• Malaysia's telecommunications sector has made significant progress in advancing ESG initiatives. While the industry currently exhibits lower emissions, it holds significant potential to further reduce its environmental impact, highlighting its crucial role in advancing sustainability efforts.

• The uptick in digital activities necessitates a robust framework for sustainable practices which highlight the need to facilitate more accurate analytics on digital impact in an evolving connectivity landscape.

• Cybersecurity threats are a significant issue in Malaysia, with 76% of businesses reporting incidents and 57% experiencing data loss, indicating a regional gap in cybersecurity readiness.

• Impending rollout of 5G poised to revolutionize connectivity and support key innovations, potentially adding RM150bn to GDP and creating 750,000 jobs by 2030.

• As Malaysia's telecommunications sector enhances its ESG commitments, the focus must shift towards integrating comprehensive data transparency and cybersecurity measures, ensuring equitable digital access while maximizing the industry's potential to significantly reduce emissions and support sustainable development goals.

Telecommunication Sector Leading in Climate Change Effort

Malaysian telecommunications sector has shown considerable progress in addressing its environmental footprint, particularly through energy efficiency improvements and increased reliance on renewable energy. Despite a sharp rise in data demand, operational emissions have remained stable since 2019, reflecting strategic efforts by leading telecom operators to align with global climate targets. Notably under our coverage, Axiata (HOLD; TP RM2.50) and CelcomDigi (BUY; TP RM8.84) have committed to science-based carbon reduction goals under the SBTi framework. These targets are aligned with the global telecommunications sector's ambition to achieve net-zero emissions by 2050, a milestone that will require comprehensive efforts across both direct and indirect emissions sources. We also note that, CelcomDigi and Telekom Malaysia (TM) (BUY; TP RM7.77) are the only companies under coverage that track their Scope 3 emission which covers waste generation and business travel.

As reported by Global System for Mobile Communications Association (GMSA), the sector is responsible for about 0.4% of total global emissions, but its positive environmental impact is significantly larger with the utilisation technologies which could contribute to avoided emissions that are ten times higher than the sector’s direct emissions. GMSA’s projections indicate that the sector could drive a 20% reduction in global CO2 emissions by 2030, using 2015 as a reference point. Meanwhile, according to the latest Carbon Disclosure Project (CDP) data disclosures, mobile operators globally have significantly ramped up their renewable energy use with proportion of electricity sourced from renewables across the sector increased from 14% in 2019 to 33% in 2022, underscoring the industry's commitment to sustainability.

GMSA also expected that the sector’s share of global emissions to decrease from 2.3% in 2020 to 1.97% by 2030, reflecting advancements in energy efficiency and a shift towards cleaner energy solutions. Supporting this advancement, TM, the nation's largest managed data center provider, is spearheading green technology initiatives through its upcoming Tier 3 data center which slated for operation in 2026. It will feature liquid cooling technology tailored for high-density AI workloads and further to comply with Leadership in Energy and Environmental Design (LEED) standards, ensuring optimal energy and water efficiency, contributing to both emissions reduction and cost savings. Meanwhile, CelcomDigi has integrated smart energy management systems to optimize energy consumption and invested in solar power for select cell sites and offices, aligning with Malaysia's 5G expansion goals. This initiative supports Sustainable Development Goal (SDG) 7: Affordable and Clean Energy, with a focus on reducing carbon emissions. Additionally, within the environmental space, there is also a strong focus on responsible Obsolete Electrical and Electronic Waste (e-waste) management through the take-back programs and collaborating with recycling firms to ensure proper disposal of outdated electronic equipment, which further supporting SDG12: Responsible Consumption and Production. Demonstrated by CelcomDigi through its e-waste take-back programs in major urban centers, facilitate the return of old devices whereby 237.8tonnes collected meanwhile 47.6tonnes was resold and recycled in 2023. Also implementing similar practise, TM in collaboration with KLEAN, had introduced Reverse Vending Machines (RVM) technology at numerous collection points which enables broad customer participation and efficient recycling processes. We believe this initiative could be expanded nationwide to amplify its impact, improve accessibility, and increase public participation, similar to Maxis' (HOLD; TP RM3.95) approach. In 2023, this effort resulted in the collection of 49,879 e-waste units. Maxis has not only provided convenient e-waste collection services for residential and commercial premises in the Klang Valley, Johor Bahru, and Penang, but has also extended its campaign by introducing a free postal dropoff service through Pos Malaysia outlets for consumers across West Malaysia.

Empowering Through Connectivity

Digital engagement in Malaysia has seen a significant growth as reported by the ICT Use and Access by Individuals and Households Survey Report 2023 from DOSM. Social network participation increased slightly from 99.2% in 2022 to 99.4% in 2023, highlighting the ongoing influence of social media on societal interactions. There has also been a modest rise in multimedia activities, with engagement in downloading pictures, videos, and games growing from 93.5% to 93.9%. This trend reflects a sustained interest in digital entertainment. Additionally, the percentage of people seeking information online about goods and services increased from 92.5% to 92.8%, indicating a growing reliance on the internet for informed decision-making. The proportion of individuals downloading software or applications also rose from 89.1% to 89.6%, showing a rising demand for digital tools. The adoption of internet telephony, Voice over Internet Protocol (VoIP), grew from 85.2% to 85.9%, suggesting a shift towards internet-based communication methods.

The high engagement in social networks and VoIP services supports greater social inclusion and connectivity, which can benefit the underserved communities. The increase in digital activities also highlights the need for sustainable practices to manage environmental impacts, such as improving data center efficiency and reducing electronic waste which reflect progress towards Malaysia’s sustainability objectives by promoting inclusivity, transparency, and green technology.

Local telecommunications companies are actively strengthening their CSR efforts by promoting digital inclusion, workforce diversity, and community development. Through initiatives supporting women in tech, fostering startups, and enhancing digital literacy, particularly in underserved and rural areas, they have contributed to SDG 9: Industry, Innovation, and Infrastructure, as well as SDG 10: Reduced Inequalities. As global connectivity expands, this further trigger the need for updated categorized internet usage data, which we believe would contribute to more accurate assessments of digital impact, particularly among children. One of the main issues that seems to be rising is in regards of online safety. In response, several initiatives including CyberSAFE, Protect and Save the Children (PS the Children), Safer Internet Malaysia (SIM), and the National AntiTrafficking and Anti-Smuggling Council (NAATSC) have been developed to enhance online and offline safety for children in the face of cybersecurity threats.

We do note that Axiata has been actively addresses these concerns by introducing the KidsSafe platform, a significant step forward in raising awareness about child online safety and tackling issues such as cyberbullying, cyberattacks, and online harassment. With the success of the platform, the company further solidifies its commitment to digital inclusion by ranking 22nd in the 2023 Digital Inclusion Benchmark by the World Benchmarking Alliance, placing it in the top quartile of the world's top 200 technology and communication firms for the fourth consecutive year, with a score of 51.4/100.

Meanwhile, CelcomDigi unveiled its 5-Year ESG Strategy Plan (refer here CelcomDigi Berhad – Positive on Inclusive 5-Year ESG Plan) during its ESG Day 2024 summit, focusing on four key pillars, one of which emphasizes "Enhancing Inclusive and Safe Digital Access." A significant initiative under this plan is the National Scam Awareness Survey 2024, which offers valuable data and insights to inform more strategic and targeted
measures against scams and fraud. This effort is expected to further enhance digital safety and strengthen cybersecurity efforts.

With these initiatives implemented, we believe Malaysia will achieve better data protection and provide greater peace of mind, especially as the internet and children increasingly interact in today’s advanced world.

Strengthening Data Governance

Governance is in action as data privacy emerges as a critical concern in the telecommunications sector. We observe that companies under our coverage have strengthened their governance frameworks to ensure the responsible management, secure storage, and transparent use of customer data, in compliance with Malaysia's Personal Data Protection Act (PDPA) 2010. Measures being implemented including data encryption, secure access controls, and regular audits to safeguard this information. Nevertheless, we believe that cybersecurity remains a significant priority through the investment in sophisticated threat detection systems and incident response protocols to counter cyber threats. This further emphasize transparency and accountability by clearly communicating data usage practices to customers and offering options for managing data preferences. Additionally, we expect the telco companies to manage data ethically and continually enhance their privacy practices to align with international standards, particularly as emerging technologies like 5G evolves, as we concur the commitment to data privacy not only fosters customers’ trusts but also supports sustainable digital progress.

Based on KROLL State of Incident Report 2022, cybersecurity threats have emerged as a critical issue in Malaysia, with 76% of businesses reporting incidents, significantly higher than rates observed in Hong Kong and Japan (Refer Chart 1). Data loss is a particularly pressing concern, impacting 57% of these incidents. In contrast to the lower rates in Australia, Japan, and Hong Kong, Malaysia's elevated incident rate underscores a gap in cybersecurity preparedness within the Asia-Pacific region. In response to these challenges, Malaysian telecommunications companies are strengthening their cybersecurity measures with most prevalent strategies include continuous monitoring, adopted by 83% of firms, cloud solutions (78%), and increased budgets (77%). Conversely, the least adopted measures involve purchasing cyber insurance (51%), hiring cybersecurity specialists (49%), and outsourcing cybersecurity functions (49%) (refer to Chart 2). Based on these findings, we believe there is a need for a more comprehensive approach to cybersecurity, particularly in addressing the areas where companies are currently underinvested.

Under our coverage, TM has developed a robust cybersecurity framework with a 24/7 Security Operations Center and partnerships with global cybersecurity firms. Besides, the company also has partnered up with the CyberSecurity Malaysia in offering an end-toend cybersecurity solutions by making CYDEC as a delivery principal, powered by TM's Global Security Operations Center (GSOC). Meanwhile, CelcomDigi employs advanced threat detection systems, strict policies, and public awareness campaigns. The company also incorporates the Telco Network Security Manual (TSNM), based on a framework by ITU-T X.805, which is a standard for an end-to-end security of communication network. These efforts reflect a shared goal of enhancing cybersecurity, protecting networks, and ensuring customer safety, in line with broader ESG goals.

5G Rollout, Driving Economic Growth and Sustainability

Over the past decade, Malaysia’s telecommunications sector has advanced significantly due to strategic investments and technological progress. The rollout of 5G technology is set to further transform connectivity, enhancing services essential for the Internet of Things (IoT), smart cities, and advanced digital applications. These efforts are in line with SDG 9 (Industry, Innovation, and Infrastructure) and SDG 11 (Sustainable Cities and Communities). 5G technology represents a major leap forward, offering speeds up to 100 times faster than previous generations and supporting up to 1mn devices per square kilometre. It facilitates innovations such as augmented reality (AR) and virtual reality (VR), with data transfer rates reaching up to 10 Gbps. Additionally, 5G is five times more energy-efficient and provides faster response times compared to 4G. These advancements support SDG 7 and SDG 13 (Climate Action) by enhancing energy efficiency and lowering the carbon footprint of digital infrastructure.

According to MIDA, the economic impact of 5G is significant, potentially contributing RM150bn to GDP and creating up to 750,000 new jobs by 2030. Notably, Digital National Berhad (DNB)’s 5G investments have already generated over 14,800 jobs and increased demand for local vendors. The establishment of a 5G Experiential Centre and Innovation Lab will further drive innovation and support tech start-ups. Meanwhile, the launch of the CelcomDigi AI Experience Centre (AiX) is strategically designed to enhance awareness and collaboration within the enterprise sector. In response to regulatory pressures from the Malaysian Communications and Multimedia Commission (MCMC), CelcomDigi has integrated 5G into existing mobile plans at no additional cost to users, supporting Malaysia’s digital inclusivity goals. As enterprise adoption of 5G expands, we believe CelcomDigi is well-positioned to capitalize on new revenue streams and assist businesses in achieving their sustainability targets through energy-efficient technologies. This strategy not only strengthens CelcomDigi's market position but also attracts strategic partnerships and investments, supporting long-term growth.

TM’s smart city projects also advance its commitment by utilizing IoT sensors and data analytics, which further improves urban management with innovations like smart lighting and real-time traffic monitoring, enhancing economic development, quality of life, and urban sustainability. The company’s PWR 2030 strategy, aimed at becoming a Digital Powerhouse by 2030, focuses on three key areas: 1) "Pioneer" for digital and sustainability innovations, 2) "Win" for strengthening infrastructure and expanding 5G, and 3) "Revitalise" for developing a platform ecosystem with the TM Cloud Platform and AI. TM's integration of advanced technologies like AI and IoT demonstrates its commitment to combining digital growth with sustainable development.

Our Thoughts - Enhance ESG Strategies for Greater Impact

Malaysian telecommunications sector demonstrated notable ESG commitments while facing significant opportunities for further enhancement. Notably, companies under our coverage have been actively addressing their environmental footprints by enhancing energy efficiency and increasing their reliance on renewable energy sources. While the industry currently accounts for a relatively low percentage of global emissions, it holds significant potential to contribute to further reductions in emissions. To truly leverage these opportunities and align with global best practices, we believe a more holistic and integrated ESG strategy is necessary. One key area to be addressed is the transparency and granularity of data related to digital usage and emissions. While the sector is tracking its operational and Scope 3 emissions, there is a pressing need for improved categorized internet usage data, particularly regarding underserved communities and children. By investing in this data collection and analysis, telecommunications companies can better assess their digital impact and tailor their initiatives to address disparities in access and safety. Moreover, while the sector is effectively managing e-waste and improving energy efficiency, there remains a notable gap in cybersecurity preparedness, particularly given that 76% of Malaysian businesses reported cybersecurity incidents. To mitigate risks and build consumer trust, telecom companies should prioritize investments in cybersecurity infrastructure and adopting comprehensive cybersecurity policies. This proactive approach will not only protect customer data but also align with emerging global standards for data privacy and security

Nonetheless, we anticipate that the introduction of the Cybersecurity Act 2024 (CBSA) will bring about a substantial change for the sector. Additionally, the growing importance of community development and digital inclusion should not be overlooked. Programs aimed at enhancing digital literacy, particularly in rural areas, should be scaled up to ensure equitable access to technology and expanding such efforts nationwide can significantly enhance the sector’s contribution to SDG 9: Industry, Innovation, and Infrastructure, and SDG 10: Reduced Inequalities. Meanwhile, as the sector moves toward greater 5G adoption, the potential for innovative applications in smart cities and IoT is vast. However, we believe that this potential must be matched with sustainable practices to minimize the environmental impact of increased connectivity through the energy-efficient solutions and greener network operations. Through all these efforts, we believe telecom companies can not only solidify their leadership in sustainability but also drive meaningful change across the communities they serve. This strategic focus will ultimately contribute to a more resilient and inclusive digital economy, positioning the sector as a key player in the global effort to reduce emissions.

Source: BIMB Securities Research - 25 Sept 2024