PETALING JAYA: Increasingly more Malaysian-listed companies have seen an improvement in their environmental, social and governance (ESG) transparency and scores, as evidenced by the number of constituents in the FTSE4Good Bursa Malaysia Index (F4GBM Index).

       There are currently 76 constituents on the F4GBM Index, following the June semi-annual review. This was a significant increase, compared with only 24 members when the index was launched in 2014.

       CGS-CIMB Research noted this was a positive development, as companies that fared well in their ESG ratings could fetch premium valuations versus peers over time.

       The brokerage said the F4GBM Index could gain more attention, as investors embrace ESG.

       “The F4GBM Index could become more prominent over time with increasing focus and scrutiny by asset managers in Malaysia on ESG practices of their investee companies, ” CGS-CIMB Research said.

       “It probably has the largest coverage in terms of ESG ratings for Malaysian-listed companies among ESG ratings providers. Also, the methodology used by FTSE Russell to determine ESG practices in F4GBM is based on global standards, ” it added.

       It expects 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.

       The brokerage’s analysis found that the F4GBM Index outperformed the FBM Emas in two (2017 and 2018) of the past five years.

       For the six months to June 2021, the F4GBM Index registered a negative return of -5.6%, underperforming the FBM Emas (-5.1%) but outperforming the FBM KLCI (-5.8%).

       “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 Index, in some years, ” CGS-CIMB Research explained.

       Meanwhile, 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 that Malaysian companies fared better in their ESG scores relative to some of its peers in the FEM Index, ” CGS-CIMB Research noted.

       Malaysia’s weightage in FTSE4Good Asean5 Index as at June 30, 2021, at 21.5%, however, was behind Singapore and Thailand, but ahead of Indonesia and the Philippines.

       At present, 22 of the 30 stocks in the FBM KLCI are also members of the F4GBM Index.

       Eight FBM KLCI stocks did not qualify for the F4GBM Index.

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

       Conversely, companies that scored well or demonstrated improvement in their ESG ratings or are part of the index could fetch premium valuations versus peers, it said.

       “However, Malaysian companies will need to improve their ESG practices as the bar is likely to be raised over time, ” CGS-CIMB Research noted.

       “FTSE Russell recently introduced new climate performance standards at 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, ” it added.