PETALING JAYA: The increasing importance for sustainable investing will lead to better valuations for companies that comply with the Environmental, Social and Governance (ESG) agenda, according to Kenanga Research.
The research house, however, warned that companies that do not adhere to basic ESG reporting standards may risk losing key investors that place a high priority on ESG issues.
Kenanga Research chose the Malaysian banking and telecommunication sectors as its preferred ESG picks, given that the sectors have a high level of disclosure.
It said 50% of companies in banking and 60% in telecommunications sectors have a high level of ESG disclosure compared with up to 33% for other sectors.
Meanwhile, the banking and telecommunications sectors have decent average Bloomberg disclosure scores of 35 and 46 respectively.
In contrast, the average score of other sectors ranges from zero to 36.
“Furthermore, we favour the banking sector as it is the single most important sector that can influence other sectors to abide by ESG best practices through lending requirements, ” the research firm said in a note yesterday.
It also listed eight ESG-friendly preferred stocks namely AMMB Holdings Bhd, CIMB Group Holdings Bhd, Malayan Banking Bhd, KPJ Healthcare Bhd, Astro Malaysia Holdings Bhd, UEM Sunrise Bhd, Axiata Group Bhd and Telekom Malaysia Bhd.
“We do qualify that the quantity of information disclosed is not a measure of quality and value accretion, but for now, we believe good disclosures are the first step to picking out ESG leaders because companies that are willing to be guided towards higher ESG performance are where the greatest rewards can be found.
“Based on Bloomberg’s latest ESG disclosure scores for stocks under our universe, we note that the highest score is 50.6 in 2018, out of a potential maximum score of 100, ” it said.
Kenanga Research stated that investors should prioritise companies with high ESG disclosures, although it also acknowledged that valuing ESG-friendly companies could be a highly subjective exercise.
Among the issues are the lack of a standardised reporting framework, scoring ESG metrics would be based on diverse investor preferences and the component companies of local ESG index or FTSE4Good are not publically available.
The research firm pointed out that global investors are allocating increasing amounts of capital to companies that have higher green revenue or are better suited to fulfil sustainable goals.
“ESG-incorporated investments has grown at a rapid pace, jumping to US$30.7 trillion in 2018 from just US$2.6 trillion in 2002 (a compound annual growth rate of 16%) in the five major markets according to the Global Sustainable Investment Review, and a strong 34% jump from 2016 alone, ” it said.