Plantation ESG conundrum

IN June this year, when IJM Corp Bhd announced plans to divest its controlling stake in its plantation arm, the group gave a few reasons for the deal.

That included securing an attractive price for an asset for which the group had no plans for expansion. The deal also enables the group to focus on its other synergistic activities of construction, property development, infrastructure concessions and the manufacturing of building materials, IJM had said.

All that is true, but industry observers reckon that one more consideration was at play – that the group had wished to decouple itself from the plantation business due to investor fixation on the environmental, social and governance (ESG) concept.

In other words, by selling off its plantation arm, the IJM group’s valuation of its other businesses would not be hampered by ESG-concerned investors shunning them as a whole.

Fast forward to today, and with crude palm oil (CPO) prices on a tear, plantation companies are reporting bumper profits.

Alas, that is having little impact on the price of their shares. That is mainly due to the fact that many funds are limiting their exposure to plantation companies due to ESG concerns.

Chan: GLICs are more likely to work with domestic companies on their ESG expectations.Chan: GLICs are more likely to work with domestic companies on their ESG expectations.

CGS-CIMB head of research Ivy Ng points out that the foreign shareholding of large-cap plantation companies has declined over the past three to five years and this is very likely due to ESG concerns.

She adds though that other factors are also at play.

“Investors could also be possibly concerned over shortages of labour (at these plantation companies) and were also reducing exposure in the Malaysian equity market because of better opportunities in markets like the United States.

“Funds will go where the returns are higher,” she says.

Fund manager Danny Wong says that based on Bloomberg data, foreign ownership in Bursa Malaysia’s big-cap plantation stocks have fallen by 5.7% since 2017.

The drop is likely to be bigger over a longer period, points out another fund manager.

“It’s an ‘ESG overhang’ (for the plantation sector). If you track back foreign ownership in plantation stocks over the last 10 or more years, it’s been only going down and along with it, these stocks’ price-earnings (PE) valuations,” he says.

Lau: Big-cap planters’ share prices have not done well likely due to the ESG-centric institutional investors.Lau: Big-cap planters’ share prices have not done well likely due to the ESG-centric institutional investors.

The price-earnings (PE) multiple of planters were historically high.

Over the past 10 years, local plantation stocks have been trading at an average historical PE of 22 times, says Wong, who is the chief executive officer of Areca Capital.

He adds that the valuation of plantation stocks have come down since June last year, from enjoying a forward PE of 40 times to now hitting a low of 13.6 times.

“The sector today is trading at a 60% discount to its peak PE. There are indeed concerns on ESG which have taken centre stage over the past several years,” he adds.

This is despite the high CPO prices leading to strong earnings of planters. The price of CPO has risen by 73.6% from last year to a high of RM5,280 per tonne at close yesterday.

Surprisingly, Wong says the price of CPO continued to rise 35.6% year-to-date but Kuala Lumpur Plantation Index dropped 9.4%, reflecting a disconnection between CPO price and stock price of plantation companies despite reporting stellar earnings.

Beyond earnings

Earnings of companies such as Kuala Lumpur Kepong Bhd, Sime Darby Plantations Bhd (SDP) and Hap Seng Plantations Holdings Bhd have seen impressive rises.

Wong: The sector today is trading at a 60% discount to its peak price-earnings.Wong: The sector today is trading at a 60% discount to its peak price-earnings.

But planters have come under increasing scrutiny over allegations about questionable labour practices, especially of foreign employees who form a significant part of the plantation and manufacturing workforce.

For instance, SDP was issued a Withhold Release Order (WRO) by the United States Customs and Border Protection (US CBP) in December last year. It had pointed out that there was a presence of the International Labour Organisation’s (ILO) forced labour indicators in SDP’s production process.

In a response then, SDP had said that it would obtain information with regards to the initial complaint that would allow it to take corrective actions, adding that it was committed to combating forced labour.

In reply to questions from StarBizWeek, SDP says there are many factors influencing investors and funds in their investment decisions.

“So far, we are unaware of any funds exiting from SDP due to ESG concerns,” it says.

The plantation group has been working hard to address the issue by appointing ethical trade consultancy Impactt Limited to conduct a comprehensive third-party evaluation of the labour practices across its Malaysian operations, mapped against the ILO’s 11 indicators of forced labour.

“While the assessment is targeted to be completed in the first quarter of next year, we are already continuously taking proactive steps to review our operations, to refine existing policies, processes and procedures.

“We are also committed to implementing any further identified improvements once Impactt has finalised the assessment,” SDP says.

Another plantation giant, FGV Holdings Bhd, came under heavy scrutiny last September when it was also issued with a WRO by the US CBP, resulting in a ban of its exports to the US.

Since then, the plantation group has also appointed an independent auditing firm, Elevate Ltd, to conduct an assessment of its operations against the ILO indicators.

Interestingly, FGV concedes it might have experienced a selldown by funds, but adds that it has been minimal and manageable.

Forming a strategy to address the issue, FGV says it has developed a comprehensive five-year action plan, which will serve as the group’s overarching programme to enhance its labour practices through its affiliation with the Fair Labour Association.

Lim: You are not seeing the re-rating of the plantation sector by global funds.Lim: You are not seeing the re-rating of the plantation sector by global funds.

“The action plan includes FGV’s commitment to, among others, responsible recruitment of migrant workers, strengthening of grievance mechanisms, intensifying human rights training and capacity building programmes, enhancing efforts around gender equality, women empowerment and protection of child rights, improving labour standard monitoring systems and remediation, and enhancing stakeholder engagement,” it adds.

Despite such efforts, fund manager Wong points out that major funds seem to have decided to reduce their exposure to the plantation sector.

Private investor Scott Lim foresees plantation companies to be trapped in a lower PE band, as there are no signs of money flowing back into the plantation sector by global funds and, in turn, the sector has not been re-rated by majority of funds.

“You are not seeing the re-rating of the plantation sector by global funds. This means investors will only enjoy dividends (of listed plantation companies) as ESG investing is capping the upside of the share price,” says Lim, who is also the founding partner of Omni Capital Partners Sdn Bhd.

The majority of local brokerage firms have a bearish outlook on the plantation sector, in line with the rising concern of ESG issues.

In July, RHB Investment Bank Research downgraded the regional plantation sector to “underweight” from “neutral” amid expectations that planters would be devalued.

“We believe this devaluation of plantation stocks’ PE will likely be permanent, as more issues may crop up over time, and as investors become more ESG-aware and start pricing it into their investment decisions,” the research house said in a report.

The brokerage also cut its target prices of planters.”

Ng: Investors could also be possibly concerned over shortages of labour.Ng: Investors could also be possibly concerned over shortages of labour.

So, why are plantation companies under the radar? Aside from the labour issues, ESG investors tend to also see planters as companies that contribute to deforestation, open burning and carbon emissions, all of which affect climate change.

Norway’s Government Pension Fund Global, with around US$1 trillion (RM4.24 trillion) in assets, divested from more than 33 palm oil companies linked to deforestation over a span of seven years, according to its 2018 annual report.

Kenanga Research notes that Malaysia lost 2.7 million hectares of humid primary forest, making up 34% of total tree cover, during the period between 2002 to 2020.

Having said that, Malaysia’s Plantation Industries and Commodities Ministry has pledged to limit the total oil palm cultivated area at 6.5 million ha, with no encroachment to forest areas, by banning conversion of permanent forest reserved area for oil palm cultivation and no new planting allowed in peatland areas.

On a corporate level, plantation groups such as FGV, SDP and IOI Corp Bhd have committed to a “No Deforestation, No Peat, No Exploitation” policy.

It is important to note that with the Roundtable on Sustainable Palm oil (RSPO) and Malaysian Sustainable Palm Oil (MSPO) certification, most social and labour issues are prioritised and audited by third parties.


With plantation companies working hard to meet ESG standards, Rakuten Trade head of equity sales Vincent Lau believes funds would likely come back to invest in the companies, with the PE increasing on these counters.

Notably, there are also other sectors bogged down by ESG concerns such as the manufacturing as well as oil and gas (O&G) sectors.

The recent big news of the week was that appliance maker Dyson has terminated its relationship with Malaysian supplier ATA IMS Bhd over allegations of forced labour.

ATA makes parts for Dyson’s vacuum cleaners and air purifiers.

The move delivered a big blow to ATA, with its shares tumbling since the news appeared.

O&G firms, which are involved in extraction and use of fossil fuels, are also feeling the heat from investors and even financiers that are disinclined to do business with them.

On the local front, Malaysia’s national pension fund, the Employees Provident Fund, has become one of the first Asian pension fund to publicly commit to sustainability. It has announced plans for its portfolios to be fully ESG-compliant and carbon neutral by 2030.

The long road ahead

According to PwC’s South-East Asia sustainability and climate change leader Andrew Chan, most government-linked investment companies want to see continuous development of the country’s economic sectors as part of their strategic agenda.

“They are more likely to work with domestic companies on their ESG expectations and the responses being put in place to continuously enhance ESG performance.

“This will increase the resilience of the companies and their value chains as our economies transition to lower carbon pathways.

CPO fr workerCPO fr worker

“In doing so, this is likely to lead to reduced risks to the investors and generate opportunities for value creation,” he says.

Chan also notes that investors may use their shareholder influence to engage the companies on specific ESG issues and enhancement plans.

On a positive note, Lau says smaller-cap planters have outperformed the Kuala Lumpur Plantation Index and FBM KLCI year-to-date, with shares prices rising 15% to 20% mainly due to buying support of retail investors and high net-worth individuals.

“These small-cap planters are Boustead Plantations Bhd, TH Plantations Bhd, Hap Seng Plantations Holdings Bhd and Innoprise Plantations Bhd,” he notes.

Citing the difference in performance between the big-cap and small-cap planters, Lau says big-cap planters’ share prices have not done well likely due to the ESG-centric institutional investors and lesser retail participation.

Given the persistent ESG prominence, Areca’s Wong says institutional investors would eventually make ESG mandatory in the coming years, employing investment screen strategies, adding that even financial institutions would not provide access to financing for companies with ESG issues.

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