BACK on Oct 2, 2021, I wrote in this column about the importance of social good in financial markets.

       Environment, social and governance (ESG) principles are the key metrics for institutional funds and research houses in dictating fund flows and this has impacted two sectors on Bursa Malaysia – oil and gas (O&G) and plantation.

       Despite the continuous increase in commodity prices as reflected by Brent crude oil and crude palm oil (CPO) indicators, the share price performance of related companies continue to remain lacklustre.

       Even the growth in earnings and increase in dividend payouts did not move the share prices of such companies.

       This had many analysts and even experienced fund managers scratching their heads. In my conversations with them, it does seem that ultimately ESG concerns are the main reason for the market behaviour.

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       Four months have passed since then and 2022 is a new picture altogether. Both of these sectors, which were laggards in 2021, are now the top performers just two months into the year.

       Take Bursa Malaysia’s plantation index as reference – it was trading at 6,348 points as of Oct 1, 2021. Today, it is trading at above 8,000 points.

       This is in tandem with CPO price movement, which has made record high, moving from RM4,751 to RM7,093 per tonne.

       Similarly, Brent oil price has moved from US$79 (RM331.55) to breaking above US$100 (RM419.69) per barrel. This level was last seen seven years ago prior to the oil price crash in 2014.

       Was the ESG justification a fallacy?

       The fact of the matter is that the plantation sector stocks have seen broad-based rally across companies. It is not purely sentiment or thematic-driven based on CPO price surging to fresh high.

       When we look at the earnings reports of the same plantation companies – which I highlighted last year – from government-linked to family-owned plantation companies, they have all outperform expectations and analysts’ forecasts altogether.

       The share price has also jumped in the range of 17% to 50% within the space of few months. In addition to earnings, based on various fundamental assessment metrics such as operational cashflow and dividend yield, plantation companies have been delivering quarter after quarter.

       I know many seasoned investors have missed out this plantation upcycle and were late to the game because of the ESG concerns that was highlighted by many.

       Some were also afraid of the force labour allegations by United States Customs Border and Protection, which was levelled against Sime Darby Plantation Bhd and IOI Corp Bhd.

       They were worried taking a position in these companies would open the risk of repeating what has happened to the glove makers in our country.

       There were also arguments in analysts’ reports which highlighted the severe labour shortage in the plantation sector that may impact companies’ ability to capitalise from high CPO price due to the fall in production numbers.

       These are indeed very reasonable concerns for investors.

       I for one is willing to admit that I was quite hesitant to invest in pure-play plantation companies despite the attractive valuation.

       However, as my investment approach is based on a balance portfolio, I did invest in Wilmar International Ltd and Oriental Holdings Bhd as my proxy to the plantation sector.

       Wilmar being one of the world’s largest agribusiness groups and Oriental being a conglomerate were companies that are big in palm oil but have other business segments to support their operations.

       This helped me manage by fear of an ESG valuation discount but not missing out entirely from the palm oil upcycle. Clearly, while the gains were satisfactory, it is not comparable if I had invested in a pure-play palm oil company.

       So, with all the talks on the importance of ESG and how funds would avoid such sectors, with the recent rally across in O&G as well as plantation, is it all but a fallacy?

       This is the question that I have been asking not only myself but the same fund managers who justified the market behaviour just few months back.

       Fund flow drives rallies

       Exactly one month since, the FBM KLCI has moved from 1,508 points to a high of 1,605 (surged 100 points), where both plantation and O&G index contributed significantly. This is also following the strong foreign fund inflow into our stock market.

       What does this mean? It means that every funds which were avoiding these two sectors on grounds of ESG has in fact ignored their earlier concerns in the chase for returns and yields.

       There is definitely some level of contradiction between the message conveyed and actual action taken. All this means that fund flow goes towards wherever they seen profits and this, in turn, drives rallies regardless of the sector.

       Do not get me wrong. I am not saying ESG is a fallacy but rather the capital markets are extremely fluid.

       There are larger overarching macroeconomic forces in play such as geopolitical tension (Russia-Ukraine war driving up crude oil price) and inflationary pressure (driving up of commodities prices including palm oil which produces edible oil).

       These will impact and dictate how fund flows as well, whether as a hedge to their portfolio or seeking out returns.

       As part of the newer generation of investors, I am a strong believer in ESG’s noble idea and concept. However, I am an even bigger believer of sustainability and its actual impact towards society and shareholders.

       There is no point if a listed company ticks all the boxes of an ESG checklist but does not deliver the actual impact to shareholders.

       Similarly, it is rather meaningless if a company makes astronomical returns but bring damage to mankind, society and the environment (think of arms dealer and weapon manufacturers).

       I do see a trend towards fund mandates which focuses more towards green, sustainability and ESG metrics. Until a wider adoption and unified approach can be developed, there is a lot of room for improvement and adjustment in this space.

       If anything, the rally in O&G and plantation sectors has taught me the importance of not neglecting any sectors simply because of certain agendas being championed by powerful interest groups.

       It is vital for investors, institutional or retail, to take cognisance there will always be good companies in whatever sector, so long they are run by good, professional management and uphold corporate responsibility for the society as a whole.

       While there is risk of greenwashing, a broad stroke brush painting an entire sector such as plantation being non-compliant with ESG philosophy is grossly misinformed and shallow.

       Hann, is the CEO of Tradeview Capital. He is also a lawyer and the author of Once Upon A Time In Bursa.