Strong ESG ratings will help valuations, says CGS-CIMB


FTSE4GOOD Bursa Malaysia (F4GBM) could become more prominent over time with increasing focus and scrutiny by asset managers on environmental, social, and governance (ESG) practices of investee companies.

CGS-CIMB Research analyst Ivy Ng Lee Fang noted only 22 out of the 30 FTSE Bursa Malaysia KLCI (FBM KLCI) component stocks are in the F4GBM Index as the rest have low ESG scores or controversies.

“Companies that fare well in their ESG ratings could fetch premium valuations versus peers over time. Our top three picks are members of the F4GBM Index.

“We believe the increased public disclosure of companies’ ESG rankings among their peers since June 2020 has allowed investors to track ESG scores of companies and to follow the index more closely,” Ng noted.

As at June 30, 2021, Malaysia’s weightage in the FTSE4Good Emerging Market (F4GEM) Index was 2.72%, which is higher than its index weight of 1.71% in the FTSE Emerging Market (FEM) Index.

This suggests Malaysian companies fared better in their ESG scores relative to some of its peers in the FEM Index, she added.

The country’s weightage in FTSE4Good Asean5 Index as of June 30 was 21.5%, which was behind Singapore and Thailand but ahead of Indonesia and the Philippines.

There are currently 76 constituents in the F4GBM Index, following the latest June semi-annual review.

“This represents a significant increase from the 24 members when the index was launched in 2014,” she said.

Ng added the increase in numbers suggests more Malaysian-listed companies are improving their ESG transparency and scores, which is a positive sign.

“We found the F4GBM Index outperformed FBM Emas Index in the past five years. For year-to-date June 30, the F4GBM registered a negative return of 5.6%, underperforming the FBM Emas Index which was at -5.1% but outperforming the FBM KLCI which was -5.8%,” she added.

This could be because Malaysia is still in the early stages of adopting ESG and given the underperformance of banks and utilities, which have a high weightage in the F4GBM, in some years.

Out of the eight FBM KLCI stocks that did not qualify for the F4GBM Index, CGS-CIMB noticed three of them, Nestle (M) Bhd, Top Glove Corp Bhd and Dialog Group Bhd, were among the top 25% ranked public limited companies (PLCs) in ESG ratings in FBM Emas Index.

“We suspect the exclusion of Top Glove and Nestle could be due to controversies while Dialog’s exclusion could be due to it not meeting the minimum climate change score threshold,” she said.

Out of the FBM KLCI constituents, Genting Bhd and IHH Healthcare Bhd appeared to have the lowest ESG ratings, which could be due to poor ESG disclosures.

Other benchmark members not part of the F4GBM Index are Mr DIY Group (M) Bhd, Hap Seng Consolidated Bhd, Press Metal Aluminium Holdings Bhd and Genting.

“There could be more scrutiny by investors on reasons why large-cap companies fail in the screening for inclusion on the F4GBM Index.

“Also, companies that score well or demonstrate improvement in their ESG ratings or are part of the index could fetch premium valuations versus peers, in our view,” she said.

Ng said Malaysian companies will need to improve their ESG practices as the bar is likely to be raised over time.

FTSE Russell recently introduced new climate performance standards in its June 8, 2021, review.

The changes set minimum climate scores for FTSE4Good Index inclusion and constituents are given until the June 2022 semi-annual index review to meet the required standard or be deleted, Ng stated in her report yesterday.