WITH non-financial considerations gaining prominence in the investment sphere, investors and shareholders are keener than ever to drive home a point to corporates – toe the line or be deprived of capital or funding.
The above forms the basis of sustainable investing – the investing mantra for 21st century – which prioritises three key pillars comprising Environmental, Social and Governance (ESG).
Local research house TA Securities Research has given an insight into its ESG framework which takes into account 14 key themes or factors that it attests as material and relevant for a company’s financial performance and long-term sustainability.
While it can be applied across 16 sectors and 106 companies under our coverage currently, the degree of their importance may vary among sectors, according to its head of research head Kaladher Govindan.
“Under climate change, for instance, the usage of fossil fuel and carbon emission are more relevant to aviation sector which fuel up its aircraft or power generation companies that use coal, gas and fuel oil to generate electricity compared to a bank,” Kaladher pointed out in a thematic report.
“Although banks may think this is not directly related to their business, carbon emissions caused by its workers travelling to work, travelling by plane for meetings, air-conditions, lights, computers and other appliances that consume electricity in their premises also contribute indirectly to carbon emissions.”
Moreover, their loan exposure to companies that have little or no regards for ESG also contribute indirectly to many risks associated with non-compliance to these sustainability factors in the long run.
For instance, competition from renewable energy and more restrictions imposed by governments on fossil fuel may affect long-term profitability of oil and gas (O&G) companies and lead to asset impairments.
“Any negative impact on their loan repayment capabilities will have corresponding effect on a lender’s loan portfolio,” rationalised Kaladher.
“These ESG factors could have a significant impact on a revenue, cash flow, balance sheet and financing cost or the weighted average cost of capital.”
However, obtaining data related to ESG is not easy as not many companies are willing to disclose them freely for various reasons.
Bigger companies with greater resources tend to make ESG disclosures more willingly but some lack consistency and substance, according to Kaladher.
“To assist in our scoring and rating, we did a survey by sending out questionnaires to all the companies under our coverage and interviewed the management to gauge the application of ESG themes in their business,” he shared.
“Data gathering was also done through secondary sources like annual reports, corporate website, internet, etc.”
In arriving at its overall ESG score, TA Securities Research will assign equal weightage to the three ESG pillars by attaching a score between zero and 100 for each of the 14 themes.
Subsequently, the average score for each pillar is added up and divided by three to arrive at the overall ESG score for the company.
“Finally, based on the scoring, we attach star ratings to denote a company’s ESG readiness with one star being the lowest and five stars the highest for each pillar and overall ,” added Kaladher. – Feb 24, 2021
