When ESG is no longer an option but an imperious necessity

WITH responsible or sustainable investing gaining traction as the future norm in the realm of capital markets, the ESG abbreviation – environment, social and governance – will become more prominently displayed than ever.

As such, Malaysia’s ESG-related vulnerabilities require an urgent and holistic response from the government, regulators, businesses and consumers alike if transition-induced economic dislocations are to be mitigated, according to Maybank IB Research.

“Capital market stakeholders will also need to expedite adjustments towards integration of ESG factors into investment and stewardship processes,” stressed analyst Anand Pathmakanthan in a thematic report on Malaysia’s ESG compendium.

“The “E” vulnerabilities posed by a historical dependency on oil & gas (O&G) is compounded by “locked-in” reliance on coal-fired power plants while negative headline-generating labour (“S”) issues that have resulted in product bans in the plantations and manufacturing sectors pose a rising risk with regard to the country’s competitiveness and inward foreign direct investment (FDI).”

Positively, domestic financial market regulators are forging ahead with sustainability initiatives with Bank Negara Malaysia (BNM) requiring disclosure of climate-related risks in addition to the central bank being a member of the international Network for Greening the Financial System (NGFS);

Additionally, the Securities Commission (SC) has published its Sustainable and Responsible Investment Roadmap with facilitating green financing a major component while Bursa Malaysia has unveiled its own Sustainability Roadmap by driving corporate disclosures on material sustainability matters.

“With growing evidence, ESG investments produce outperformance over the long-term while unresponsive corporates are penalised,” observed Maybank IB Research.

“EPF, the country’s largest asset manager with RM1 tril AUM (asset under management) has declared it aims to integrate ESG into all its investment decisions by 2030.

“Greater active stewardship is needed to guide corporates on incorporating sustainability considerations into their business strategies and operating models.”

At the country level, Malaysia’s overarching vulnerability from a sustainability perspective is primarily related to the economy’s dependence on high-carbon industries, principally the O&G sector (at a fiscal level, between 20%-30% of government revenues continue to be sourced from the O&G industry via a combination of taxes, royalties and dividends).

Elsewhere, the palm oil industry which accounts for around 7% of Malaysia’s gross exports has attracted international concerns/generated negative headlines relating to environmental impact and labour practices.

“The ESG concerns plaguing the palm oil sector appear to be a key reason why plantation stock share prices have significantly lagged crude palm oil (CPO) price recovery and why foreign shareholdings have been steadily declining,” added Maybank IB Research. – April 8, 2021.

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