This article first appeared in The Edge Malaysia Weekly on September 19, 2022 - September 25, 2022

It is not easy to answer the question of which Malaysian bank is doing the best in the area of environmental, social and governance (ESG). When ESG asked two international rating agencies and a boutique asset management firm this question, the responses were very different. 

For instance, Hong Leong Financial Group Bhd (HLFG) was ranked at the top by a global rating agency but placed at the bottom by another. The varying standards in ESG rating metrics might be why there is such a divergence in views. 

As at Aug 5, MSCI — one of the world’s largest providers of ESG indices — gave Public Bank Bhd and RHB Bank Bhd the highest ESG rating score among nine local banks. Both banks have an ESG score of 8.3 and an AA rating. These are followed by Malayan Banking Bhd (Maybank) (8.1), Alliance Bank Bhd (7.7) and AMMB Holdings Bhd (7.5). These three banks also have an AA rating.

The lowest-ranked bank is HLFG, which has an ESG score of 3.88 and a rating of BB. 

In an email response to ESG, MSCI points out that Public Bank’s high scores in human capital development contributed to its performance. Meanwhile, “RHB Bank scores very well on its corporate governance metrics and leads global and local market peers”, according to MSCI.

However, HLFG was viewed favourably by Morningstar Sustainalytics, another international ESG ratings provider. HLFG has the second lowest ESG risk score.

In an email reply to ESG on Aug 23, Sustainalytics says HLFG has an ESG risk score of 27.6, owing to its strong management and low exposure to material ESG issues. 

“It manages its risk exposure to business ethics and product governance well. This is driven by strong [company] policies and programmes. It also has no involvements in relevant controversies [in the financial industry],” it says. 

At 19.5, CIMB Group Holdings (CIMB) has the lowest ESG risk score among its peers, according to Sustainalytics. Similarly, the main contributing factor to its low ESG risk level is its “strong management and business ethics”. It also has fewer human capital issues.

Among the six material ESG issues assessed by Sustainalytics, however, CIMB has a medium-level ESG risk rating when it comes to data privacy and security. It has a low and negligible risk level in the five other material ESG issues. 

According to a Sustainalytics report, “the company’s exposure to data privacy and security issues is high and moderately above the sub-­industry [average] exposure”. 

The report also points out that CIMB has established an adequate policy on data privacy and security. However, it does not conduct regular risk assessments on data privacy. 

“The company has average preparedness measures to address data privacy and security issues and has been implicated in minor controversies related to the issue. In our view, the company’s management of the issue is average,” says Sustainalytics. 

Meanwhile, a Sept 1 report by CGS-CIMB has Maybank as its ESG pick among Malaysian banks. It believes Maybank was the first to embark on ESG initiatives. None of the other local banks under its coverage can match the breadth of Maybank’s regional network, through which it can maximise the number of beneficiaries of its ESG initiatives, according to the report. 

Neoh Jia Man, portfolio manager of local boutique asset management firm Tradeview Capital Sdn Bhd, also has Maybank as his top pick. Neoh says the firm’s ESG rating system is based mainly on the United Nations Principles for Responsible Investment (UNPRI) and the Sustainability Accounting Standards Board, while the information it uses to rate these companies is gleaned from their annual reports.

When rating local banks, the firm gives a 20% weightage to the environment factor and 40% each to the social and governance factors, he adds. 

Maybank stands out from other local banks because it scores well in all three metrics. “It has the best [ESG] disclosure standards, the highest amount of sustainable financing and good diversity at its board level,” says Neoh. 

He adds that the bank has a talent retention rate of 90%, which is quite high, and good customer satisfaction. Digitalisation-wise, Maybank is at the forefront. 

Public Bank comes in second, as it scored well on its social pillar, which is partly reflected through its high employee retention rate, even though it lags behind its peers on its digitalisation efforts. 

Meanwhile, smaller banks such as Affin Bank and Alliance Bank are ranked lower because of the lack of ESG data and information. “We have to make our own estimation and fill in some gaps based on our own assessment. The same situation [where smaller firms do not have enough ESG disclosures] happens in other industries as well,” says Neoh. 

He adds that some banks have held analyst briefings on ESG matters, but he has not attended one. 

Neoh is not surprised that local banks are rated differently by different agencies as they could be using other rating methods and standards. Even when there are standards that are more widely adopted by market players, they continue to evolve. 

“As these standards change, we need to adjust our ESG assessment method as well. It’s not an easy process,” he says. 

Asked whether the valuations of banks are affected by their ESG ratings, Neoh does not think so. “The reason is simple. Among the three pillars, environmental metrics are the most quantifiable and have the most consensus, particularly on greenhouse gas (GHG) emissions. So, the share price of companies that release high levels of GHG are [more likely to be influenced] by their ESG ratings.

“Banks are not big contributors to GHG emissions. It’s hard for the market to come to a consensus on which elements under the social and governance pillars they should look at and how much weightage to put on them,” he says.

From an industry perspective, Malaysian banks fare better than their Southeast Asian peers on corporate governance and environment, according to MSCI. 

It says: “[Local banks’] scores for climate change and the environment have increased significantly over the last four years. This has been supported by Bursa Malaysia and the regulators’ focus on corporate governance performance and on environmental and sustainable investment reporting.”

Sustainalytics points out that local banks have slightly lower ESG risk levels or risk rating scores than the global average and do better than their Latin American peers at managing ESG risk. 

Local banks could do better in managing social issues and corporate governance. 

“There is major room for improvement [for the local banks] relating to some social issues, in particular access and ease of financing to the underserved communities, as well as human capital development, such as employee training and development,” says MSCI. 

Sustainalytics emphasises the issue of business ethics. It says: “According to our research, Malaysian banks have relatively strong management when it comes to business ethics, but that is due to the lack of significant controversial events that are captured in our database.”

The firm points out that Affin Holdings Bhd has relatively weak business ethics policies and programmes. It is not a signatory of any industry initiatives, including the UNPRI. 

It adds that AMMB has relatively high ESG risk compared with its peers because of weaker ESG disclosures. “Its unmanaged risk is due to business ethics, data privacy and security issues. The bank’s policies and programmes pertaining to these areas are assessed as low or adequate.”

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