WHILE the recent selldown of certain plantation counters, said to be due to foreign funds’ commitment to Environment, Social and Governance (ESG) investment criteria, is seen as negative for the companies, it is not all bad, some say.

“It’s a short-term negative. But in the longer run, it’s better for the companies, employees and the environment,” says Chris Eng, chief strategy officer at Etiqa.

Eng was formerly head of investment research at the insurer.

“Yes, there could be some selling pressure as more funds adopt ESG but it’s not the end of the sector as plantation counters still have a big weighting on the FBM KLCI. There is still support from local funds, especially from shariah-compliant funds, as plantation stocks are a major component for this category since banks have been excluded,” says an equities head at a global insurer.

Another fund manager agrees that shariah-complaint funds have been holding up the performance of plantation counters, despite low crude palm oil prices and recent negative perception of the sector arising from the haze phenomenon.

Plantation counters such as Kuala Lumpur Kepong Bhd (KLK) and Genting Plantations Bhd saw their shares being sold down following news that fires had been discovered at their estates in Indonesia.

Forest fires were blamed for the haze choking Singapore, Malaysia and parts of Indonesia in August and September.

Other Malaysian companies implicated include Sime Darby Plantation Bhd, IOI Corp Bhd and TDM Bhd. They have all responded to the reports, saying that the fires had occurred either inside or outside their concession areas and had been put out.

In any case, as many industry observers have noted, it did not make sense for the plantation companies to start fires in their estates.

“Open burning is unconceivable for IOI or any other responsible palm oil producer as open burning uses fire to do land clearing and this would result in the loss of the business licence,” IOI says in a Sept 20 statement.

Malaysian planters were not the only ones affected. A Sept 25 statement by Indonesia’s Ministry of Environment and Forestry listed 55 companies from Indonesia, Singapore, Malaysia and Hong Kong that were being investigated for fires at their estates.

According to an Oct 8 report by UOB KayHian, share prices of Singaporean, Malaysian and Indonesian plantation companies declined by an average of 2.5% following a Sept 24 statement by Greenpeace on burnt areas in Indonesia. Genting Plantations was one of the companies named in the Greenpeace statement.

On Oct 4, KLK saw 31.6 million shares or a 2.97% stake transacted off market, reportedly by a foreign fund, due to the ESG investment criteria. The shares changed hands at a discount of close to 8% to the counter’s closing price of RM22.78 on Oct 3.

“I think European funds are the ones that have incorporated the most ESG elements in their investment policies. But there is still no industry-wide accepted policy on plantation investments. Some may take a blanket action not to invest in plantation counters but then they should be consistent and avoid soybean companies clearing forests in Latin America too,” says Eng.

A potential compromise would be for funds to invest only in companies that are certified sustainable by the Roundtable on Sustainable Palm Oil (RSPO) or Malaysian Sustainable Palm Oil (MSPO), he adds.

“This will help drive a premium for certification, which is still largely absent for the actual certified palm oil product,” says Eng.

Nevertheless, he expresses surprise that ESG-related selling on plantation counters has only started now, given that ESG investing has been around for a few years now.

“It’s probably the tail end of selling from foreign funds on the ESG issue. Those that remain will probably ride this out and have their own justification for staying invested in plantation stocks.”

Bursa Malaysia had an early start by being the first bourse in Asia to introduce a globally benchmarked ESG index — FTSE4GOOD Bursa Malaysia Index — in 2014.

There are 71 component members in the index. Sime Darby Plantation and IOI are among the top 10 constituents. Both counters make up 6.05% of the index’s weightage.

The fund manager with the global insurer says there has not been across-the-board selling of plantation stocks despite ESG having been around for a while as different funds may have different ESG filters or simply “different boxes to tick” in the absence of one standard policy on such investing.

ESG investing made news early this year when Norway’s Government Pension Fund Global (GPFG), which manages US$1 trillion (RM4.18 trillion), disclosed that in the last six years, it had sold stakes in more than 60 companies due to deforestation, including 33 involved in palm oil.

The fund had also engaged with the companies it invests in to push them to stop deforestation.

Apart from plantation stocks, the oil and gas sector has also been affected by ESG investing. Norway’s GPFG, which is also the world’s largest sovereign wealth fund, said in March that it will exit investments in O&G exploration but will remain invested in those with divisions in renewable energy such as BP and Shell.