Investing with ESG in mind

ENVIRONMENTAL, social and governance (ESG) investing continues to gain traction in Malaysia, with corporates striving to align with global sustainability trends. This is not surprising as a recent study by Maybank Investment Bank Group (MIBG) Sustainability Research finds a positive correlation between ESG performance and equity returns.

The financial group’s analysis of ESG performance among 114 Malaysian companies, representing about 70% of the nation’s market capitalisation, finds both progress and challenges in corporate sustainability efforts, with implications for investors seeking opportunities in a rapidly evolving market.

According to MIBG’s study, 48 companies, or 42% of those surveyed, scored above the median of eight points across 15 ESG metrics. Notably, nearly two-thirds of these high-performing companies outpaced the MSCI Malaysia Index over one, three, and five years. This underscores a strong correlation between robust ESG performance and superior equity returns.

The study identifies industrials and real estate as the leading sectors, with 75% of companies scoring above the median. Followed by utilities with 57%, while banking, financial services, insurance (BFSI), broadcasting, gaming, materials and transport sectors each have 50% of their constituents performing well.

In contrast, real estate investment trusts (REITs) saw only 44% of their companies achieve above-median scores.

Positive trends

Encouragingly, several industries are leading positive change.

MIBG notes that industrials, real estate, utilities, materials and transport are driving ESG improvements. Senior management accountability is also growing, with 46% of companies integrating sustainability into key performance indicators (KPIs) tied to executive remuneration.

In terms of environmental progress, carbon dioxide emission intensity declined between 2021 and 2023, while the disclosure of Scope 3 emissions – a measure of indirect emissions –has risen by 76% since 2021.

Moreover, gender diversity has improved, with 63% of companies reporting women make up at least 30% of their workforce, and 51% observing an increase in female representation on boards.

Board composition is another area of strength: 72% of companies have boards where independent directors form at least half the membership, and 67% show stability or improvement in this metric.

Despite these positive developments, significant challenges remain.

Fewer than half of the companies analysed report using renewable energy, a glaring issue for a nation striving to decarbonise. Only 48% of companies have announced net-zero targets, with just 8.5% of these aligned with the Science-Based Targets initiative (SBTi).

Additionally, disclosures around Scope 3 emissions remain inadequate, with only two banks revealing their financed emissions.

Another critical concern is the increase in Scope 1 emissions – direct emissions – between 2022 and 2023. Furthermore, only 24% of companies have established standalone sustainability boards or appointed chief sustainability officers, limiting the institutionalisation of sustainability practices.

Energy transition

Globally, the energy transition required to combat climate change faces significant hurdles, from developing low-carbon energy sources to mobilising transition finance.

While high-income economies demonstrate greater scale and speed, Asean nations, including Malaysia, are grappling with these challenges.

Singapore leads the regional transition with clear policies, strategies and financing mechanisms to achieve net zero by 2050, MIBG notes.

Malaysia, while financially well-positioned and pragmatic in its policies, lags in renewable energy adoption – a critical bottleneck in scaling corporate net-zero implementation, it argues.

However, MIBG is optimistic about Malaysia’s ability to adapt to flood risks and compete in emerging industries like electronics, artificial intelligence and data centres by accelerating its renewable energy adoption.

The report identifies utilities, plantations, transport (including airlines and logistics) and oil and gas as the four largest contributors to Malaysia’s emissions, collectively accounting for 88% of total emissions. Among these, utilities and plantations have successfully reduced emissions intensity over the past two years, while transport emissions have increased.

In terms of renewable energy usage, 68% of companies report adopting some form of renewables, including rooftop solar, biogas and green energy tariffs from Tenaga Nasional Bhd. However, only 10 companies – mostly from the plantation sector – report renewables constituting over 40% of their energy consumption.

Progress in disclosure

MIBG employs a proprietary ESG scoring framework to evaluate companies based on quantitative and qualitative factors, alongside ESG targets. It points out that scoring more than 50 indicates a robust strategy to mitigate ESG risks and seize opportunities.

Of the 114 companies analysed, 80% achieved a score of 50 or above, with 47% surpassing 60.Industries such as BFSI, energy, healthcare, industrials, transport and utilities demonstrated consistent performance, with all their constituent companies scoring 50 or more.

Among the 94 companies re-evaluated, 63 showed improved scores, driven by better disclosures and enhanced ESG performance, while 24 reported declines. Notably, even among those with declining scores, most still performed above the 50-point threshold.

Positively, governance practices have shown signs of improvement, partly due to stricter ESG disclosure requirements introduced by Bursa Malaysia in 2023. These now include references to the Task Force on Climate-Related Financial Disclosures and expanded reporting on material ESG factors.

Investment opportunities

MIBG highlights renewable energy engineering, procurement, construction and commissioning as key investment themes. Select utility players are also well-positioned to benefit from Malaysia’s push towards sustainability.

Bottom-up stock picks from MIBG focus on companies aligning with these themes, presenting investors with targeted exposure to Malaysia’s ESG transition.

As it stands, MIBG’s ESG portfolio comprises Axis REIT, Bermaz Auto Bhd, CelcomDigi Bhd, CIMB Group Holdings Bhd, CTOS Digital Bhd, Gamuda Bhd, Hong Leong Bank Bhd, Inari Amertron Bhd, MISC Bhd, Press Metal Aluminium Holdings Bhd, SD Guthrie Bhd, Sunway Bhd, Telekom Malaysia Bhd, Westports Holdings Bhd and Yinson Holdings Bhd.

In general, Malaysia’s ESG landscape is a mix of progress and untapped potential, as MIBG’s report illustrates.

While companies are making strides in emissions reduction, gender diversity, and governance, significant gaps remain in renewable energy adoption and net-zero commitments.

For investors, the growing emphasis on sustainability KPIs and ESG disclosures offers a promising pathway to identify resilient, high-performing stocks in an evolving market.

The correlation between strong ESG performance and equity returns is clear, and this is a trend that investors cannot afford to ignore.