Managing carbon risk with the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select indices

The world is on a “fast track to climate catastrophe”, UN Secretary-General António Guterres warned in April. On the current trajectory, global warming is expected to exceed the 1.5°C limit set by the Paris Agreement and lead to serious impacts on the environment and livelihoods.

To avoid this future, global greenhouse gas (GHG) emissions will need to peak before 2025 at the latest, according to estimates by the Intergovernmental Panel on Climate Change.

This pressure has led investors, financial institutions and other stakeholders to scrutinize the carbon profile of companies, beyond their environmental, social and governance (ESG) objectives. Companies must act and reduce their carbon emissions or risk losing key customers and markets.

This movement gained momentum last year at COP26, where countries including Malaysia pledged to achieve net zero GHG emissions within the next few decades. Another catalyst is the Net Zero Asset Managers initiative, where an international group of asset managers have pledged to support the goal of net zero emissions by 2050 or earlier. In May, it represented US$61.3 trillion in assets under management worldwide.

All of this translates into a need for companies to pay close attention to their carbon emissions and for investors to analyze the carbon footprint of their portfolio companies.

Responding to the call to better respond to this increased interest and focus on the climate agenda, Bursa Malaysia, together with its index partner FTSE Russell, has launched the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Index ( FBM100LC) and the FTSE Bursa Malaysia Top 100 ESG Low Carbon Select Shariah Index (FBM100LS) on August 29.

The indices track companies in the FBM Top 100 Index that have recognized sustainability practices and low carbon characteristics. It excludes companies operating in controversial sectors such as armaments, thermal coal, tobacco, nuclear power generation, gambling, adult entertainment and those involved in controversies as defined by the principles of the United Nations Global Compact.

Domestic and international investors who want to manage their exposure to ESG and climate risks should use these indices as they include targeted reductions in carbon reserves and emissions as well as improved ESG performance. Investors who want to create funds and exchange-traded products can use these indices as a benchmark.

How are the indices different from the FTSE4Good index?

The FTSE4Good Bursa Malaysia Index uses FTSE Russell’s market-leading and best-in-class ESG screening methodology to select constituents based on ESG scores within a certain threshold. On the other hand, the ESG Low Carbon Select indices are based on the FTSE Bursa Malaysia Top 100 Index. Companies are not excluded from the indices, but a transparent tilting methodology is applied to overweight or underweight the stocks of the index.

The tilt of the indices is designed to achieve predetermined targets relative to the parent benchmarks, which are the FTSE Bursa Malaysia Top 100 Index and the FTSE Bursa Malaysia Top 100 Shariah Index. The targets are a 20% improvement in ESG performance, as determined by the FTSE Russell ESG score; a 30% reduction in operational carbon emissions intensity; and a 30% reduction in the intensity of fossil fuel reserves (coal, oil and gas).

Based on five-year performance data, the FBM100LC and FBM100LS outperformed their benchmarks by 5% and 6% respectively. This translates to an annualized return of 1.98% and 0.2% for the FBM100LC and FBM100LS respectively.

This means that using Low Carbon indices as an investment tool not only allows investors to effectively manage the carbon intensity and ESG performance of their portfolios, but also potentially offers them better returns. Since the constituents are from companies with larger market capitalizations, institutional investors can easily adopt these indices for their passive strategies.

Index factsheets and rules of thumb can be found on the FTSE Russell FBM Index Series webpage (www.ftserussell.com/products/indices/bursa-malaysia), from which details of the top 10 constituents of the index can be obtained. The Bursa Data Business-Index & Sustainable Business team can be contacted at [email protected].