KUALA LUMPUR: Malaysia's top three environmental, social and corporate governance (ESG) scoring banks - Malayan Banking Bhd (Maybank), Public Bank Bhd and BIMB Holdings Bhd - have outperformed KL Finance Index by 17 per cent, 24 per cent and 170 per cent in the past three, five and 10 years respectively on average.
Hong Leong Investment Bank Bhd (HLIB) said the banks were trading well above 1.0x price to book value (P/B) and the sector means of 0.9x.
"While it is evident ESG investment can give additional alpha returns, one must still diligently incorporate traditional financial analysis into their decision-making process.
"Looking at the top three ESG-graded banks, all of them have above-average ROE (return on equity) output and P/B valuations.
"In general, valuations of banks are still mainly based on tangible assets (measurable in nature) and remain largely dependent on stock fundamentals for price discovery by employing ROE and long-term growth (LTG) with ESG acting as a supplement," it said in a note today.
HLIB said ESG investing was rapidly gaining prominence and studies had revealed conscious capitalism can help to reduce portfolio risk and churn better returns.
"Based on our analysis, Maybank posted the highest ESG grade while Alliance Bank Malaysia Bhd was bottom of the rankings.
"However, we saw improving ESG scores year-on-year for the majority of banks under our coverage," it said.
HLIB has maintained its "overweight" call on the banking sector.