THE impact of ESG investing in Malaysia is already happening, according to fund managers and equity research analysts.
Affin Hwang Asset Management (Affin Hwang AM) director of equity strategies and advisory Gan Eng Peng pointed out that companies sitting in the less environmentally friendly sectors are seeing an underperformance in their share prices and describes the situation as “a decoupling of share price action versus underlying fundamentals.”
“Examples would include Tenaga Nasional Bhd and palm oil stocks in Asia. This is both a domestic and international trend that is forcing more investors to follow suit, which is becoming a virtuous or vicious cycle, depending on which perspective one looks at it, ” he says.
Meanwhile, UOB Kay Hian Malaysia head of research Vincent Khoo has observed lower foreign shareholdings in sectors that face more ESG issues such as plantations, energy, and oil & gas.
“With the growing attention and emphasis on sustainability investing, ESG investing has started creeping into mainstream investments, ” says Khoo.
Khoo says that the FTSE index of equities with significant involvement in environmental markets rose 37% in 2020, more than double the gain in the MSCI ACWI Index of global stocks.
“However, we reckon that many of these stocks represent sectors (such as technology) which were resilient or thriving in last year’s extremely challenging economic conditions, ” he adds.
Khoo also says that ‘green’ stocks, such as those involved in renewable energy, healthcare and electric vehicles, delivered healthy returns in 2020, reflecting structural demand growth that in turn was driven both by government legislation and consumer demand.
RHB Investment Bank Bhd head of regional equity research Alexander Chia says the ESG theme is gathering momentum locally, driven by trends emanating from developed markets.
“We expect this to continue and increasingly, fund managers will take ESG factors into consideration before making an investment decision, ” says Chia.
However, Affin Hwang AM’s Gan also points out that ESG investing is not for all investors.
“We run many retail and institutional mandates and most of them do not have an ESG directive. In other words, some of our clients did not sign up for ESG style of investing. We can’t go to these clients and tell them we missed entire opportunities because of the lack of ESG ratings, ” says Gan.
He reckons ESG investing will persist and is a structural trend, as long as social and environmental imbalances are in place and there is desire to address them.
Rakuten Trade head of equity sales Vincent Lau (pic below) says that from a retail investor’s point of view, return or yield is the most paramount factor.
He points out that while ESG metrics would be one of the boxes that investors would tick, they would still be focusing on components like returns and performance, industry type, and the growth story.
“If it’s a sin stock that has declined in market price, but offers good performance and dividend yields, investors would still look closely at it.”
Lau adds that the online retail brokerage has not incorporated ESG metrics into its stock research.
Rakuten Trade would still consider ESG metrics in its stock research but in terms of weightage, it would be a smaller percentage he says.
“The ESG theme has been mainly driven by the greater awareness of sustainability, and investors are looking for businesses that have a long term view. Some investors are not just looking at pure profit plays, but also elements like climate change and sustainability, ” says Lau.
Gan though says that with a clear divergence of stock price performance due to institutional ESG flows, ESG considerations is a must in the investment decision making process for all their mandates.
Regarding the ESG score of a company, Gan says fund managers use various third-party sources like MSCI, Bloomberg and those produced by certain stockbroking research
However, he notes that it can be a challenge reconciling the various ESG ratings.
“The qualitative process in ESG scoring generates the different ratings, ” says Gan.
RHB Research Chia points out that the ESG assessment process is extremely subjective and may differ from one provider to another given inconsistent ESG disclosure standards by corporates.
“There are also many third party providers of ESG metrics and scores, ” says Chia.
Regarding corporate ESG reporting, Khoo notes also that some companies that have low ESG ratings may reflect their current lack of disclosures on their ESG policies, but may be already practising reasonably good ESG policies.
“Some of these companies could be in the midst of stepping up their disclosures.
“We would still advocate companies that continue to create good shareholder value and practise good corporate governance (including having good dividend policies), ” he says.