A Study Finds that High ESG Performance May Lower Valuations for Palm Oil Companies

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Illustration of Palm oil plantation. Photo by: Sawit Fest 2021 / Tiara Nur Fadilah

PALMOILMAGAZINE, SINGAPORE – Environment, social, and governance (ESG) reports do not always result in higher valuations for palm oil plantation companies. A recent study by the Centre for Governance and Sustainability (CGS) at the National University of Singapore (NUS) Business School found that palm oil companies with strong ESG performance were often valued less than their peers.

In a press release on Thursday (June 6, 2024), NUS noted that this trend appears to be unique to the palm oil industry. These companies face challenges in meeting shareholders’ demands to prioritize ESG assessments, which differs from other sectors where detailed sustainability reports typically lead to higher valuations by investors and stakeholders.

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The study, titled “Innovating ESG Integration as Sustainable Strategy: ESG Transparency and Firm Valuation in the Palm Oil Sector,” was published in the 22nd edition of the Sustainability Journal, volume 15, an open-access journal managed by the Multidisciplinary Digital Publishing Institute (MDPI).

Also Read: Palm Oil ESG: A Key Contributor to Achieving Sustainable Development Goals (SDGs)

The report analyzed financial data from 36 publicly traded palm oil companies, ranking them based on the transparency of their sustainability policies across 182 indicators in 10 categories. The scores were derived from the companies’ ESG disclosure transparency.

The study’s results showed a negative correlation between valuations and ESG scores in the palm oil sector, indicating that companies with high ESG transparency were valued less compared to those with poorer ESG performance.

The writer assumed that this might happen for the close connection of this sector with high ESG risks that erased the investors’ trust and escalate financial risks perception.

Director CGS, Professor Lawrence Loh said that every party should do much more to show that sustainability and profitability do not stand alone. “This needs collaboration among the government, palm oil companies, and especially the investors to encourage the changes heading to more sustainable practices,” he said, as Palmoilmagazine.com quoted from Business Times.

To encourage ESG implementation as the metric, the companies should do efforts massively to communicate and educate other stakeholders about their ESG and solve every worry to come.

“By doing it, they should also show their commitment on sustainability, escalate the reputation in this sector, and recover the investors’ trust,” Professor Lawrence said.

The governments from palm oil producer and consumer countries should reinforce the acts and policy to deliver incentives for the companies to get innovation and implement sustainable practices.

NUS noted most (31 of 36) palm oil companies involved in the study operated in Malaysia and Indonesia as the main palm oil producers. Having investment in technology to help the companies to escalate their ESG report, particularly for small companies that may be lack of natural resource, would also encourage the investors’ positive perception to sustainability initiative. (T2)

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