UKFF1023/UKFF1093: ESG criteria: What they are, and how do they affect companies: Financial Management Fundamentals Case Study, UTAR, Malaysia


Universiti Tunku Abdul Rahman (UTAR)

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UKFF1023/UKFF1093: Financial Management Fundamentals

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Case Study

ESG (Environmental, Social and Governance) criteria: What they are, and how do they affect companies? The bans on rubber glove and palm oil exports from Malaysia, owing to allegations of forced labour, have affected the performance of local companies recently. This negative news reflects the growing importance placed by global investors on ESG (Environmental, Social and Governance) (Tan, 2021).

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In the local context, the power generation sector and the company -Tenaga Nasional Bhd (TNB), for instance, draw more than 60% of their power in Peninsular Malaysia from coal plants. Tenaga has always been a benchmark for foreign investors because it’s a big and decent share. Still, foreign stockholding has fallen to a decade low, making it one of the cheapest utilities in Asia. Why? Seeing from the ESG concerns, if a fund manager holds on to Tenaga, they have to answer many questions from investors as to why they are investing in a huge polluter and emitter of carbon. In 2016, foreign shareholders owned 29% of the TNB whereas, as of end-March 2022, the
number is 12.4% (Tan, 2021).

As for the palm oil industry, companies such as General Mills, Nestlé and Unilever have suspended FGV Holdings Bhd from their supply chain, owing to alleged exploitative labor practices in the company. Recently, looking at the foreign shareholding of plantation shares, investors will see that European funds have been selling out of this sector for years because they don’t like the environmental profile of these shares (Tan, 2021).

Bursa Malaysia comprises mainly sustainability-challenged sectors such as financials, oil, and gas (O&G), power utilities and plantations. These sectors, alongside foreignlabour-dependent exporters such as the rubber gloves manufacturing companies, often attract negative ESG headlines. The local property sector generally has favorable ESG scores. Still, it does not feature heavily in the ESG portfolio, owing to operating challenges such as oversupply, high gearing ratio, and affordability concerns (Tan, 2021).

Another example is Genting Bhd, which is rated fairly well by Sustainalytics. But there have been many related-party transactions throughout the history of the Genting group that is perceived to have favoured the controlling shareholder over minorities (Tan, 2021).

Malaysian investors should also incorporate ESG into their strategies. When companies are more aware of ESG issues, it tends to give investors greater confidence that their strategy (in terms of what companies are pursuing to achieve sustainable growth) is more holistically considered and justifies the risk premium on a company’s share. If Malaysian companies and investors do not consider ESG factors, they ignore the risks that will come as countries transition into a net-zero carbon emission economy.

China has pledged to reach that target by 2060 and the US by 2050. As Malaysia’s major trading partners such as China, the US and Japan are heading towards their net-zero carbon emissions goals in the next few decades, Malaysian companies could risk being locked out of markets and supply chains if they do not match the pace of transition.

Malaysian companies can embark on these opportunities and transition. Renewable energy and electric vehicles (EVs) companies are some prime examples to embark on these opportunities and transitions (changes or shifts).

Unfortunately, Malaysia is lagging behind other ASEAN countries in the initiatives to develop EVs and the relevant infrastructure. Simply put, Malaysia is not at the forefront of investors’ minds on these opportunities and transitions (Tan, 2021).

Some of the better-performing local shares in the past year through the pandemic have been ESG plays, such as Solarvest and Cypark, which have a renewable energy and technology portfolio. These shares are akin to the new economy stocks that can thrive in a low-carbon world. Apart from the investors’ concern, the analysts’ views always prevail because they can provide forward-looking perspectives on the shares and have a personal understanding of the companies.

Hence, Oil and Gas (O&G) companies such as Yinson Holdings Bhd and plantation companies such as IOI Corp Bhd are generally included by the analysts in the ESG portfolio. Including sectors such as O&G into an ESG portfolio may seem counterintuitive to some. But investing in companies transitioning to become sustainable can generate the biggest alpha for ESG investors.

A company’s ESG profile change impacted valuation and share prices that are unable explained by the general market or other factors. ESG score upgrades led to higher valuations and vice versa (Tan, 2021).

Foreign investors may also lose interest in local companies that do not meet ESG criteria. The companies’ management teams should understand what is required of them in the new economy and sustainability megatrend. If the management incorporates the ESG and improves their ESG criteria, the market will recognise that.

Subsequently, their ESG scores or ratings will improve, and companies can see the returns (Tan, 2021).

The number of ESG standards and frameworks, data providers, ratings and rankings has expanded, with 600+ ESG ratings and rankings existing globally as of 2018 and continuing to grow.

As this system has developed, it has influenced how companies report on and disclose ESG data and performance, shaped the creation of ESGrelated investment products and framed the public perception of companies. Investors and analysts may easily identify companies with strong ESG practices or exposure to ESG risks by looking at Refinitiv’s ESG scores and Refinitiv’s ESG controversies (ESGC) score (Refinitiv, 2021).

1. ESG score – measures the company’s ESG performance based on verifiable reported data in the public domain.

2. ESGC score – overlays the ESG score with ESG controversies to comprehensively evaluate the company’s sustainability impact and conduct over time.

Refinitiv ESG scores reflect the underlying ESG data framework. They are a transparent, data-driven assessment of companies’ relative ESG performance and capacity, integrating and accounting for industry materiality and company size biases.

Refinitiv’s ESG scoring methodology follows several key calculation principles (see figure 1 below). An overall ESGC score is also calculated, which discounts the ESG score for news controversies that materially impact corporations.

The underlying measures are granular enough to differentiate between companies with limited reporting and are not transparent or deliver minimal implementation and execution versus companies that “walk the talk” and emerge as leaders in their respective industries or regions (Refinitiv, 2021).

Refinitiv ESGC scores provide a rounded and comprehensive scoring of a company’s ESG performance, based on the reported information related to the ESG pillars, with the ESG controversies overlay captured from global media sources.

The main objective of this score is to discount the ESG performance score based on negative media stories. It incorporates the impact of significant, material ESG controversies in the overall ESGC score.

When companies are involved in ESG controversies, the ESGC score is calculated as the weighted average of the ESG scores and the ESG controversies score per fiscal period, with recent controversies reflected in the latest completed period. When companies are not involved in ESG controversies, the ESGC score equals the ESG score.

The Refinitiv ESG controversies (ESGC) score is calculated based on 23 ESG controversy topics. During the year, if a scandal occurs, the company involved is penalised, affecting their overall ESGC score and grading.

The event’s impact may still be seen in the following year if new developments are related to the negative event. For example, lawsuits, ongoing legislation disputes or fines. All new media materials are captured as the controversy progresses (Refinitiv, 2021).

The controversies score also addresses the market cap bias that large-cap companies suffer, attracting more media attention than small-cap companies.

Refinitiv captures and calculates over 500 company-level ESG measures, of which a subset of 186 of the most comparable and material per industry power the overall company assessment and scoring process. These are grouped into ten categories that reformulate the three pillar scores and the final ESG score, reflecting the company’s ESG performance, commitment and effectiveness based on publicly reported information (Refinitiv, 2021).

The category scores are divided into three-pillar scores – environmental, social and corporate governance. The ESG pillar score is a relative sum of the category weights, which vary per industry for the environmental and social categories. For governance, the weights remain the same across all industries. The pillar weights are normalised to percentages ranging between 0 and 100 (Refinitiv, 2021).

ESG scores are available on the Refinitiv Eikon platform in the UTAR library. These scores are accessible via the ESG company views, the Screener app, Eikon for Office and Eikon Portfolio Analytics (PORT) app. The ESG views show the scores in letter grades to show how companies perform relative to their peers and where a company’s ESG weaknesses and strengths lie (Refinitiv, 2021).


(a) Discuss the background of your selected Public Listed Company (PLC).

(b) Identify the prospects of your selected company concerning the market structure, growth potential, competitiveness, risk, advantages of its product, etc.

(c) By downloading the four years ESG (Environmental, Social and Governance) and ESGC (Environmental, Social and Governance Controversies) scores of your selected Public Listed Company (PLC) from the Refinitiv database in the UTAR library, appraise the ESG rating and the exposure to ESG risks of your company, concerning the negative events related to your company reported from global media sources.

(d) By downloading the WEEKLY adjusted closing share prices of your selected Public Listed Company (PLC) and the market index (FBM KLCI index), calculate:

(i) the mean (average) share price returns of your selected Public Listed Company (PLC) for each year and over the LATEST four years period;

(ii) the risks, as measured by both standard deviation and a beta of your selected Public Listed Company (PLC) over the LATEST four years period;

(iii) the correlation coefficient of your company’s share price returns with the market returns over the LATEST four years period (FBM KLCI index).

(e) Based on the financial statements obtained from the LATEST four years’ Annual Reports of your selected Public Listed Company (PLC), and with the profits (or earnings) attributable to owners of the parent that can be obtained
from the firm’s audited financial statements (from the Group or Consolidated Financial Statements):

(i) Analyse the profitability (excluding the return of equity (ROE)) and the market ratios of your selected Public Listed Company (PLC).
(Notes: Please be noted that heavier weights will be awarded for the indepth analysis, reasoning, and linkage to relevant facts of your company and particular industry or sector rather than precision of calculations or number of ratios calculated. Students are advised to compute the financial ratios on their own. All the financial ratios obtained from the Refinitiv databases or the companies’ annual reports only serve as guidelines).

(ii) Determine the return of equity (ROE, in %) based on the DuPont model. Perform a time series and in-depth analysis on the return of equity (ROE, in %) of your company (Notes: The DuPont model = Net Profit Margin x
Total Assets Turnover x Debt (or Equity) Multiplier).

(iii) Conduct an Asset Perspective Free Cash Flow (FCF) analysis of your company.

(f) Based on your overall analysis and findings in Parts (a) to (e), provide a comprehensive summary and recommend whether your company is viable and sustainable for long-term investment.

and findings, where appropriate, with the various articles and resources about your selected Public Listed Company (PLC).

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