After reaching record highs in January of this year, the emerging markets in Southeast Asia have witnessed a tremendous sell off amid fears of a looming trade war and a rising US interest rate environment. These factors have forced markets in the region to become highly volatile.
How can investors help stabilize their strategy in this uncertain environment?
If you are focused on the long term, the current volatility may actually be a boon. This year’s Bloomberg Buy Side Forum in Malaysia focused on identifying the opportunities that have surfaced in sustainable and long-term investing in Malaysia during the recent pull-back in emerging markets.
Sustainability and the rise of ESG
In the past, taking a long-term view on a company meant being laser-focused on its financial performance. But in recent years, Sustainable Responsible Impact (SRI) investing has made significant inroads into the long-term investment strategies of fund managers. According to BNP Paribas, assets under management (AUM) in SRI for 2016 reached USD 23 trillion, which was 30 percent of the global AUM.
As a world leader and standard bearer in Islamic finance, Malaysia can potentially gain the most from this SRI wave. In fact, Malaysian regulators are looking for ways to encourage a partnership between Islamic finance and SRI as both share some commonalities in their principals (do well by doing good), methods (e.g. exclusionary screening) and claims (emphasis on ethics).
However, for Malaysia to be at the forefront of both Islamic finance and SRI, both regulators and the industry will have to focus on some key areas.
First, firms will have to scale up their operations and product offerings by positioning the country as a regional center for Sharia-compliant SRI. Only then will their products draw wider international interest. Secondly, innovation is key in creating a vibrant ecosystem that will drive Islamic financial markets and also allow SRI to thrive alongside in the long run. Lastly, they will have to offer targeted incentives to Islamic finance players for Malaysia to maintain its leadership position in this space.
If Malaysia is successful, the value-add will be two-fold: Investors will have more SRI opportunities and Islamic products will be on the path to greater global appeal.
Role of AI in SRI investments
However, one of the major challenges of SRI investments is accessing and analyzing huge volumes of unstructured ESG data to measure social impact.
As SRI gains more prominence in long term investment portfolios, fund managers are leaning towards technology to help them make sense of big data sets and compare investment opportunities against their criteria. Artificial intelligence (AI) in particular is being used to derive patterns from large pools of inconsistent ESG data to explain price movements more effectively. Its capacity to process vast volumes of data can help institutional players to make decisions that are more accurate in SRI investing in Malaysia.
AI, however, will still need the intervention of humans for insight and accountability purposes to ensure the goals of a strategy are being achieved. Organizations will also have to find ways to upgrade their talent pool with a nimble workforce as the trajectory of the future skills needed in AI is uncertain.
In the coming years, environmental, social and governance issues will continue to move up on the agenda of market players. In order for institutional players in Malaysia to make the most of their long-term investments, it will be imperative for them to incorporate technology into their Sharia-compliant SRI decisions.
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