BETA activism is relatively new but institutional funds are increasingly adopting it as it mitigates systemic risk and improves the risk/return dynamics of the market as a whole.

In essence, beta activism widens the definition of what it means to be an investor. Traditionally, investors assume that the only way they can mitigate risk and improve returns is through trading and portfolio construction as well as diversification.

On the other hand, a beta activist pays attention to the real economy, rather than just the numbers on their screens. Issues like climate change, sustainability and good governance take precedence over financial returns.

The origin of beta activism can be traced back to former Chief Investment Officer of the Government Pension Investment Fund of Japan (GPIF), Hiro Mizuno.

According to Mizuno, “Large institutional investors are effectively universal owners, and because their portfolios are highly diverse, they have taken a slice through the whole economy and market.

“The environmental costs incurred by some companies in their portfolios will have an impact on companies elsewhere in the portfolio. This means that asset managers must develop investment strategies that contribute to making the whole system more sustainable”.

Jon Lukomnik and James Hawley, the authors of “Moving Beyond Modern Portfolio Theory: Investing That Matters” have referred to Mizuno’s style of investment at GPIF “beta activism”.

Higher Standards

Beta activism by GPIF not only lifted corporate governance standards in Japan but also its equity allocation by five fold over the past decade. Today the pension fund is benefiting from the rally in the Japanese stock market.

Japanese companies have been receptive to beta activism, especially in areas related to board independence and diversity. Even the Tokyo Stock Exchange (TSE) made radical moves by segmentising the exchange’s constituents into three distinct groups. They are Prime, Standard and Growth, with each having a specific corporate governance rule.

The TSE also boldly upped the game in ensuring the valuation of the listed companies by requiring all companies with a price-to-book ratio of less than one or return on equity of less than 8% to devise a plan to improve capital efficiency and promote investment. Companies that do not develop such a plan could be delisted.

Malaysian institutional investors should consider the GPIF initiatives to enhance shareholder returns. With foreign institutional investors making up only 19.5% of the overall Bursa Malaysia’s market capitalisation as at December 2023, these investors must take beta activism as a strategic means to lift total returns. This will make the market more vibrant, and perhaps even trade at a premium to our regional peers.

Impact Investing

A key pillar in beta activism is how the institutional investor takes a crucial and critical role in managing climate risk. Other elements include institutional investors actively ensuring at least 30% women participation and more independent non-executive directors than non-independent executive directors on company boards.

Beta activism also looks at issues related to Diversity, Equity and Inclusivity to ensure the corporation has a governance structure that is cascaded down to senior management and below.

Other issues of interest to a beta activist include biodiversity, deforestation (especially those related to land clearing), and even mining in the oil and gas industry.

Malaysian Beta Activists

While shareholder activism has gained substantial traction over the years, more can be done to ensure corporations abide by the environmental, social and governance standards and that is where beta activism comes in.

Institutional investors in Malaysia have played an active role in shaping large listed corporations’ governance standards. Institutional investors have also held a strong position and some do publish their respective voting principles as well as decision-making processes.

One clear example is political appointments to the board as well as opposition to any form of share-based compensation scheme for independent directors. Institutional investors also pay close attention to any form of greenwashing while on alert for any corporate manoeuvres that oppress minority shareholders.

NSRF Raises the Bar

Let’s face it. Issues related to climate change, biodiversity and deforestation are real.

While corporations are under pressure to do the needful, especially under the new National Sustainability Reporting Framework (NSRF), the push from beta activists will ensure higher standards of compliance. The financial impact, which may cause a dent in profitability in the short to medium term, should be rewarding in the longer term, with improved total returns.

According to the Securities Commission, the NSRF is meant to ensure corporate Malaysia provides consistent, comparable, and reliable sustainability information to enhance Malaysia’s competitiveness and attractiveness to investors.

Corporates are to implement the NSRF through a phased and developmental approach. With this, Malaysia joins more than 20 other markets, which represent more than half of the global economic output, that are adopting these new standards of reporting.

With NSRF, Malaysian-based beta activists will be given an added tool and mechanism to ensure that corporates in Malaysia will abide by the expected compliance under the NSRF, which will enhance portfolio returns in the long term.

In conclusion, beta activism is here to stay for the benefit of all stakeholders. Thanks to Mizuno, global markets are now well aware of the importance of beta activism and the added value it brings to the table.

The article was first published by The Star.

Photo by Joshua Hoehne on Unsplash.