Potential increase in sustainable investments

PETALING JAYA: Climate change may result in a potential acceleration of supply and demand for sustainable investments after global sustainable funds attracted some US$13.7bil inflows in the third quarter of the year.

“Physical climate risks and sustainability gaps may become more apparent, spurring sustainable investments amid rising temperatures in 2024,” Affin Hwang Investment Bank Research said in its 2024 strategy report.

It added that although the inflows into global sustainable funds declined quarter-on-quarter (q-o-q) and year-on-year (y-o-y), the fall was lower compared with the broader fund market, which experienced outflows.

“This suggests relatively stickier investor demand for sustainable funds, boding well for the long run,” Affin Hwang Investment Bank Research said in its 2024 strategy report.

The research house pointed out that global sustainable fund flows were close to 40% weaker q-o-q and y-o-y in 3Q23, on the back of global macroeconomic pressures and volatility in the broader fund universe.

It added there was also the impact from more caution being taken in the development of new sustainable strategies due to greenwashing accusations and the uncertainties in the regulatory environment.

On the local front, Affin Hwang expects increased focus on mandatory sustainability-related disclosures, scrutiny into added granularity and comparability as well as enhanced investor and corporate consideration of a broader range of environmental, social and governance (ESG) issues.

It highlighted there will be additional ESG disclosures related provisions come into effect next year.

The emphasis of integrating renewable energy by the construction sector has led Affin Hwang to have an “overweight” call on the sector, which it sees as being on the brink of a sustainable evolution.

“We remain ‘overweight’ on the construction sector, given the improved prospects to expand order books as government infrastructure spending and domestic industrial property development accelerate in 2024,” it added.

In particular, it said Samaiden Group Bhd is poised to reap the benefits of the government’s energy transition strategy through the National Energy Transition Roadmap, which entailed the development of new renewable energy (RE) resources to meet the 2025 and 2035 goals.

“Entities such as engineering, procurement, construction and commissioning project contractors, solar farm owners/operators, and transmission as well as distribution asset owners find themselves strategically positioned,” it added.

The research house, which has a “buy” call on Samaiden with a target price (TP) of RM1.52 a share, said the counter is attractive as it is poised to reap the benefits of the government’s commitment to enhancing green power generation in Malaysia and participate in bids for RE projects under the Corporate Green Power Programme.

AffinHwang also has a “buy” call on Tenaga Nasional Bhd with a TP of RM10.90 a share as the power utility assumes a pivotal role in driving the NETR and in supporting government initiatives to expedite Malaysia’s energy transition plan especially when it comes to the electricity grid.

“Ample favourable opportunities are present due to its strategic position for substantial investment in domestic RE and green projects, as well as overseas initiatives, to contribute to an expanded renewable portfolio and an improvement in its ESG rating,” the research house said.

As for the plantation sector, Affin Hwang said there was heightened pressure to strive for sustainable cultivation practices, especially as global stakeholders and policymakers, including the European Union, intensify scrutiny of the sector.

“We believe a continuation of, or escalation in, the Ukraine-Russia war is a disruption risk to the global exports of vegetable oils, and will keep prices volatile and high, in addition to the warming global temperatures that are likely to disrupt crop production yields,” it added.

The research house’s top pick for the plantation sector is Kuala Lumpur Kepong Bhd (KLK) with a TP of RM25.20 a share as it expects higher earnings going into FY24.

“Given its good track record, decent valuation and expansionary mode, KLK remains a top market and sector ‘buy’ among the large caps. For a small-cap exposure, our preference is Jaya Tiasa (TP: RM1.18) for its undemanding valuation,” it added.

“We remain ‘overweight’ on the construction sector, given the improved prospects to expand order books as government infrastructure spending and domestic industrial property development accelerate in 2024.”Affin Hwang Investment Bank Research