Citing poor sustainability record, JPMorgan to remove Petronas from ESG Index

Petronas has been put on a watchlist for removal from JPMorgan’s ESG EMBI index, the bank said yesterday.

JPMorgan said Malaysia’s Petronas as well as Indonesia’s Pertamina are expected to exit the bank’s JESG suite at the June’s month-end rebalance, as their sustainability (environment and ethics) scores have dropped below the bank’s minimum requirements.

Just as carbon footprint is now something that automotive industry has to be mindful, the investors’ community is also shifting towards what’s called ESG (environmental, social and governance) compliant investments.

Many investment banks now offer so-called ESG-compliant products, and JPMorgan has a wide range of it. The ESG EMBI is just one of the bank’s many ESG Index Suite (JESG).

JESG scores are given by 2 third parties appointed by the bank, Sustainalytics and RepRisk. The general idea is that companies that investors put their money in have to conduct their businesses in a manner that is in-line with the United Nations Sustainable Development Goals (SDG).

Coal, tobacco and weapons manufacturing companies for example, are automatically disqualified from ESG indexes.

On Petronas’ impending removal, JPMorgan said some of Petronas’ or its affiliates' activities in "high-risk regions" may be viewed as a violation of a United Nations arms embargo. It also added that "ongoing exposure to multiple incidents related to human rights" and "the ongoing political situation in Myanmar," as among the reasons for Petronas’ declining scores.

Earlier this month, the former president and CEO of Petronas Tan Sri Wan Zulkiflee Wan Ariffin was removed from ExxonMobil’s board, less than four months after his appointment.

ExxonMobil was caught in a difficult position after ESG-focused hedge fund Engine No.1 won 3 seats at the American oil company’s board. The little known hedge fund surprised board members by successfully rallying shareholders, attacking ExxonMobil’s slow efforts to address concerns on climate change.

Engine No.1 convinced investors that failure to adapt to climate change is a financial risk, and on that basis, ExxonMobil represented a risky investment, and the newly appointed ex-Petronas boss had little experience to offer in addressing this new challenge, and voted him out.