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WHILE the de-rating of certain companies on Bursa Malaysia owing to sustainability issues has been taking place in recent years, 2021 may be remembered for the significant impact environmental, social and governance (ESG) investing has had on local equities.

The most recent and palpable effect was seen in the sharp selldown in stocks of electronics manufacturing service (EMS) providers when news of forced labour involving these companies emerged. As news of potential labour problems at VS Industry Bhd spread on Dec 2, the Employees Provident Fund reacted swiftly, selling 21.67 million shares in the EMS counter and ceasing to be a substantial shareholder the very same day.

Later in the day, Kumpulan Wang Persaraan (Diperbadankan) followed suit, disposing of 6.58 million shares in the company.

The selldown of VS Industry shares coincided with an investor briefing organised by Credit Suisse, where migrant worker rights activist Andy Hall touched on the Responsible Business Alliance’s audit on the company, among other concerns.

VS Industry’s share price reached a 52-week low of 99.5 sen that day.

Competitor SKP Resources Bhd was also not spared as selling pressure weighed on its shares. Both VS Industry and SKP Resources eventually and separately issued joint statements with Hall, promising to further improve the welfare of foreign labour in their employment.

In the Minority Shareholders Watch Group newsletter on Dec 17, its CEO Devanesan Evanson said these developments show that ESG will feature prominently in fund managers’ investment decisions.

“It will not be profit-at-all-costs for these fund managers. They will be prepared to take a lower profit or even a loss to send the right message to the market — that ESG matters,” he wrote, adding that fund managers’ preferences and inclinations will have an impact on share prices, and this will be another consideration that minority shareholders should watch out for.

During the year, it is evident that plantation stocks decoupled from the rally in crude palm oil (CPO) price as foreign funds shunned these counters due to environmental and sustainability concerns. Despite CPO reaching a historic high of RM5,000 per metric tonne for a year-to-date gain of 62%, the KL Plantation Index actually lost 11%.

Commenting on the de-rating of companies on Bursa Malaysia due to ESG requirements, Chris Eng, chief strategy officer of Etiqa Insurance and Takaful, a member of the Maybank Group, says the pressure from ESG investors will raise the operating standards and practices of companies in the long run despite the short-term pains.

“It’s a clash of standards and expectations between practice and the evolving expectations of foreign investors. The perception may change one day but not in the next few years, which is a pity,” he says.

On the lacklustre performance of plantation stocks, Eng thinks the production of palm oil can be sustainably managed, but investing in the producers requires in-depth research. “The problem is the perception of palm oil is negative. And given the negligible percentage of plantation stocks in the portfolios of foreign funds, they are avoided totally,” Eng explains.

 

BlackRock: Corporate governance requirements in Malaysia higher than other countries in region

A major driver of environmental, social and governance (ESG) principles is the world’s largest asset manager, BlackRock. In 2020, it wrote to 577 companies in the Asia-Pacific, telling them that it expected greater sustainability disclosures. How are Malaysian companies adapting to the ESG investing landscape? Shinbo Won, BlackRock’s head of Investment Stewardship, Asia ex Japan, tells The Edge.

 

The Edge: As an investor in Malaysian equities that upholds ESG investing principles, do you find companies here becoming more aware and taking steps to incorporate ESG into their operations?

Won: Broadly speaking, we do observe a handful of companies that are very proactive and demonstrate vast year-on-year improvements, for example, the rising number of companies committing to net zero initiatives or outlining detailed carbon emissions reduction plans/targets.

Transparency and public disclosure of the company’s ESG strategy and initiatives is key for investors – oftentimes in our engagements with companies, we find that they demonstrate a high level of awareness on material ESG issues affecting their businesses, but that is not shared publicly via their reports or disclosures. We would like to encourage companies to consider disclosing their sustainability-related practices to frameworks like the Taskforce on Climate-related Financial Disclosures or industry-specific standards such as the Sustainability Accounting Standards Board which cater to investors’ needs for financially material, decision-useful, consistent and comparable ESG-related data.

More importantly, actual implementation and the integrity of policies around ESG that are reported/disclosed hinge on the involvement, oversight and leadership of top management and board. Investors look for engagement with leadership due to this reason.

In general, we find the level of corporate governance requirements and expectations in Malaysia to be higher than most other countries in the region ­— this is seen from the Securities Commission Malaysia’s 2021-23 Corporate Governance Strategic Priorities. The priorities now include new requirements for public-listed companies, like the mandatory 12 years tenure limit for independent directors (listing requirement in 2022), and the mandatory one woman board member for all public-listed companies taking effect from Sept 1, 2022 onwards (first mandatory gender quota in the region).

We believe that such a regulatory landscape is beneficial in encouraging companies in Malaysia to integrate ESG and sustainability into its corporate strategy and operations, as good corporate governance practices are key to achieving ‘E’ and ‘S’ performance.

 

Which sectors among Malaysian-listed companies do you see the need for much more ESG awareness?

The Covid-19 pandemic and its resulting movement control orders have really put a spotlight on social-related and labour issues in Malaysia. Sectors that are traditionally reliant on foreign workers have faced labour-related constraints or shortages due to the pandemic, as well as heightened scrutiny over worker rights, and health and safety concerns.

In general, through our engagements with companies in these sectors, they do demonstrate an awareness of the salient ESG issues that are material to them, and our conversations usually surround their human capital management strategies and initiatives to close any potential gaps between international labour standards and local labour practices.

 

Have you seen the push from ESG investing translating to positives in the real world in Malaysia?

A lot of the positive externalities from improved ESG practices take time to show. As such, we are unable to comment if the push from ESG investing in particular has already resulted in real-world positives. However, through our engagements with companies, we do observe more companies committing to net zero initiatives and carbon transition plans, as well as embarking on initiatives that benefit all their stakeholders – not only their shareholders, but also their workers, suppliers, customers and the communities in which they operate. We look to the leadership of boards and management in ensuring that these commitments translate into real impact.