ESG a pressing issue

Maybank IB noted that while national oil company Petronas has underscored its clean energy and low carbon ambitions by targeting to achieve net zero carbon emissions by 2050, the research house however cautioned that this would be no easy task.

PETALING JAYA: Malaysia’s environmental, social and governance (ESG) issues are in need of an urgent and holistic response from the government, regulators, businesses and even consumers if transition-induced economic dislocations are to be mitigated.

With issues such as climate change, human rights and equality, as well as ESG influencing investment habits today, Malaysian companies need to be able to step up to the challenge if they want to be able to compete on the global stage.

Maybank Investment Bank Research (Maybank IB) in a report said Malaysia’s overarching vulnerability from a sustainability perspective is primarily related to the economy’s dependence on high-carbon industries, principally the oil and gas (O&G) sector.

“At the fiscal level, between 20% and 30% of government revenues continue to be sourced from the O&G industry via a combination of taxes, royalties and dividends.”

The research house added that palm oil, which accounts for around 7% of Malaysia’s gross exports, has also attracted international concerns or generated negative headlines relating to its environmental impact and labour practices.

“A less oil-intensive future would effectively translate into a significant write-down of Malaysia’s natural capital wealth, with negative knock-on repercussions for the extensive O&G supply chain and the country’s fiscal trajectory.”

Maybank IB noted that while national oil company Petronas has underscored its clean energy and low carbon ambitions by targeting to achieve net zero carbon emissions by 2050, the research house however cautioned that this would be no easy task.

“Not only is every other energy and power company in the world seeking to make a similar transition to a low-carbon business, hence bidding up the cost of transition, Petronas’ financial capacity to make the required transition capital investments has been weakened by a combination of low oil prices and elevated dividend levies from a cash-strapped government over the last few years.”

Maybank IB noted that Petronas’ net cash position has halved since 2018.

Additionally, the research house said Malaysia’s power generation sector is also at risk as global funds, regulators and citizens push for a zero-emission economy.

“At the national level, 43% of the country’s power generation is based on coal, a ratio that is only expected to decline below 30% after 2032, when three coal plants are scheduled to be retired.

“Another 38% is generated by natural gas, which is also a fossil fuel but generating 50% less emissions than coal.”

Meanwhile, companies within the palm oil sector have long been under international scrutiny for environmental concerns relating to deforestation and biodiversity loss, to the point of triggering sanctions from the European Union.

Maybank IB noted that even as Malaysia’s environmental concerns had decreased following stricter regulation and enforcement, social issues still persist.

Examples include the allegations of labour force abuses resulting in the US banning all shipments of palm oil from two of Malaysia’s largest palm oil companies, namely Sime Darby Plantation Bhd and FGV Holdings Bhd, in the fourth quarter of 2020.

“The ESG concerns plaguing the palm oil sector appear to be a key reason why plantation stocks’ share prices have significantly lagged crude palm oil price recovery and why foreign shareholdings have been steadily declining over the past few years, ” said Maybank IB.