability over the long term
• Investing in ESG-focused businesses may be able to reduce climate change and benefit the environment
• Investing in ESG-focused businesses may lower overall investment risk due to their superior comparable governance practices and higher standards of conduct

ESG investment is based on the fundamental tenet that organisations have a higher chance of success and significant returns if they add value for all their stakeholders, including the environment, consumers, suppliers, and broader society.

What is ESG?

Environmental, Social, and Governance, or ESG, are the three key components that determine how sustainable an investment is. Its origins lie in the “Triple Bottom Line,” often known as “People, Planet, and Profits” (PPP), a notion that was first proposed in the 1990s. For any commercial organization to be viable, it was suggested, enterprises should concentrate on all three “P’s” and not just “Profits.” This idea developed into ESG’s primary objective, which is now the cornerstone of the Socially Responsible Investing (SRI) framework.

How does it work? 

The ESG strategy involves making investments in businesses that receive high marks from independent, third-party research organizations and firms on their environmental and social responsibility measures.

Environment, social responsibility, and corporate governance are the three main factors considered when assessing a company for ESG investing.

Why invest in ESG? 

• Businesses that include ESG concerns as part of their long-term strategy planning give investors a more complete picture of their potential worth.
• Additionally, studies have demonstrated that good sustainability and ESG policies may have a favorable impact on a company’s operational and stock price success.
• Socially conscious companies give investors a chance to help the environment and help mitigate climate change.
• Investors are given access to performance-driven ESG investments at a bite-sized 

Key considerations and risks for private equity investors

Who can invest in ESG?

Those with a preference for long-term sustainability and a more holistic perspective on investing are suitable candidates for ESG-oriented companies. In addition to improving investment returns, cooperation between investors, businesses, and communities can hasten the broad adoption of sustainable business practices.

What should you consider before investing in ESG?

Greenwashing is a key issue that is prevalent when investing in ESG. This is generally due to inaccurate, false or misleading claims made by a company about the positive impact that it has on the environment. There are a number of reasons as to why greenwashing is considered as a ‘material risk’ in many jurisdictions – the lack of complete and accurate ESG data that is used for screening, disclosures and further innovation, and an overreliance on third parties who lack the necessary credentials from both the regulatory and standard setting bodies. This issue is further exacerbated by the overarching net zero claims made by corporates.

To mitigate this, we at KLDX work very closely with our panel ESG consultants along with the issuing party to ensure that greenwashing is prevented. This is done using IOT devices that actively record the relevant data that is sent directly to the KLDX platform via the blockchain. This ensures that the data is transparent, immutable and verifiable for our investors to gain access to.

How can KLDX play a part in ESG investing?

At KLDX, we believe that our platform plays a crucial part throughout the development of ESG projects through the facilitation of sustainable financing and lifecycle management of these projects. 

KLDX can facilitate the generation of carbon credits through projects that promote carbon sequestration which would further incentivize large corporates to play their part in ensuring that Malaysia is able to meet its unconditional target to cut national emissions by 45% against GDP by 2030 (as compared to 2005 levels) and to meet its obligation to become net zero by 2050 as per the Paris Agreement. 

This is done by ensuring that sustainable projects undergo thorough due diligence prior to being financed by investors, complete end-to-end facilitation of the carbon credit generation process, and fundraising is carried out entirely on the KLDX platform through the use of blockchain technology that is hard coded into our platform. This would ensure that an appropriate level of transparency is maintained throughout the fundraising, issuance of carbon credits, and periodic disclosures as per the whitepaper released by the issuer. Doing so would allow for adequate investor protection whilst playing our part in aiding Malaysia as it aims to meet its emissions mitigation targets. 

At KLDX, we understand that there exists a variance in the types of funds that could be raised – via equity, fixed income and funds. Of these methods, project developers tend to gravitate towards fixed income fundraising due to the funds raised being better suited for a project basis. The KLDX platform is well equipped to facilitate fundraising for a plethora of fixed income financing methods – green financing, social financing and sustainability financing (combination of green and social financing as per UN SDGs). Corporates are also able to fundraise to fund their company’s transition to a more ESG – focused future by offering a fixed income product or even equity. Relevant KPIs would be set in place in the whitepaper prior to the fundraise and corporates are to meet these requirements in order to avoid being charged a penalty.