This article first appeared in The Edge Malaysia Weekly on November 7, 2022 - November 13, 2022

ALL public listed companies (PLCs) on the Main and ACE Markets in Malaysia will now automatically have an environmental, social and governance (ESG) score by FTSE Russell.

Bursa Malaysia Bhd and the London Stock Exchange Group (LSEG), which owns multi-asset index and benchmark provider FTSE Russell, signed a memorandum of understanding (MOU) last week to make this possible. Prior to this, only PLCs that are part of the FTSE Bursa Malaysia EMAS Index had ESG scores provided by FTSE Russell. That accounted for approximately 30% of total Malaysian PLCs.

This expansion of coverage allows more PLCs to measure and understand their ESG performance. It will also help them meet the increasing demand for transparency and disclosures from global stakeholders on ESG issues.

According to Bursa Malaysia and LSEG, the ESG score will be provided to PLCs for free. The PLCs will also be able to access a web-based research platform that details their scores and the data indicators used for assessment. This could be helpful to PLCs that want to improve their ESG performance over time.

“ESG scores and data have traditionally focused on the largest and most liquid companies in investors’ portfolios. But it is becoming critical to a widening range of stakeholders and financial institutions. Banks and insurance companies are now taking ESG risk and performance into account in establishing premium and lending rates,” say Bursa Malaysia and LSEG in an email interview with The Edge.

To remain relevant and competitive in a global economy, ESG transparency is critical, as international companies, investors and other global stakeholders are increasingly relying on ESG data to make business decisions, they add.

“Companies need to understand what is important for international and domestic stakeholders, make appropriate adjustments, and see how they compare versus their peers and across markets. More importantly, companies play an important role in supporting Malaysia’s ambition to develop a sustainable economy, which is vital for future generations.”

A report by consulting firm EY in November 2021 found that 74% of the 324 global institutional investors it surveyed are more likely to divest from companies with poor ESG track records than before the Covid-19 pandemic.

In Malaysia, financial institutions (FIs) have already begun assessing new financing and investments based on the Climate Change and Principle-based Taxonomy, which classifies economic activities based on how it contributes to climate change mitigation and adaptation. Going forward, FIs will also be subject to climate stress testing and scenario analysis.

All these initiatives, which are meant to help FIs become more resilient against future challenges, will put a spotlight on the ESG performance of companies.

The ESG scores will be applied to all PLCs in line with the scoring methodology for existing companies. This is the same methodology that is used to construct the FTSE4Good Bursa Malaysia Index.

PLCs will be assessed on their ESG performance once a year, either in June or December. This assessment is based on publicly disclosed information by the companies. A team of data analysts from LSEG assesses the PLCs in relation to a set of data points. The results of the assessments will be announced in the third week of June or December.

Briefly, the FTSE’s ESG ratings measure a company’s exposure to and management of ESG issues. It looks at three pillars — E, S and G — and 14 themes, which cover more than 300 indicators. An average of 125 indicators is applied per company.

Each company will have a different level of exposure to the pillars and themes, depending on the sector and circumstances. Once that exposure level is established, companies are scored on how well they manage the issues related to the relevant themes.

Examples of themes under the three pillars are climate change, customer responsibility and anti-corruption. Indicators under the climate change theme include greenhouse gas (GHG) emissions and energy reduction, and targets to reduce fleet GHG emissions, among others.

Not all companies have sufficient resources to measure and report their ESG risks. This is especially true for smaller companies. When asked, Bursa Malaysia acknowledges this challenge and highlights that ESG reporting is a journey that requires support, engagement and capacity building.

Since the launch of the sustainability reporting framework in 2015, Bursa Malaysia has provided toolkits and held workshops and webinars for PLCs. The MOU with LSEG will also see both parties collaborate on ESG educational initiatives.

This includes support for FIs to implement sustainable supply chain finance and transition financing workflows, and exploration of corporate ESG solutions aligned with internationally-recognised standards, such as the Task Force on Climate-related Financial Disclosures.

“All of these would aid in enhancing PLCs’ ESG practices and disclosures and addressing Malaysian financial institutions’ climate-related requirements, while also supporting the exchange’s goal of being a sustainability catalyst in the Malaysian capital market,” says Bursa Malaysia.

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