POC2023 Panel Session - Palm Oil Sustainability: The Way Forward

Khor Yu Leng, from Segi Enam, was part of a panel during POC2023 titled "Palm Oil Sustainability: The Way Forward", which was cleverly moderated by Datuk Darrel Webber with football analogies. Other panellists included Joseph D'Cruz from RSPO, Perpetua George from Wilmar International Limited, Renaka Ramachandran from Sime Darby Plantation, and Tan Chee Yong from MPOCC.

During the Panel Discussion - Palm Oil Sustainability: The Way Forward. [From the left: Tan Chee Yong (MPOCC), Renaka Ramachandran (SDP), Perpetua George (Wilmar), Joseph D’Cruz (RSPO), Khor Yu Leng (Segi Enam) and Darrel Webber (IRGA)]

Panellists on stage receiving tokens of appreciation from Bursa Malaysia.

During the panel discussion, speakers discussed the challenge of meeting the constantly evolving sustainability standards and how companies always needed to catch up with the moving “goalpost”. The business sector representatives shared that certification bodies always add new standards, making it difficult for businesses to anticipate or prepare to ensure they meet the standards to remain certified.

Joseph, of the RSPO, explained that new sustainability standards are not added arbitrarily, but rather in response to environmental factors. The industry, must understand where it should move towards and consider drivers and trends to meet the demands for sustainability and greater transparency from the market.

Yu Leng highlighted the sustainability progress within the industry, citing a 20% growth in certified growers who have embraced the opportunities presented by certification. She also noted a decrease in certification costs and increasing demand for sustainable palm oil and good premia, which might be off-putting for buyers. Recent new planting data from RSPO showed that 43% of estates are now developed on grassland and other areas (non-deforestation), while 24% of such landbank are conservation areas.

Renaka described SDP’s activities at the forefront of sustainability as there is a lot of demand from customers and stakeholders. She acknowledged that the goalpost for sustainability standards is constantly changing and improving. Businesses should prioritize decarbonization and take action as soon as possible. (Editor’s Note: Let’s all say yes, to continual improvement! While keeping an eye on the cost effectiveness ways to achieve this.)

The discussion then shifted to regulatory standards, focusing more on the EU non-Deforestation Regulation (EUDR). Yu Leng noted that the 2020 cut-off includes millions of hectares of conversion, but a central/national registry is required to benefit from it. Indonesian smallholders are optimistic as this is a pathway for them to enter the EU market. This aligns with our read that the EU is making efforts to be more pro-smallholder (after criticisms from some countries). Attesting to this is an update that smallholders of up to 4 hectares can use geolocation points (rather than shape files of their farms).

Wilmar’s Perpetua believes that Malaysia is a low-risk country under the EUDR. She cited several reasons for her opinion, including the fact that Malaysia's certification for palm oil is now mandatory under the Malaysian Sustainable Palm Oil (MSPO) regulation, and oil palm dealers are also required to obtain MSPO certification. Additionally, Malaysia's major expansion in oil palm cultivation occurred before the 2020 cut-off date of the EUDR. Finally, Malaysia has readily available palm oil data that can be compiled and presented to meet regulatory requirements. (Editor’s Note: Not sure if Malaysia can be classified as a low-risk country as this is based on sector annualized growth rate of production areas and such; but by virtue of Malaysia’s administrator bureaucracy and its data, it can be easily demonstrated as low-risk to comply with the EUDR, if there is an effort to do this.)

On the labour issue, Perpetua noted it is “a big scapegoat issue,” but this is also a problem for other commodities. However, finding a solution to this problem is difficult as it requires action from the government. Other speakers agreed that it is a politically sensitive issue that government administrations may be hesitant to tackle as it could have negative consequences. (Editor’s note: This likely relates to the problem of granting rights to migrant workers. Doing so might anger voters).

On the future of certification and whether it is still relevant now with EUDR, MPOCC’s Chee Yong shares that as more and more criteria are being added and now regulations are being introduced, there needs to be a centre point to see how this is workable. Certification bodies can be the centre point, but government effort is needed as well. For RSPO, Joseph said that it is a space for the industry to allow companies to convene for discussions. That was how RSPO was formed.

The speakers discussed how MSPO and RSPO can be more proactive. Yu Leng suggested that Malaysia could establish a national or central registry and become more data-ready, especially for the SME sector. More financial institutions are willing to provide green funding to companies, indicating a growing market for sustainable products. Joseph noted that sustainability standards serve as a measuring tape to assess companies' compliance and that the industry is accountable to those who set the bar.

There was a question from the floor regarding certification fatigue. Renaka shared that there is value in aligning with sustainability measurements. It is now part of a company’s image. Yu Leng worried that the narrative is misguided by a minority of the stakeholders. She suggests companies use certification and sustainability for business opportunities e.g., how do you participate in supply for Sustainable Aviation Fuel (SAF) that Argus notes is now around USD3,000/tonne (versus below USD1,000 for palm oil)? Top buyers want reliable data from suppliers.

Links: PalmTrack 25 Jan 2023, PalmTrack 21 Feb 2023

Read our other post about POC2023:

• Stocks, prices and more at POC 2023 KL

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Reported by Wong Ivan (ivan.segienam@gmail.com) | 27 March 2023 (Edited on 4 April 2023, 9:00am. Updated data from RSPO on new planting data.

Singapore F1 Grand Prix Gets into Green Gear

Singapore Formula 1 Grand Prix is kicking climate action into higher gear. The event will last three days leading up to the 61-lap race on the evening of 2 Oct 2022.

According to a media statement by Singaporean-based biofuels company Alpha Biofuels, “when the night race returns to the streets of Marina Bay in September—after a two-year hiatus due to the pandemic—a full sustainability audit will also be conducted, which could see data such as the amount of carbon emissions and waste generated by the event being measured and reported for the first time.”

Responding to CNA’s queries, a spokesperson from Singapore GP said that the existing track lighting will be replaced with more energy-efficient LED lights from 2023, and that it will switch to electric or hybrid support vehicles where applicable.

The official Singapore Grand Prix website confirms that management consultancy Faithful + Gould has been appointed to write a Carbon Footprinting Report identifying emission sources of concern. The results will be then audited by Tüv Süd PSB.

On that note, take a look at F1’s 2026 target for 100% sustainable fuel and how ARAMCO creates F1’s sustainable fuel. Also significant is Singapore’s import of renewable (hydro-powered) energy from Laos, its challenges, and questions on large-scale dams.

See below for the sustainability commitments listed on the Singapore Grand Prix website:

Source: Singapore Grand Prix (accessed 26 Sep 2022)

research@segi-enam.com | 30 Sep 2022

Sime Darby Implements Governance and Operational Changes

Sime Darby has announced in a press release “sweeping changes in governance and operations” in attempt to address forced labour allegations levelled against the company and USCBP findings that resolving the issue would require “significant financial investments” and restructures. Several reforms pledged by Sime Darby are of notable:

• Reimbursement of recruitment fees. Sime Darby will reimburse some 15,078 foreign workers with an aggregate sum of RM38.6 million. A sinking fund of RM43.5 million to reimburse 19,565 workers will also be set aside. All reimbursements will be paid in lump sum, and current foreign workers will be informed of and receive their monies on 17 February 2021.

• Ethical recruitment. Due diligence will be conducted regularly on recruitment agents to ensure that they are credible and fully licenced. Monitoring and training will be given to agents selected via open tender processes, and will undergo performance monitoring as well. Agents found to have violated Sime Darby’s zero recruitment fee policy will be prohibited from working with Sime Darby.

• Structural changes. An ESG scorecard with “clear indicators” has been approved by the Board. A Social Welfare & Services department responsible for the implementation of policies concerning workers’ safety and welfare has also been established. Accordingly, 40 full time Site Safety & Sustainability Officers have been appointed to enforce these policies.

Mapping the Natural Rubber Value Chain in Malaysia

Happy New Year, everyone! It’s been a tumultuous end to 2021—the Philippines was ravaged by Typhoon Odette, Malaysia faced one of its worst floods in decades, several countries around the world were reporting and/or expecting a surge in Omicron infections.

The floods has triggered yet another wave of anger against the government, with frustrated Malaysians taking to social media to criticise officials for their incredibly slow response. Citizens and migrants are forced to help each another once again, this time under the #BanjirDarurat (Flood Emergency) campaign. Questions are also heating up on deforestation and the source of log jams in rural zones. As usual, we have the relevant social media data which we will explore in our next post under the Data and Analysis page.

For this post, a brief moment of happy news for us: in mid-December 2021, WWF released two reports exploring the sustainability issues surrounding the Malaysian natural rubber industry, both of which Segi Enam authored. What we found was that while the rubber supply chain is generally straightforward, the lack of transparency, traceability, and publicly available data makes it a difficult industry to evaluate when it comes to sustainability standards. Much of the root of the problem lies within the production system—for instance, smallholders dominate in this area and are typically not afforded the incentives to adopt more sustainable practices.

Segi Enam (WWF; 2021): Indicative map of rubber plantations in Malaysia based on the 2013-2014 dataset and maps retrieved from the Global Forest Watch (GFW) platform. Rubber dominant zones (dark green and mid-green) include: (1) Gua Musang, Kelantan; (2) near the Gerik, Perak-Southern Thai border; (3) Serting and Palong, Negeri Sembilan; (4) Lipis and Raub, Pahang; and (5) FELCRA/RISDA projects in Sarawak and estates in Sabah.

Read the full report here: Mapping the Natural Rubber Value Chain in Malaysia.

For the second report focusing specifically on the rubberwood sector: Addendum Report on Rubberwood

Aquaponics: What's That?

The search for more sustainable, environmentally-friendly farming methods has been well underway within the agricultural community, further motivated by growing concerns about food security amidst the looming threat of both climate change and the ongoing Covid-19 pandemic. One promising concept that has been shyly popping up in recent discussions is aquaponics.

Aquaponics is essentially a practice combining both aquaculture and hydroponics. The idea is to create a symbiotic relationship by growing both fish and plants in the same space—fish manure fertilises the plants with nutrients beneficial for growth; in turn, the plants purify the water which is then pumped back into the fish pond. Aquaponics thus presents an interesting avenue for sustainable, eco-friendly farming, especially in areas where the resources required for more traditional agriculture activities are limited.

Due to the absence of soil, much of the benefits reaped from an aquaponic environment is similar to that of its hydroponics or aeroponics-based cousins, with possible added bonuses. Crop yield and productivity from soilless cultivation systems, for example, are generally higher than their soiled counterparts, with aquaponics having the added advantage of a more natural source of nutrients courtesy of the fish (Trees.com, 2021; Agritecture, 2019; Gashgari et al., 2018).

Pak choi at the Kundasang Aquafarm (Kundasang Aquafarm, 2018)

Still, aquaponics is not the most popular agricultural practice out there, probably owing to factors such as the relatively expensive and complex start-up. However, some places in the world have turned to aquaponics farming as a continuous, sustainable source of fresh produce: an aquaponics lab in Berkshire County, Massachusetts plays a dual role of providing the community with almost 1,000 heads of lettuce a week and as an educational site for inmates; the Malaysian farming scene is seeing a rise in aquaponics spearheaded by small companies/projects such as The Urban Farm, E-Farm, Kundasang Aquafarm, Homegrown Goodness, and Aquaville Asia; German-based desert-tech company Desertfoods International has partnered with Integrated Aquaculture Ltd to establish South Africa’s largest aquaponics facility, which aims to generate 200 tonnes of fish and vegetables annually.

ESG Benchmarking: Part #3 - Race to the Top

As explained in previous posts in this series (again, disclaimer made in the first post still stands!), investors may be better versed with the key issues that Contemporaries focus on, and are given more up-to-date, standardized and reliable ESG ratings for companies. However, data scores given are more volatile when comparing Contemporaries with Traditionalists. When comparing TVL with MSCI, TVL has higher standard deviation and variance in ratings, with standard deviations of 1.41 and 0.97 respectively. 

However, this is not to say that this volatility is bad. Humans have a habit of lowering entropy or seeking out patterns, some of which may not entirely exist. In the AI world, it is purely algorithmic, determined by a machine. There is no conscious decision making that is forcing the AI algorithm to lower deviation in data. It simply uses the information at hand, does some calculations, and comes up with a rating. 

This is a good thing that reinforces the objectivity of Contemporary approaches. Nevertheless, it is not to say that the Contemporary approach is entirely perfect. AI algorithms are highly dependent on large volumes of data to enhance learning and provide outputs closer to the “true value” we are looking for. Therefore, Contemporaries would definitely need lots more data to help fine tune their system. For example, data is not evenly distributed geographically: there is more data to be scrapped in the developed world than there is in developing countries. There is no equality in data access, and things such as data censorship, government suppression of information, or simply a lack of infrastructure to relay data online can all affect the reliability of the AI algorithm used by Contemporaries. 

Moreover, Contemporaries are completely dependent on external sources of data. It is important that there are data vendors available to them, or rather more data vendors may be needed. But more global data sources are becoming increasingly available, and may be used in the near future to help enhance the Contemporary method of ESG rating. Two examples include the Global Forest Watch (GFW) and MethaneSAT. GFW provides forest data globally, using satellite data as well as a network of partners to collect this information. This data is publicly available and free to use. MethaneSAT is a Jeff Bezos-funded initiative utilizing satellites to collect methane data all around the world and at a faster rate than scientists can measure from Earth. Data is publicly available to see how companies and governments are progressing with their carbon initiatives. 

MethaneSAT boasts several impressive feats. Its satellites can identify emissions across the globe and measure the amount of emissions released from pre-determined locations. From there, its algorithms are able to calculate the rate at which methane is escaping into the atmosphere as well as the total emissions from both individual points or regions.

The key points about these data vendors is that they provide global data and are publicly available. Having more data sources like this would thus be advantageous to Contemporaries, as they help tackle the issue of geographic informational inequality and enforce the reliability of data due given the freedom of public scrutiny. However, there needs to be more of these types of data sources, and data vendors of this sort for the other two aspects of ESG, Social and Corporate Governance.

Additionally, corporate disclosures are also an important source of information that has not been given much attention by Contemporaries, although to avoid greenwashing or providing a false image of a company, mandates should be put in place to enforce responsible auditing on ESG issues and more transparency in company disclosure.

Perhaps a better approach for Contemporaries would be to look at the discrepancies between the corporate disclosures and the internet data they collect. Discrepancies could be used as a confidence weighting on ratings for each component of ESG to ultimately determine a company’s rating. Whatever approach is taken, it is clear more data and richer sources are therefore required to help tackle the issues of volatility and increasing equality in access to data. 

What are the issues we should be worried about?

A major concern regarding Contemporaries is that they are run by profit-driven businesses. Their work is not publicly available or free to use, whereas Traditionalists like Sustainalytics have their ESG ratings available online. There is a lot of talk on how powerful their AI tools are, but not much of it can be publicly scrutinised unless you request for a demo, raising justifiable concerns about how reliable the technology actually is. Moreover, Contemporaries tend to be closely associated with international financial centres (IFCs)—TVL, for example, is owned by FactSet, an American financial services company in the second largest hedge fund state of Connecticut. 

Since their methodology is not easily examined,  due to limited disclosure, it is unclear as to the sort of parameters used or the assumptions made in developing its ESG rating model. Moreover, algorithms are not entirely subjective in their creation. They are subject to the scrutiny of their makers, and may have certain biases or other hints of subjectiveness built into the foundation of their AI system. Without a true value to compare ESG ratings with, we would not be entirely sure how well the algorithm really works.

With the uncertainty in the actual formulation of the Contemporary AI analyst, and the profit-driven nature of Contemporaries themselves, Hughes, Urban, and Wójcik (2021) note that Contemporaries may “complement rather than substitute” the Traditionalists in the near future (Hughes, Urban, and Wójcik, 2021). Although Contemporaries seem more democratic and provide more transparent ratings, Contemporaries also have areas of opaqueness that can affect the way ESG ratings are done. Perhaps if Contemporaries were not profit driven and rather more altruistic could AI truly replace traditional approaches to ESG.

Check out my first two posts on AIs and ESG benchmarking: ESG Benchmarking: Part #1 - ESG, AI, and the Investment Industry and ESG Benchmarking: Part #2 - AI, the New Hope of ESG

By MUHAMMED Hazim, Segi Enam intern, 30 Aug 2021 | LinkedIn

Edited by Nadirah SHARIF

ESG Benchmarking: Part #2 - AI, the "New Hope of ESG"

Following my first post on Traditionalists (the disclaimer in that post still stands here!), we are now venturing into AI-powered ratings known as Alternative Ratings or Contemporaries. Contemporaries are heavily reliant on the technological power of data scraping and AI, using sentiment analysis (SA) to come up with ESG benchmarking for companies. SA uses words, adjectives, tone, and aspects of a subject/thing to determine the connotations, opinion, or stance derived from the sentence, document or source of information provided. There are various sources of data to use for Sentiment Analysis, including but not limited to:

1. Product reviews

2. Stock market information

3. News articles

4. Debates

5. Posts

6. Social media and micro blogging (a rich source of information)

There are quite a number of Contemporaries in the market now. However, there is not much information about how things work algorithmically, and different Contemporaries have different approaches. One of the more established contemporaries, TruvalueLabs (TVL). TVL uses various data sources including news, journals, and trade blogs, but avoids social media due to random noise and unreliable data from the source (Hughes, Urban, and Wójcik, 2021). 

How good are they? Can they really replace the Traditionalists?

The big data approach taken by Contemporaries is one of their biggest strengths. They take an “outside-in” approach to ESG rating, and rely on external data scraped off the internet and public sentiment paired with noise (aka controversy) to help determine a company’s rating. This is thought to be “democratic”, since they are not relying on company disclosures (Hughes, Urban, and Wójcik, 2021). 

The use of technology also allows Contemporaries to work with far more data: TVL can scrape data from 100,000 sources daily in comparison to the under 4,000 sources the Traditionalist MSCI would use (Hughes, Urban, and Wójcik, 2021). This wider access allows Contemporaries to have a broader perspective on a company to help determine its ESG rating. 

GreenWatch is an AI tool used specifically to tackle the problem of greenwashing. It verifies the authenticity of “green” claims made by a company by analysing its environment-related statements made in corporate communications, including how forthcoming the company is regarding its stance on climate change, against its carbon scores. Companies are then placed into one of four categories: (1) green leaders; (2) hidden green champions; (3) green incrementalists; or (4) potential greenwashers (Bloomberg, 2021).

Having access to a treasure trove of external data with a democratized perspective comes with various advantages. For one, it may help to combat the issue of greenwashing faced in the Traditionalist approach, a potential solution to the problem! Additionally, the Contemporary approach may mitigate the problems caused by the subjectivity of ratings and lack of standardization present in Traditionalist approaches by avoiding as much subjectivity as they can in their rating method.

Contemporaries also have advantageous flexibility to help determine ESG ratings. This is due to an important feature of TVL’s algorithm called the dynamic “Impact %” which they use to calculate weightings of key issues for companies: if there are more noise generated for certain controversies, the weighting for a related key issue is adjusted for the company. 

Finally, one very important feature brought by technology is the fact that Contemporaries can keep track of companies in real time. Contemporaries constantly scrape data and can update investors in real time about company ESG ratings and their respective issues. One such case study showed that TVL was able to decrease ratings for a commodity trading company called Glencore in light of various controversies they were involved in, whereas MSCI ratings were only adjusted after their annual review of Glencore (Hughes, Urban, and Wójcik, 2021). This means that investors have better access to more up-to-date information and data to make an investment decision. This means that investors have better access to more up-to-date information and data to make an investment decision. The images below show the controversies picked up by TVL in a relatively short period of time as well as the data points and ratings that were given to the company.

Hughes, Urban, and Wójcik (2021): “Spotlight events for Glencore. Source: Truvalue Labs.”

Hughes, Urban, and Wójcik (2021): “Insight Materiality trendline for Glencore from the TVL online platform. The dotted line refers to the daily pulse score, from which the Insight score (solid line) is derived as an average. The purple circles refer to ‘spotlight events’, ESG events which create a lot of data points. Larger circles equate to more datapoints. Source: Truvalue Labs.”

TVL provides a good insight of the capabilities and solutions Contemporaries provide to issues faced by Traditionalists. This includes a more democratized and transparent approach, access to far more data sources in comparison to Traditionalists, more objectivity, standardization, and up-to-date information to help investors make better decisions with relation to ESG and investment.

When broadly comparing the Traditionalist and Contemporary approaches to ESG ratings, it seems that Contemporaries win on various fronts: they can update investors quickly and try to be as objective or transparent as possible. However, not all Contemporaries may follow the exact same methodologies and get the exact same ratings. It is all dependent on the data sources they use, the key issue frameworks they choose, and how their algorithms work. 

Unfortunately, Contemporary data is not widely open to the public, and the data mentioned here is all only from TVL. With a lack of access to their data, we cannot undergo certain stress tests to see if there are unique features of Contemporaries, such as picking up on issues that Traditionalists do not see. For the moment, they seem to be able to do what the Traditionalists do with less subjectivity.

Check out my first post on AIs and ESG benchmarking: ESG Benchmarking: Part #1 - ESG, AI, and the Investment Industry

By MUHAMMED Hazim, Segi Enam intern, 23 Aug 2021 | LinkedIn

Edited by Nadirah SHARIF

ESG Benchmarking: Part #1 - ESG, AI, and the Investment Industry

The Environment, Social, and Governance (ESG) criteria is the way forward. This standard is used to provide social credit ratings for companies, and see how they tackle ESG-related issues to become a more sustainable company. ESG is in high demand amongst investors, because they want to invest in places that align with their own values. International organisations have endorsed the use of ESG-related standards, including the United Nations (UN) via its Principles for Responsible Investment (PRI), an initiative to make sure investment companies incorporate ESG issues into their investment decisions. From 2006 to 2018, Assets under Management (AUM) has grown from 6.5 to 81.7 trillion dollars under the PRI initiative (Eccles & Klimenko, 2019), showcasing a growing interest in ESG principles amongst investors.

However, ESG is also important to investors for financial reasons. Companies that ignore ESG issues tend to lose money (meaning investors do too). The Bank of America estimates that up to $600 billion has been lost to ‘ESG controversies’ in the S&P 500 since 2013 (Reuters, 2020). On the other hand, the Bank of America reports that the highest performing ESG firms are outperforming the lowest performing firms by more than 40%, become high quality stocks, are less volatile, and have higher three year returns (Eccles & Klimenko, 2019). 

ESG is thus very important: it makes sure companies are held accountable for their business, and for investors, they can put their money in a company that is profitable and that they are confident in. To that end, sustainability ratings are widely used, and there are various agencies, such as MSCI, Bloomberg, and Sustainalytics that do ESG ratings for companies. 

The Edge Markets (2021): RHB has downgraded various plantation companies amidst growing ESG concerns.

A question you might be thinking of is that if ESG ratings exist for companies, why do people still make investments in companies that get caught up in ESG controversies, like Dieselgate 2015? There is an issue with the current rating system, and a tech alternative powered by Artificial Intelligence (AI) has entered the playing field. In this series of posts, we will look at how ESG is currently being benchmarked, its limitations, and how effective the new AI-powered benchmarking is.

TRADITIONAL RATING AGENCIES

Quick Disclaimer: 

Before I continue with this post, I would like to note that various ideas noted down in this paper were primarily derived from the work of Arthur Hughes, Michael Urban, and Dariusz Wójcik from the School of Geography and the Environment at the University of Oxford (Hughes, Urban & Wójcik, 2021). My area of exploration on the topic was to compare the different approaches to ESG rating, and their paper is the first comparative study on the human-driven and AI approach to ESG benchmarking. There was one other informative paper related to ESG benchmarking (In, Rook, Monk & Rajagopal, 2019), but it was a general paper on possible alternative ESG data sources rather than a commentary analyzing how the human and AI based approaches work. In these series of posts, I have supplemented their work with some of my own research and commentary to enhance the discussion on how ESG affects investors.

What about them? How do they work?

Traditional rating agencies refer to the big players in ESG rating such as MSCI, Bloomberg, and Sustainalytics. In this post, I will be referring to them as Traditionalists. The analysis and final output benchmarking by Traditionalists is subject to the discretion of a human analyst. In terms of their modus operandi, Traditionalists identify key issues and apply weightings to them to use as criteria for a company’s ESG rating. Key issues refer to ESG-related issues that affect a company financially. Data used alongside the key issues and weightings come from corporate data, online data, and face-to-face contact (F2F) to come up with the final rating for a company. 

What's wrong with what they’re currently doing?

For starters, Traditionalists take a rather questionable approach in coming up with ratings by relying heavily on company disclosure—it is estimated that 45% of benchmarking is based on disclosures. This becomes a problem if a company chooses to be less transparent about their ESG problems. Therefore, there is a justifiable concern regarding transparency of these data sources, particularly the integrity and reliability of this data. 

There is actually a term for an extreme version of this problem known as greenwashing, where a company influences and misleads their ESG ratings, and is a major problem in the Traditionalist ESG rating system. Moreover, there is a lack of standardization in the selection of key issues and weightings: in the case of MSCI, weightings are decided for the entire year, and key issues are subject to change at the discretion of MSCI. Therefore, the methodology in determining the rating for one year may be different from another. 

So how confident can an investor be in a Traditionalist rating? To add to the organizational subjectivity, Traditionalists rely heavily on the brainpower of a select few, often leaving analysts with the tall task of examining a long list of companies—MSCI, for instance, rates about 14,000 companies with a manpower of only 185, meaning that a single research analyst handles an average of almost 80 companies (Hughes, Urban & Wójcik, 2021). 

This complication  has led to major flaws in ESG ratings. Take Boohoo, for example, a major fashion retailer in the UK. They had been rated highly and included in various ESG funds, until they got caught up in a wage scandal for underpaying workers (Chatelin, 2020). On the other hand, an environmentally conscious but small company could be given a lower rating than they deserve due to limited company disclosure (Reuters, 2020).

Source: Sustainalytics (accessed Jul 2021)

From my own data sleuthing, Traditionalists continue to have shortcomings in their reporting. Looking at Top Glove, which has been removed from three ESG indexes amidst forced labor allegations, poor labor conditions, and a poor safety protocols that led to Covid-19 infecting 25% of its workforce (The Business Times, 2021; Nikkei Asia, 2021), Top Glove still has a medium ESG risk rating of 26.1 (scoring is on a scale of 0–40, with 0 being the worst and 40 being the best) and a Level 2 (moderate) controversy level (on a scale of 1–5, 1 being low and 5 being severe) (Sustainalytics, accessed Jul 2021). From a chronological perspective, the forced labor allegations happened in March 2021, and the poor labor conditions and Covid situation in June 2021. Sustainalytics last updated their rating in April 2021.

All in all, the Traditionalist approach, although viable for the most part for investment decisions, is riddled with significant amounts of subjectivity, is not necessarily reliable or up-to-date, and possibly suffers from a lack of transparency. A quote obtained during an interview with a research analyst conducted by Hughes, Urban & Wójcik (2021) best summarizes the limitations of the Traditionalist approach:

“With MSCI scores, there’s a lot more research that goes into them than I think people give them credit for. But it is somewhat arbitrary because they cover so many companies.”

By MUHAMMED Hazim, Segi Enam intern, 16 Aug 2021 | LinkedIn

Edited by Nadirah SHARIF

PEFC Supporting Sustainable Rubber

The Programme for the Endorsement of Forest Certification (PEFC) has launched the Our Supporting Sustainable Rubber campaign in effort to ramp up sustainability standards within the rubber industry. PEFC held an online webinar to officially kickstart the campaign yesterday, in which several interesting pieces of information were revealed:

1. Problems faced by rubber smallholders are essentially: (1) price volatility; (2) low productivity; (3) unsustainable practices; and (4) compliance issues. To that end, PEFC is a key partner in an initiative with the UN-REDD Programme to develop a sustainable forest trade certification framework, with its pilot project already ongoing in the Lower Mekong region in Thailand.

2. The Global Platform for Sustainable Natural Rubber (GPSNR) is looking to create a risk-based platform that would allow certified companies to assess its sustainability standards against the standards recommended by the GPSNR. The platform was led by tire companies as an alternate (non-certification?) approach. The International Rubber Study Group (IRSG) also has a self-declaration approach to rubber sustainability.

3. There was a point made about the increasing global demand for traceability, and that it may be more beneficial to view the requirement of traceability as a tool to improve sustainability practices rather than to reveal good and/or bad practices in itself. Panellists also noted that there is also a lot of work that still needs to be done to identify pertinent sustainability issues, especially when it comes to social issues such as equality of pay.

Edit (08.07.2021, 12.50 p.m.): Edited to include last two sentences in point 2.

OFIC 2021 Virtual Conference: Day Two

Day Two of the OFIC 2021 virtual conferenced concluded yesterday, this time involving speakers with technology and consumer expertise. Again, there were several intriguing takeaways throughout the day:

1. Dr Jason Schatz of Descartes Labs Inc explained that although recent sustainability monitoring-based technology advances have been promising—e.g. there are now satellites that can see through clouds and tree canopies, as well as measure carbon footprint—mapping out supply chains in detail still remains a challenge. While there is no specific technology that can help solve the problem, Dr Schatz suspects that existing tools, such as a consumer packaged goods (CPG)-traders coalitions, blockchain, and trackers, could go a long way in addressing it.

2. According to Mr Dario Altera, the Oleochemical Head of Department of the Desmet Ballestra Group, the market is shying away from petrochemicals in favour of oleochemicals, particularly in the personal care, pharmaceutical, food, and feed sectors. Consequently, there is a need to find a balance between oil for food and oil for oleo as the market share of oleochemicals and biofuels continues to grow.

3. Dr Gary Theseira observed that Covid-19 has revealed the world’s vulnerability to climate change and other associated risks (interestingly, he mentioned that the demand for plastics has increased during the pandemic). Greater transparency from companies—in this context, palm oil companies—is increasingly demanded by the public and required for more concrete steps to materialise and address this vulnerability.

4. Ms Luanne Sie, the Head Group Sustainability and Corporate Responsibility of CIMB Group, revealed that investors are increasingly asking banks pertinent questions about deforestation and Task Force on Climate-related Financial Disclosures (TCFD). She also gave an interesting update on the regulatory front: the Climate Change and Principle-based Taxonomy, an initiative by Bank Negara which aims to assist financial institutions in determining whether their economic activities will “contribute towards climate change mitigation and adaptation.”