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Economic factors, such as inflation, rising rates and supply chain disruptions have been top of many investors’ minds in 2022. You may ask, in such a volatile economic environment, if it is worth it for investors to think about sustainability and ESG at all.

I would say yes, in fact it is crucial for investors to think about how these economic factors will affect longer-term structural trends, such as the low carbon transition.

Changing Energy Economics

With rising energy prices, political momentum for decarbonisation has slowed. But importantly the private sector continues to push ahead, helping close some of the gaps between the ambitions of global leaders and corporate readiness for transition.

Changing energy economics also affects how companies will look to decarbonise, with higher energy prices incentivising improvements in energy efficiency. Technologies like heat pumps are becoming more viable compared to alternatives. The adoption of technologies will not just affect the companies developing or producing them, but across the value chain.

Rising Demand For Sustainable Food And Water

The global population is expected to increase 40% from now to 10bn in 2050, while getting richer as living standards grow. This will drive the demand for food, while the physical effects of climate change, such as rising temperatures and changes to weather patterns, puts pressure on supply.

Huge amounts of investment will be needed for the world to have sustainable food and water. With these needs come opportunities, for companies who can come up with the technologies and innovations to meet it. Recent food price inflation has accelerated these structural trends, driving a focus on food security.

The Importance Of Human Capital Management

It is not all about the environment. The cost of living crisis has intensified social stresses. Few governments have the fiscal capacity to absorb shortfalls in household budgets. Companies are coming under pressure to ensure vulnerable workers are protected – whether through increasing wages and benefits for their own employees or their responsibility to workers in supply chains.

Companies that are better at managing human capital may be well-placed to navigate the challenges posed by the complicated macro environment. I hope I have showed you that ESG factors are not things to think about in isolation – they are core to informing our view of the world and how to invest.

By Mervyn Tang, Head of Sustainability Strategy, APAC, Schroders

In our previous article, we explored how poor investment and savings behaviours could lead to higher vulnerability among Malaysian investors –  leaving them at risk of suffering fraud, financial exploitation, or the effects of unsuitable investments. Nonetheless, we also highlighted that vulnerability is a multifaceted phenomenon with frequently overlapping and closely interconnected drivers.

Beyond financial behaviour and accessibility, the Institute for Capital Market Research Malaysia (ICMR) also identified situational and industry-related drivers of investor vulnerability. Based on findings from our nationwide survey, this article will delve deeper into both these categories to further understand how Malaysians experience vulnerability during their investment journeys. 

Navigating Unexpected Life Changes

Situational drivers refer to experiences of specific life events or temporary difficulties such as bereavement, job loss, income shock, death within close relatives, or changes in expenses and savings behaviours. Understanding these drivers is especially significant considering how our lives have been impacted by greater uncertainty since the COVID-19 pandemic.

Throughout the pandemic, many Malaysians lost their jobs, income, or faced income cuts. The impact of this lasted even after lockdown measures were lifted and has been exacerbated by the rising cost of living. ICMR’s survey conducted in early 2022 found that 60% of Malaysians felt that their expenses had outpaced their monthly income in the last 12 months, hence affecting how they made ends meet.

Despite Malaysia’s economy opening up in the post-pandemic phase, many Malaysians are still struggling to sustain themselves financially. This was evident even before the real knock-on effects of inflation had been felt, which rose from 2.3% in January 2022 to 3.8% in December 2022 on the back of higher food and transportation prices.

To curb inflationary pressures, the Central Bank of Malaysia (BNM) increased the Overnight Policy Rate (OPR) by 100 basis points to 2.75% as of the end of 2022. Now, sandwiched between higher borrowing costs and higher inflation of food and oil prices, households will have even less discretionary income – which could increase their level of vulnerability.

It gets more concerning when the issues of expenses and inflation are coupled with complex life events, which appears to be the case for 61% of respondents to ICMR’s survey. Within this group, most respondents experienced ‘death of close relatives’ or ‘changes in employment and financial status’, potentially most of these losses being due to COVID-19.

Despite the widespread belief that vulnerable individuals comprise the older generation, our study emphasises that notwithstanding age, changing life situations caused by the pandemic or changes in employment can cause individuals to feel more financially vulnerable. This, coupled with the current state of the economy, further contributes to poor financial decision-making.

Challenges Dealing With Financial Service Providers

The final category of vulnerability driver we identified is ‘industry-related drivers’. The variables measured in this category include experiences surrounding the actions of market or individual financial providers; firms that do not act with appropriate levels of care; products that are inappropriate for a particular client; and inadequate/complex or misleading documentation/information.

ICMR found that 47% of surveyed respondents rely on financial consultants, agents, or brokers as sources of financial information. However, we also found that investors only referred to financial consultants who happened to be their friend or who were introduced by their family or friends. This correlates with our findings of 44% preferring to listen to friends and family for financial information.

Moreover, 83% of those who do seek professional financial advice claim to experience some difficulties, especially due to insufficient information or knowledge. At the same time, 70% of those who engaged with financial service providers faced some misconduct, including unsuitable prices or terms, being pressured into making an investment, high fees, technical issues, and language barriers.

This was further confirmed in our qualitative interviews, where interviewees felt that all the documents and information given were too complicated and difficult to understand. Elderly folk and youths were among the most affected. This, coupled with low financial knowledge, will make understanding important disclosure documents even more difficult for these groups.

Many investors feel that financial services and products have been streamlined and designed based on the idea of a perfectly rational investor. Because of that, financial consultants and agents struggle to meet the needs of investors who do not fit into the idea of a perfectly rational investor, which has the potential to lead to negative experiences and consumer detriment.

“The documents and disclosure are too complex and hard to understand. Only those with financial background could understand. I feel that the sales agent does not know the details of the product so the agent will just work to promote”

– Emma, 34, real estate consultant

Vulnerable Investors More Susceptible To Financial Scams

Although not all vulnerable individuals face the same challenges, most tend to feel overwhelmed and unable to cope during certain vulnerable moments. When faced with these feelings, individuals find it difficult to prioritise, which leads to sub-optimal decision-making. This results in them making decisions that further worsens their situations, particularly when dealing with financial services firms.

Findings from the three vulnerability drivers we’ve explored highlight that individuals may experience overlapping vulnerable characteristics, leaving more investors susceptible to the allure of making fast money. Stay tuned for our next article, as we will look closely at the factors that cause investors to fall prey to investment or financial scams.

This article is part of a content series by the Institute for Capital Market Research (ICMR). Follow ICMR’s Facebook page to stay updated on behavioural tips and insights for better investing habits. To learn more about ICMR’s research on new age vulnerabilities, visit www.icmr.my or download the full report.

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