• 2050 draws ever nearer. With net-zero and carbon-neutral commitments on the rise, banks today can no longer downplay the importance of ESG. Instead, through the allocation of capital and supporting their clients, banks will need to step up and take a leading role to facilitate an effective transition to a lower-carbon global economy. In fact, having high ESG standards may become a bank’s “license to operate” in the coming years. Our sector Top Picks are as below, and our country preference order is Indonesia, Malaysia, Singapore then Thailand.

• The ESG journey continues … This journey is ever evolving and, given the improvement the banks have exhibited in recent years with respect to their sustainability reporting, we have taken the opportunity to revisit our ESG scoring methodology for the sector. From the initial three pillars (“E”, “S” and “G”) and nine factors-based scorecard approach, our updated scorecard for the banks now encompasses 12 factors, with four factors per pillar. The overall weightage is unchanged, ie 50% ascribed to the “E” pillar, with the remainder split equally between the “S” and “G” pillars. With this exercise, we hope to better identify the leaders and laggards in ESG. We believe the leaders will be in a better position to take advantage of opportunities for developing new businesses, better understand and engage with clients, and ultimately, build a sustainable competitive advantage.

• Highlights from scorecards. Indonesia emerged as the country with the best scores for the “E” pillar. This is no surprise, as all five banks present comprehensive emissions disclosures, with Bank Negara Indonesia (BBNI) and Bank Rakyat Indonesia (BBRI) both reporting financed emissions as well. Malaysia banks fared decently under the “S” pillar, due to the numerous financial inclusion initiatives across the sector. For the “G” pillar, we note that most banks across the four countries scored expectedly well, whereas lower scores were mostly assigned to those with less Board independence and/or no sustainability-linked performance indicators.

• Impact on banks scores. BBRI remains the highest-ESG scoring bank under our coverage, with its ESG score maintained at 3.4. CIMB Group was a top winner from our recalibrating exercise, posting a higher ESG score of 3.3 from 2.9 previously. This takes into account its ESG leadership among banks in Malaysia and the region, and its early disclosure of financed emissions as a stepping stone for guiding its higher-ESG-risk customers on their sustainability transition. Banks such as DBS, BBNI and Bank Mandiri (BMRI) also chalked higher ESG scores. On the other hand, BIMB, Affin and SCBX saw their scores reduced, due to less comprehensive emissions disclosures.

• Where do we go from here? In the years to come, we expect to see more and more banks disclosing financed emissions and more detailed breakdowns of their loans/investments portfolio based on ESG risk. This, we believe, is a crucial step towards developing actionable mitigation plans for said risk. Elsewhere, we look forward to the banks introducing new and innovative ways to propel their financial inclusion and digitalisation agendas forward, while maintaining already-exemplary governance standards.

Source: RHB Securities Research - 26 Mar 2024