ALTHOUGH high environment, social and governance (ESG) ranking/disclosure does not necessarily enhance the valuation of public listed companies (PLCs) and share price performances, this is an upcoming trend that is here to stay.
As time and tide wait for no man, PLCs must as well compel themselves to embrace ESG as a second nature at both their operational and management levels.
“While our studies agree with the consensus view that just being ESG-compliant does not necessarily enhance a stock’s valuation or share performance, we observe that some companies with high ESG ranking and promising earnings growth tend to have better share performances and trade at premiums as compared with their peers,” observed UOB Kay Hian Research’s head Vincent Khoo.
“We notice that the MSCI Europe ESG Leaders Index (EUSI Index) has also outperformed the MSCI Europe Index for the past three years in annual performance.”
Additionally, the MSCI Europe ESG Leaders Index has landed at a higher valuation as compared with the MSCI Europe Index.
In Malaysia, companies get a premium after their inclusion in the FBM Emas Shariah Index (FBMS Index) where they tend to command better share price and valuation.
“Although the FTSE4Good Index has underperformed the FBM Emas Index, FTSE4GOOD’s performance had increased by 7% over the four past years as of end-December 2020,” opined Khoo.
“With the ESG theme starting to creep into financial and investment decisions by financial institutions, we expect companies with better ESG practices and disclosure to be favoured by financial institutions and funds.”
In this regard, UOB Kay Hian Research reckons that the FTSE4GOOD index will continue to expand with more funds focusing on ESG investing. Since it was introduced in 2014, FTSE4Good has been growing from 24 constituents to 75 currently.
It further observed that the share price performance of companies involved in or related to green businesses (ie renewable energy, healthcare and electric vehicles) had increased in 2020 given investors believe that these sectors have major growth potential and going green is the way forward.
“Based on our studies, we strongly believe that companies with better ESG engagement and disclosure would have a better premium as compared with their peers in the future with ESG investing starting to become more mainstream,” added the research house. – March 30, 2021
