In our ESG review for Bursa Malaysia, based on its 2023 Sustainability Report, we find that Bursa demonstrates a strong commitment to fostering ESG practices among listed companies, facilitating sustainable reporting, and promoting accountability through initiatives such as the Bursa Malaysia ESG Reporting Platform and the Centralised Sustainability Intelligence Platform. Efforts like the Mandatory Sustainability Onboarding Program for directors and collaborative initiatives like #financing4ESG MoU have yielded positive results, fostered sustainable financing opportunities and improved ESG credentials of the PLCs. Internally, Bursa is actively reducing its emissions and transitioning to renewable energy sources, with a clear trajectory outlined towards net-zero emissions by 2050, that has been validated and approved by SBTi. Employee engagement in sustainability practices is encouraged through various initiatives, contributing to YoY reductions in waste and water consumption.

On the social front, Bursa demonstrates a strong commitment to employee welfare, guided by its DEI Policy, resulting in a well-balanced workforce in terms of ethnicity and gender. While it actively promotes gender equality and fosters an open work culture through transparent communication channels and employee engagement initiatives, there is room for improvement in areas such as female representation in leadership roles and closing the gender pay gap. Additionally, Bursa's commitment to financial inclusion is evident through initiatives like the LEAP Market Transfer Framework and the expansion of the BSAS platform, providing opportunities for growth to small and mid-sized companies. Furthermore, its dedication to corporate social responsibility is demonstrated through events like the Bursa Bull Charge 2023 and various CSR initiatives, underscoring its commitment to supporting communities and contributing to societal well-being.

In terms of Governance, Bursa demonstrates robust governance practices, including adherence to various international reporting guidelines and frameworks. Notable initiatives include educating stakeholders on sustainable finance, promoting transparent and efficient capital markets, and managing conflicts of interest and technology risks effectively. Bursa's leadership structure ensures strategic alignment and implementation of sustainability goals, though the absence of KPIs tied to sustainability targets within the management team may limit systematic progress tracking. While showing positive financial indicators like improved ROE and net profit growth, challenges like decreased ADV and market volatility persist.

Environment (E: ★★★★)

We give Bursa an E score of 4-stars. Bursa Malaysia's environmental efforts reflect a proactive stance towards sustainability, evident through its commitment to fostering ESG practices among the public listed companies (PLCs). As a regulatory authority, we find that Bursa demonstrates a dedication in steering PLCs towards more sustainable operations through initiatives aimed at enhancing sustainable reporting, which would then promote accountability in the PLCs sustainability practices. In addition to providing tools and guidance, Bursa actively engages with PLCs through educational workshops and webinars focused on ESG topics.

We believe that the launch of the Bursa Malaysia ESG Reporting Platform serves as a pivotal step towards standardising sustainability disclosures, facilitating data collection, and promoting transparency in reporting. The introduction of the Centralised Sustainability Intelligence (CSI) Platform would further enhance Bursa's sustainability efforts by enabling stakeholders to evaluate environmental impacts and share standardised ESG data. In addition to supporting carbon footprint reduction, this platform can foster collaboration and innovation in sustainability initiatives among PLCs. Although the process of gathering data and reporting sustainability is complex, we think that Bursa's encouragement is essential for openness and advancement in accelerating the nation's decarbonisation efforts.

Next, we believe the development of more comprehensive and consistent ESG data would accelerate demand and also help improve the trading on Bursa’s newly launched The Bursa Carbon Exchange (BCX). Through BCX, PLCs have access to a platform for trading carbon credits, thereby potentially incentivising investments in carbon reduction and reforestation projects. Collaborations with organisations like Gold Standard, Sarawak Energy, Hydropower Sustainability Alliance and I-REC Standard Foundation expand the range of highquality carbon credits to be made available, in the near future.

The successful inaugural carbon credit auction conducted by BCX underscores its effectiveness in facilitating price discovery and promoting the adoption of carbon mitigation strategies among corporates. However, we believe that efforts to broaden participation beyond larger corporations will be essential for maximising the platform's impact on carbon emissions reduction.

Internally, Bursa has been proactively implementing measures to reduce its own emissions and transition towards renewable energy sources. Efforts to reduce Greenhouse Gas (GHG) emissions, within the organisation include optimising equipment and improving awareness among staff, which had resulted in a 12% reduction of the energy consumption in 2023. Initiatives such as installing rooftop solar panels and the use of Renewable Energy Certificates (RECs) also demonstrate a commitment to reducing Scope 2 emissions. However, we note of some challenges in 2023, particularly in addressing the spike in Scope 1 emissions attributed to the expansion of Bursa’s reporting boundaries, and some fugitive emissions being released due to an unforeseen building incident. The leakage of the chiller has been repaired and a new replacement chiller will be commissioned in 3Q 2024.

Meanwhile, a clear trajectory has been outlined for Bursa's journey towards net zero emissions, aiming to reduce GHG emissions by at least 50% and 100% from the 2022 baseline by 2030 and 2050 respectively. While Bursa's roadmap demonstrates a steadfast commitment to sustainability, evidenced by efforts to diversify the energy mix, transition fleet vehicles, and establish science-based targets to mitigate environmental impact, with Scope 3 baselining only being recently completed in November 2023, we understand that Bursa is in the process of further analysing the results and determining plans to reduce emissions. However, for now, Bursa noted that that both the near-term and net zero targets have been validated and approved by the Science-based Target Initiative (SBTi).

Elsewhere, we note that Bursa encourages its employees to embrace sustainable practices both professionally and personally through initiatives like the Bursa Malaysia Waste Disposal and Recycling Guide and the Personal Net Zero GHG Emissions Guide. These initiatives aim to inspire and facilitate individual efforts to reduce GHG emissions. Overall, we observe YoY reduction in general waste sent to landfills and water consumption. Additionally, Bursa has installed a food composting machine at its premises to process cafeteria food waste. The resulting compost is donated to community gardens primarily in the Klang Valley region and occasionally to gardens in other states across the country.

Social (S: ★★★★)

We recognise Bursa for its robust social efforts, scoring it 4-stars. The company places a strong emphasis on employee welfare. It is guided by its Diversity, Equity, and Inclusion (DEI) Policy, and as such boasts a well-balanced workforce in terms of ethnicity and gender, with women comprising 47% of its employees. While Bursa is committed to gender equality and is a signatory to the Women’s Empowerment Principles (WEPs), we believe that there is room for improvement in areas such as increasing female representation in leadership roles and closing the gender pay disparity. Despite this, Bursa has been acknowledged as Asia’s Leading Exchange in Gender Equality in Corporate Leadership Asia 2023 Report by the United Nations Sustainable Stock Exchange (SSE) and the International Finance Corporation.

Bursa fosters an open work culture, encouraging transparent communication and empowering employees to contribute ideas and concerns via townhalls, pulse or random surveys and employee engagement surveys. Noteworthy events like Appreciation Day provide opportunities for employees to interact directly with senior management, discussing Bursa Malaysia’s strategic direction and long-term vision. Additionally, informal gatherings like Coffee & Donuts sessions and Kopi & Cekodok Sessions foster engagement between employees, the CEO, and respective Heads of divisions. New recruits benefit from the Hello Buddy program, which assists them in assimilating with the company culture and workplace environment. Through these initiatives, Bursa reinforces its commitment to creating a supportive and inclusive work environment where employees feel valued and connected to the organisation's mission.

In 2023, Bursa Malaysia demonstrated a heightened commitment to engaging its suppliers through initiatives such as Supplier Engagement Day, while also bolstering its supply chain management through various training and upskilling programs. Upholding transparency and integrity, vendors are required to partake in the tender process and submit a Vendor Declaration Form, ensuring compliance with Bursa Malaysia policies and mitigating corruption risks. To foster a sustainable and ethical supply chain, vendors must be registered and adhere to the Vendor Code of Conduct, which includes criteria like financial stability and a sound financial performance history. These stringent checks are vital in ensuring vendors maintain financial integrity and uphold anti-corruption standards. In 2023, Bursa experienced a decline in its dependence on local suppliers from 94% in 2022 to 78% in 2023. By elevating the quality of its local vendors and increase increasing procurement spending domestically, we believe Bursa could curb some of its Scope 3 GHG emissions.

Bursa is actively promoting financial inclusion through several key initiatives.

#financing4ESG, a collaborative effort between Bursa Malaysia, Alliance Bank, and OCBC Bank have yielded positive results. Launched in November 2021, Bursa noted that the initiative has facilitated over RM6bn in sustainable financing opportunities, via sustainability-linked loans and bonds, have helped PLCs to improve their ESG credentials. It is noteworthy, that as at 14 December 2023, the number of constituents in FTSE4Good Bursa Malaysia Index and the FTSE4Good Bursa Malaysia Shariah Index rose to 109 and 88, respectively, from 98 and 79, in 2022, respectively. The average FTSE4Good ESG scores of PLCs assessed have also improved from 1.31 in 2014 to 2.84 in 2023.

Additionally, the LEAP Market Transfer Framework, which commenced on April 1, 2023, enables eligible LEAP Market PLCs to transition to the ACE Market, providing them with enhanced opportunities for growth and expansion. In other areas, Bursa's expansion of the BSAS (Bursa Suq Al-Sila') platform plays a vital role in offering Islamic microfinance facilities to local communities via various Non-Bank Financial Institutions (NBFIs), including Islamic micro-financing companies, cooperative societies, and ArRahnu/Islamic pawnbroking entities. Furthermore, Bursa has recently partnered with RAM Holdings Bhd to establish the BR Capital debt fundraising platform. This platform is designed to benefit small to mid-sized companies by providing them with an alternative avenue to raise funds by issuing credit-rated investment notes.

Finally, Bursa's commitment to corporate social responsibility is exemplified through its annual charity run, the Bursa Bull Charge 2023. This event saw participation from over 11,000 runners and raised an impressive sum of over RM15mn. These funds were allocated to support more than 150 beneficiaries, including communities such as the Orang Asli, women (including single mothers), children, and persons with disabilities. In addition to the Bursa Bull Charge, the company engages in various other CSR initiatives. These include donations and sponsorships of activities and programs focused on environmental protection, financial literacy, and poverty alleviation. Bursa also extends support through scholarships for the underprivileged. Bursa's foundation, Yayasan Bursa Malaysia, contributed approximately RM2.5mn in 2023, equivalent to around 1% of its net profit.

Governance (G: ★★★★)

We give Bursa Malaysia a commendable G score of 4 stars, to reflect its robust governance practices. One notable strength is its adherence to various international reporting guidelines, principles, frameworks, and standards, which ensures comprehensive and transparent reporting of sustainability efforts. The alignment with global goals, including the UN SDGs and UNGC principles, along with adherence to frameworks such as the Malaysian Code on Corporate Governance (MCCG), Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), World Federation of Exchanges (WFE), and Task Force on Climate-Related Financial Disclosures (TCFD), underscores Bursa's commitment to accountability and transparency.

As a regulator, we note that Bursa is actively progressing towards meeting the WFE Sustainability Principles, particularly in educating participants and engaging stakeholders to advance the sustainable finance agenda. Initiatives like capacitybuilding sessions for SRI products and awareness programs for various industry stakeholders such as business communities, and state and federal government bodies to deepen the knowledge in the newly introduced Voluntary Carbon Market (VCM), demonstrate Bursa's dedication to fostering a vibrant, sustainable finance ecosystem.

Furthermore, Bursa's adherence to SASB - Security & Commodity Exchange standards in promoting transparent and efficient capital markets is noteworthy. The reduction in trading halts and algorithmic trading volume, coupled with the absence of stock suspensions due to erratic trading, reflects efforts to enhance market efficiency and stability, thereby instilling investor confidence. In more detail, Bursa reported that there were 70 trading halts in 2023 with 62 of it relating to public release of information. This is an improvement from 101 halts in 2022. The average duration of the halts was for 1 hour. Bursa also noted that there was no suspension of stock due to erratic trading. Meanwhile, algorithmic trading, which constituted 7.1% of traded volume in 2022, has fallen to 5.5% of traded volume in 2023.

Bursa’s healthy G score also exhibits the regulator’s adeptness in managing conflicts of interest and technology risks, evident from the absence of monetary losses from legal proceedings and minimal cybersecurity incidents throughout 2022 and 2023. Despite experiencing a significant market disruption in April 2023, attributed to a power interruption, where BSAS was inaccessible for 3 hours and 20 mins, Bursa's transparent communication mitigated potential impacts on market integrity and investor confidence.

In enhancing the availability of investor-relevant and decision-useful ESG information, Bursa consistently updates its ESG-related listing requirements and guides to align with international standards. Initiatives like the enhancing the Sustainability Reporting Framework (SRF) in 2022 to further elevate the sustainability practices and disclosures of PLCs, now includes a common set of prescribed sustainability matters and indicators. Additionally, Main Market issuers are now required to make climate change-related disclosures. In 2023, Bursa further introduced the Illustrative Sustainability Reporting Guide (ISR) and A Sustainability Reporting Guide and Toolkits (3rd Edition) to aid listed companies in independent reporting and embed sustainability in their organisations, thus reducing reliance on external consultants.

The identification of 14 material matters, obtained from the receipt of 579 responses in 2023 survey, are mapped into five priority areas namely, 1) Strengthening its core, 2) Driving growth, 3) Protecting the environment, 4) Empowering the workforce and 5) Advancing communities, underscores Bursa's commitment to stakeholder engagement, support a vibrant and sustainable market, reduce the environmental footprint and promote inclusivity. However, there's room for improvement in reporting double materiality matters to provide a more comprehensive view of sustainability risks and opportunities, and thus create a more long-term value for its shareholders and society.

Bursa's engagement with independent verifiers like BSI Services Malaysia Sdn Bhd enhances the credibility of its reporting. Recognition in indices such as FTSE4Good Bursa Malaysia (F4GBM) and Bloomberg Gender-Equality Index (GEI) underscores its ethical governance practices and commitment to gender equality.

Operationally, Bursa adopts a top-down leadership approach, with a Sustainability Development Committee (SDC) at the board level overseeing sustainability initiatives. Supported by the Management Committee (MC), this structure ensures strategic alignment and implementation of sustainability goals. Additionally, the Risk Management Committee (RMC) at the board level plays a crucial role in enhancing vigilance against potential threats, including sustainability risks. The RMC oversees the Integrity Unit within Risk & Compliance, tasked with implementing core functions mandated by the Malaysian Anti-Corruption Commission (MACC), thus ensuring governance,

integrity enhancement, detection, verification, and complaints management are effectively managed.

However, while Bursa demonstrates effective operational structures, the absence of key performance indicators (KPIs) tied to sustainability targets within the management team is noted. We believe this oversight may limits the ability to systematically measure and track progress towards sustainability goals, potentially hindering the effectiveness of sustainability initiatives. Incorporating KPIs related to sustainability would enhance accountability and ensure that sustainability considerations are integrated into strategic decisionmaking processes.

In analysing the effectiveness of Bursa's management team, positive indicators such as an improved return on equity (ROE) to 31% in FY23, net profit growth of 11.4% and healthy dividend payouts in excess of 90% to shareholders are observed. Funds raised via new listings had also risen to RM13.6bn in FY23 vs RM11.2bn last year. However, amid challenges such as a weak macro backdrop, the bourse continues to suffer from a decrease in average daily trading value (ADV) of 0.6% YoY in 2023. Meanwhile, the retail and foreign investor’s participation were of little change at 28% and 29%. Overall market volatility also remained lacklustre at 29% vs the 10-year average of 35%. Initiatives like Bursa RISE show promise in promoting under-researched stocks, as the average velocity of the 60 participating PLC was 10.1% higher than the overall market velocity by the end of 2023. Nevertheless, we believe that further data on the effectiveness of various initiatives and capacity-building efforts are needed to provide a comprehensive assessment of Bursa's management capabilities and their contribution to achieving sustainable growth.

Earnings Impact

In 2023, Bursa purchased 3,668 carbon credits for RM223.3k. Excluding the spike in fugitive Scope 1 emissions last year, along with ongoing efforts to improve energy efficiency and further reduce Scope 1 and 2 emissions, we foresee the net carbon credits to be offset to be little changed from last year due to further expansion of Bursa’s reporting boundaries, now to also include a more extensive Scope 3 GHG emissions. With that, we foresee the need for Bursa to procure additional carbon credits to sustain its carbon neutral status in FY24 and FY25. Management noted that Bursa will continue offsetting its GHG emissions with carbon credits and the utilisation of Renewable Energy Credits.

With the purchase of carbon offsets comprising approximately 7-8% of total operating expenses, we are retaining our projected earnings FY24/25/26 at RM272.4/291.5/308.4mn, respectively. Overall, Bursa is guiding for a stronger PBT, estimated between RM293mn and RM323mn, partly supported by a nontrading revenue growth rate of 5-7% YoY. Capital market activities should improve on the back of ongoing initiatives to attract trading and IPOs/products to strengthen market vibrancy.

Valuation and Recommendation

We maintain Bursa's target price (TP) at RM8.20. Our TP is based on an implied FY24 PER of around 24.4x. We reiterate our BUY recommendation on Bursa. We note that Bursa is trading within the regional peers PER range 20x to 26x (SGX: 20x, HKEx: 23x, ASX: 26x).

Other key upside risks to our TP include 1) a compression in risk premiums, 2) a pick-up in velocity, 3) a stronger-than-expected improvement in the derivatives market, 4) further improvement in retail sentiments, and 5) the ability to sustain foreign inflows.

Source: TA Research - 4 Apr 2024