ESG discount on plantations sector narrows

The Russia-Ukraine war has triggered imbalances in the global food supply

by ASILA JALIL / Pic by TMR FILE PIX

ENVIRONMENT, social and governance (ESG) factors remain an important investment criterion despite the discounts that were applied to exchange listed companies in sectors like plantations appear to have narrowed since the outbreak of the Russia-Ukraine conflict in February.

Some market analysts believe the geopolitical factors as well as the global health crisis might have pushed the importance of ESG a notch lower for now as profit motives dominate decisions.

The conflict has triggered a rally in the edible oils market with the benchmark crude palm oil futures (FCPO) contract price hitting a historic high of RM7,268 a tonne in March.

Ukraine is the world’s largest producer and exporter of sunflower oil with a share of 47% of global exports while Russia’s global export of the commodity stands at 29.9%.

Areca Capital CEO Danny Wong said the Russia-Ukraine war has triggered imbalances in the global food supply, namely wheat and sunflower oil.

He said palm oil is for now likely the only substitute for many food manufacturers and the local plantations industry has taken steps to make itself more ESG compliant.

“ESG risks are being addressed with the palm oil industry increasingly certifying its activities as ‘sustainable’, ‘responsible’ and ‘conflict-free’.

“It is how a person perceives the current situation: Is palm oil more acceptable as sustainable edible oil or have buyers loosen up on the ESG concerns?

“The producers have to work towards making palm oil a sustainable edible oil and continue to reduce ESG risks. This is the longterm solution in making palm oil the main sustained edible oil,” he told The Malaysian Reserve (TMR).

News of Iceland supermarket’s decision to reverse its ban on palm oil and palm oil-based products made headlines recently as the ban was first imposed due to ESG concerns surrounding the commodity.

Its U-turn on palm oil came due to acute shortage of sunflower oil in the world market as a result of the Russia-Ukraine crisis and sanctions applied to Russia.

Iceland Foods Ltd MD Richard Walker had reportedly expressed “huge regret” about having to row back on its pledge to remove palm oil from all of its own-brand items.

Some institutional investors in Europe are even considering including arms manufacturers as ESG compliant due to the RussiaUkraine war.

Malaysia’s plantation sector had faced mounting criticisms relating to labour rights issues such as exploitative working practices as well as deforestation.

However, the war between the two east European countries has elevated commodity prices in the world market.

Even before Russia invaded Ukraine on Feb 24, the Plantation Index on Bursa Malaysia had started to recover on the back of the bullish demand supply fundamentals in the edible oils market.

The Plantations Index rose from 6,683 points on Feb 9 to a high of 8,784 points on March 3 as commodities rallied on the back of the war. The sector stocks have also been boosted by foreign investors turning net buyers of local equities in the first quarter of 2022.

Rakuten Trade Research VP Thong Pak Leng warned that many institutional investors have not loosened up on ESG concerns despite the good profits the plantation sector has gained.

“This might just be momentary,” he told TMR as the three-month forward FCPO contract on Bursa Malaysia Derivatives edge lower by RM51 to close the trading day at RM6,126 a tonne yesterday.

With the war set to prolong, and destroy infrastructure and market access of products from both the warring nations into the world market, bullish demand supply dynamics for palm oil look set to continue in the foreseeable future with sector companies likely to post improved earnings which will help attract more investors and thus, erase the valuation discount the sector companies have had to endure in the past couple of years.