Asian national oil companies Petronas of Malaysia and Indonesia counterpart Pertamina are on a watchlist for removal from JP Morgan’s Environmental, Social & Governance (ESG) Emerging Market Bond Index at the end of June.

The US bank said both state-owned players "are expected to exit the ESG suite at the June month-end rebalance" as their scores fell below the required threshold for inclusion.

The bank uses third party companies to assess the ESG score required for inclusion in the index. Sustainalytics, one of these companies, said some of Petronas’ or its affiliates' activities in "high-risk regions" could be viewed as a violation of a United Nations arms embargo, reported Reuters, citing the bank's statement.

Petronas’ score also reportedly relates to "ongoing exposure to multiple incidents related to human rights" and "the ongoing political situation in Myanmar", where the military seized power in a 1 February coup resulting in a bloody breakdown in the nation’s road to democracy.

"Regrettable" decision

Petronas said its exclusion from the ESG EMBI and the ESG Asia Credit Index is not a true representation of its continuing commitment to its sustainable and responsible investing in line with environmental, social and good governance practices, with the national oil and gas company calling JP Morgan’s decision "regrettable".

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“As a business entity, Petronas adheres to prudent corporate governance and strict business practices in accordance with all applicable laws, rules and regulations wherever it operates,” the Kuala Lumpur-based player said.

The Malaysian national oil company added it remains firmly committed to respecting internationally recognised human rights — a commitment that is “closely aligned with the United Nations Guiding Principles on Business and Human Rights”.

“We are also determined to progress its sustainability journey, which forms the core essence of our Statement of Purpose, a progressive energy and solutions partner enriching lives for a sustainable future,” said Petronas.

Refinery fires

Meanwhile, Pertamina’s declining score is due to part to the recent fire at its Cilacap refinery in West Java that forced the evacuation of almost 1000 people living nearby.

This was the second major fire at one of the company’s oil refineries this year following the March blaze at the Balongan facility, also in West Java province.

Pertamina’s score was blighted too by the ongoing negotiations with the Indonesian government relating to a settlement for historic oil spill incidents.

"We value analysis from financial institutions that are carried out based on reliable data and information," a Pertamina spokeswoman told Reuters.

"In February 2021, the global bonds issued by Pertamina were oversubscribed by up to 2.5 times, showing market interest and high levels of trust in the company," she said.

Pertamina could not be contacted for independent comment at the time of publication.

JP Morgan’s ESG EMBI tracks liquid dollar emerging market fixed and floating-rate debt instruments issued by sovereign and quasi-sovereign entities, explained