PETALING JAYA: Although environmental, social and governance (ESG) issues have been gaining prominence, they do not appear to enhance the stock valuation in the country.
The Covid-19 pandemic has prompted governments and businesses to focus on sectors like healthcare and green spaces, connectivity via the Internet, as well as work and education opportunities.
But does a ESG ranking and disclosure enhance valuation in Malaysia?
UOB Kay Hian said its studies concur with the consensus view that just being ESG-compliant does not necessarily enhance a stock’s valuation or share performance.
With the ESG theme beginning to feature in financial and investment decisions by financial institutions, the research house expects companies with better ESG practices and disclosure to be favoured by financial institutions and funds moving forward.
“Although the FTSE4Good Bursa Malaysia Index (F4GBM) has underperformed as compared with the FBM Emas Index, F4GBM’s performance had increased by 7% over the past four years as of Dec 20, last year.
“We reckon that F4GBM will continue to expand with more funds focusing on ESG investing. F4GBM has been growing since it was first introduced in 2014 from 24 constituents to 75 currently, ” it noted.
The index is a series of ethical investment stock market indices launched by the UK-based FTSE Group.
The MSCI Europe ESG Leaders Index (EUSI Index) had also outperformed the MSCI Europe Index for the past three years in annual performance.
In addition, the EUSI Index landed at a higher valuation as compared with the MSCI Europe Index.
In Malaysia, UOB Kay Hian said companies would receive a premium after an inclusion into the FBM Emas Syariah Index where it had observed a better share price and valuation.
“To play on the ESG theme, we have cherry-picked our top picks from the constituents of F4GBM.
“Besides looking at companies’ ESG metrics, we also focus mainly on their fundamental growth based on their growth prospects and valuation. Our top picks are Astro Malaysia, Axiata Group, CIMB Group, Inari Amerton, My E.G Services, Sunway Bhd and Yinson Holdings, ” UOB added.
ESG initiatives, which include green economy and and sustainable investing, are expected to be further boosted with the United States, under President Joe Biden, returning to the Paris Agreement, an international treaty on climate change.
Former US President Donald Trump, withdrew from the agreement last year but officially rejoined on Feb 19 this year.
The Paris Agreement is a deal within the United Nations Framework Convention on climate change, climate change mitigation, adaptation, and finance, signed in 2016.
As of February this year, 191 members are parties to the agreement.
The Malaysian government’s commitment to catalysing the sustainability agenda is reflected in Budget 2021, which has a special focus on sustainability and seeks to move Malaysia towards a more sustainable future.