KUALA LUMPUR (March 25): The Securities Commission (SC) is urging public-listed companies (PLCs) to make concerted transition efforts as advanced economies raise the number of environmental, sustainability, and governance (ESG) policies.

Nearly half of Malaysia’s PLCs are concentrated in industries that can be deemed the most carbon-intensive, the SC said in the Capital Market Stability Review 2023 released on Monday. Further, about one-fifth of the firms are in industries most likely to be scrutinised for labour practices, it noted.

“Delays in transition journey by PLCs may create unnecessary loss of opportunities as ESG-related measures and policies are gradually being implemented globally,” the SC said. “Companies that are not moving in line with this would be deemed as unattractive by the investors.”

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The SC’s recommendations come at a time of rising numbers of climate and ESG-related policies in the European Union (EU) and advanced economies, such as the EU’s Carbon Border Adjustment Mechanism (CBAM).

Businesses that deal with European counterparts will be impacted by the implementation of the EU’s CBAM starting 2026 as “many European multinational companies have expressed intentions to remove suppliers who do not meet their carbon transition goal by 2025”, the SC noted.

In particular, the SC noted that up to 75% of Malaysia’s exports to the EU will be impacted by CBAM, even though they collectively account for only 8% of Malaysia’s total exports from 2021 to 2023.

A study conducted by the SC found that 19% of the PLCs are concentrated in industries that can be considered the most carbon- and export-intensive sectors, even though a much lower proportion are in sectors that export to the EU and face potential CBAM or deforestation concerns.

Further, the studies also found that 17% of a PLC’s assets in the most carbon-intensive sector are also at a higher risk of becoming stranded assets during decarbonisation efforts over the growing concern on the environment standards and rapid rate of technological change.  

“Although this is a rough estimate and includes a firm’s property, plant, equipment, and current assets, it is crucial as it concerns the underlying book value and valuation of a firm,” the SC said.

In terms of shareholdings, the SC noted that PLCs with significantly higher foreign holders may face a liquidation risk if the investors make ESG-related moves, regardless of the stance of domestic investors.

According to the SC, 15% of PLCs stand to lose the most when the investors and asset managers - both domestic and abroad - apply stringent ESG scrutiny or consider carbon- and labour-intensive criteria in their investment portfolios.

Still, the SC believes that the transition to a more environmentally and socially sustainable world presents significant opportunities for the PLCs.  

“There is ample opportunity to capture the share of rapidly growing funds in the ESG space. This is given the expectation that global ESG assets are on track to exceed US$53 trillion (RM251 trillion) by 2025 and will represent more than a third of the projected total asset under management of US$140.5 trillion,” it added. 

https://www.theedgemarkets.com/node/705756