• We introduce our framework for ESG scoring as we assess initiatives undertaken by management of listed companies in our coverage.
• Our parameters include 10 key issues surrounding the three areas of ESG – 4 for environment, 3 for social and 3 for governance.
• Our company analysis going forward will now include ESG metrics and scoring, as well as the possible impact on stock price valuation, if any.
• Among sectors, we observe that environmental issues are highest on the agenda, perhaps due to constant narrative on climate change and being less difficult to measure.
• The FTSE4GBM Index has slightly outperformed the KLCI on both short and long-term horizon, but has trailed the FBM Emas performance over a 5-year period.

Environmental, social and governance (ESG) investing is the consideration of ESG factors, alongside financial factors, in the investment decision-making process. We have seen a global rise in awareness of ESG during the past few years, but has since accelerated since the break out of the Covid-19 pandemic. A company’s success – according to some stakeholders and regulators – should also take into account efforts such as saving the environment and promoting diversity in its workforce, not solely by its financial performance. As a result, listed companies have taken ESG initiatives to ensure that they remain on the radar of investors as many investor groups, including pension funds see their role as more than just return-seekers.

The term ESG sometimes may be thought of as interchangeable with concepts such as corporate social responsibility (CSR) or sustainability, but there is a key difference here. While “sustainability” as a term may refer to a variety of different things, social responsibility can be assessed on the basis of many subjective judgements.

Shareholders’ scrutiny on listed companies is at an all-time high, which could shape the way on how investment world behaves. Regulatory frameworks have seen to improve, companies are urged to disclose more ESG information, ESG investment metrics and tools are proliferating, independent third-party agencies provide ESG ratings, and new ESG indices are introduced for portfolio benchmarking.

From investment perspective, one of the key challenges in our view is ensuring that ESG-focused portfolios are able to consistently provide superior returns as opposed to key indices. The Emas index for example has given better returns than the FBM4GBM over a 5-year period. Cyclical stocks such as commodities which are perceived as less ESG-compliant, are currently riding high and could provide better performance in the near-to-mid-term horizon.

The main ESG challenge for key sectors is the environment

We sum up several key challenges for major sectors under our coverage and observe their ESG trend below. All things considered, we observed that the environment pillar is the most critical issue to tackle among public listed companies in Malaysia, followed by social and then governance. For example, in the oil and gas sector the 2 main issues high on the ESG agenda are: 1. Emission, ie the discharge of greenhouse gas (e.g., carbon dioxide (CO2), methane, nitrous oxide, and 2. Energy, ie the efficient use and consumption of electricity as well as energy generated from renewable sources.

Environment. Most of the sectors are heavy on emission with 5 are identified out of 7 points. Although Malaysia only contributes 0.7% of global greenhouse gas emissions, this remains an issue as it still one of the main causes of global warming that has seen rising yearly. In tandem with Malaysia’s 2050 carbon neutrality aim, various policies to accelerate green growth would be put in place such as no new power plants, carbon pricing, developing electric vehicles technology and blue economic blueprint.

Social. Labour dependency remains entrenched in the plantation and manufacturing industry, despite years of mechanization/automation efforts. Given the inherent labour-intensive nature of the industry, it is unsurprising that the industry, palm oil in particular (>62 working hours per tonne), continues to be embroiled in issues relating to poor working conditions, low wages and even child labour. Changes to current immigration laws and policies as well as treatment of migrants should be looked into, among other solutions required for the country.

Governance. Transparency (anti-corruption) on the disclosure of remuneration and incentives seem to differ across the sector, and certain companies fail to disclose the breakdown of base and bonus pay. We believe the difficulties faced by companies in complying with this can be resolved with a more specific set of standards for each sub-sector of industry, regarding what to disclose and how much to disclose – perhaps a penalty for non-disclosure would motivate companies to comply.

Our findings and ranking of the importance of each ESG theme are summarized in the latter part of this report (Table 4).

Source: BIMB Securities Research - 13 Oct 2021