Highlights

ESG Investment Is a Multi-trillion Dollar Industry

• According to the Global Sustainable Investment Alliance (GSIA), total global sustainable investing assets under management (AUM) have grown by 15% in the past 2 years from 2018 to 2020 to US$35.3 trillion. This represents 35.9% of total AUM tracked by the GSIA. This shows that environmental, social and governance investing has become more prominent among investors. Note that the GSIA is an international collaboration of membership-based sustainable investment organizations. To put things into perspective, the total sustainable investing AUM globally is 80 times of the total market cap of Malaysian stocks at around US$439 billion (or RM1.82 trillion) (Exhibit 6).

• In this report, we have also included key takeaways from a recent event themed “Impact Investing” jointly organized by the World Bank Group and CFA Society Malaysia (Pages 6 and 7).

Data Consistency Remains a Key Challenge

• Globally, there is currently no consistency on how to assess a company on each of its environment, social and governance criterion. However, we noticed that there are two widely-referenced organizations – Principles For Responsible Investment (PRI) and FTSE Russell. Note that PRI is an investor initiative in partnership with the United Nations Environment Programme Finance Initiative and United Nations Global Compact (Exhibits 4 and 5).

Our Approach on Integrating ESG Into Equity Valuation

• We assess each company under our coverage using up to 10 criteria. Based on the average rating of those criteria, we will rate a company from 1 to 5 stars. Companies with 3 stars are deemed an average performer hence no discount or premium to our fair value. As for companies that have demonstrated a good track record, our overall rating will either be 4 stars or 5 stars. For 4-star/5-star ESG-rated companies, we include a 3%/6% premium to our fair value. As for 1-star/2-star ESG-rated company, we include a 3%/6% discount to our fair value to reflect its below average performance in our ESG assessment.

Top 5 ESG picks: Maybank, Hong Leong Bank, Westports Sunway and Lagenda Properties

• Our ESG picks may be different from our top 10 fundamental pick. Companies which outperformed in ESG tend to have a long-term focus hence their near-term earnings growth may not be at the highest quartile. We select our 5 ESG picks (Exhibit 1) based on their above-average ESG rating with BUY calls. Beside the top 5 ESG picks, investors who have a preference for certain sectors may refer to our best-in-class ESG investing table (Exhibits 2 and 3). This is our selection of the top three ESG performing company with a 4-star rating within a specific sector. For our best-in-class strategy, the stocks selected are a combination of BUY and HOLD calls as some sector fundamental factors are not as exciting in the near term.

Source: AmInvest Research - 28 Oct 2021