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ESG can temporarily take a back seat

ONE of the biggest news stories this week was that UK supermarket chain Iceland reversed its ban on palm oil due to the sudden shortage of sunflower oil.

Interest in environmental, social and governance (ESG) issues, such as deforestation, was a key factor in the supermarket banning the product three years ago.

The palm oil plantation sector has come under increasing scrutiny over deforestation, emissions issues as well as labor rights issues over exploitative labor practices.

That said, the supermarket expressed “tremendous regret” for bringing palm oil back to its shelves, citing the disruption of Ukrainian sunflower oil exports following Russia’s invasion of Ukraine.

It is important to note that Ukraine is the world’s largest producer and exporter of sunflower oil, with a market share of 47% of world exports.

World sunflower exports from Russia amount to 29.9%.

Notably, the two countries currently in conflict account for around 60% of the world’s sunflower oil production.

With the conflict resulting in sunflower oil shortages, does this mean that food producers might put ESG concerns on the back burner due to overriding concerns about food safety and the rising cost of living?

Ivy Ng, head of research at CGS-CIMB Research, told StarBizWeek that ESG concerns may be temporarily put on the back burner due to current sunflower oil shortages.

“Unless it’s a permanent switch to palm oil, ESG would take a back seat. But to my knowledge, this is temporary due to current shortages.

“I want to clarify that the ESG concerns highlighted apply to some palm oil users, but not all,” she says.

It should be noted that Iceland’s managing director, Richard Walker, explained that the return of palm oil to the store is a “temporary measure”, noting that the company will now use palm oil sustainable.

Agribusiness veteran Mr Chandran says concerns over economic and financial sanctions imposed on Russia and its allies, coupled with the threat of biological and nuclear warfare and food security, are reshaping the debate on ESG, sustainability and climate change.

“Regarding Iceland’s recent decision to allow food products containing certified sustainable palm oil ingredients in their retail stores, this is a desperate move and a relationship blow. cynical public to protect the company’s bottom line,” he said.

That said, fund manager Danny Wong thinks growers would now increasingly manage their ESG risks with improved sustainability and that palm oil could be a good edible.

“It is important to note that with the Roundtable Sustainable Palm Oil and Malaysian Sustainable Palm Oil certifications that most plantation majors tend to have, most social and labor issues are prioritized and audited by third parties, such as Finnwatch and Tenaganita.

“When ESG risks are taken into account and the palm oil industry increasingly certifies its operations as ‘sustainable, responsible and conflict-free’, palm oil would no longer be of concern to the ESG and therefore could be the main edible oil,” he adds.

That said, Wong predicts steady annual growth in palm oil demand of 3% to 4% that will continue in the long term, driven by rising population and income.

“The tight oils and fats market is expected to gradually ease but is expected to remain tight through 2023.

“With food commodity prices on the run, crude palm oil prices should remain at an equilibrium level,” said Wong, who is the managing director of Areca Capital.

Besides palm oil, analysts point out that the UK government’s push to ensure that oil and gas (O&G) investments have certainty of supply would put pressure on the government’s ability to achieve net emissions of zero greenhouse gases by 2050.

Since the Russian-Ukrainian war has put an emphasis on oil and gas investments, the data also shows that the demand for sustainable equity funds has declined. Refinitiv, one of the world’s largest financial market data providers, revealed that ESG equity funds saw a 60% slowdown in inflows to $9.4 billion (RM39.6 billion) in February, up from $24.4 billion (RM102.7 billion) the previous month.

As such, AJ Bell Investments’ Head of Investment Analytics, Laith Khalaf, said in a report that “the Russian invasion of Ukraine has put ESG investing on the back burner, as security energy has taken center stage over carbon intensity”.

“The continued use of coal power, which was unthinkable only a few weeks ago, is now the order of the day across Europe, and rising oil and gas prices may have persuaded some ESG investors who were there for the profits, that there might still be some life left in the traditional energy sectors,” he explained.

With the recent surge in O&G investment, Wong believes O&G companies stand to benefit as investment in the sector is vital to UK energy security, in addition to accelerating the country’s energy transition.

Within the supply chain, he believes upstream exploration and production players would benefit the most due to direct exposure to the current high oil price environment.

Back in Bursa Malaysia, Wong points out that local upstream exploration and production players who have exposure to the UK stand to benefit.

“However, the local O&G service players are mostly tied to Petronas’ capital expenditures,” he adds.