Sustainable Investment in China | China’s Investor Activism: The Role of Minority Investors

Investor activism usually isn't the first word that springs to mind when talking about ESG and China, but in many ways it’s precisely what has caused an explosion of ESG disclosure in China in the past two to three years. As the largest investor in many state-owned Chinese companies, the Chinese government has been a very active investor over the last several years. In 2008, for example, the State Assets Supervision and Administration Commission of the State Council (SASAC), a government body that acts on behalf of the government and is the majority investor in China’s largest state-owned businesses, requested that all Central State-owned Enterprises in China have strategies in place to manage ESG issues—and corporate responsibility reports to disclose progress.

What does this mean for other investors in Chinese companies? With the government often the majority investor, other investors are thus minority investors and may struggle to identify what role they should, or can, play as active investors to encourage better ESG practices. BSR recommends that minority investors do the following:

• Focus on Material ESG Issues and Help Identify Risks and Opportunities. In the rush to capitalize on China’s market opportunities, some companies are failing to step back and ensure that they have fully identified current material risks and opportunities. Current ESG implementation and awareness in the Chinese business community is broad but shallow. Investors need to encourage companies to look two to five years down the line at future ESG risks and opportunities that might affect them.
• Use an ESG Lens as a Proxy for Management Quality. The case of China’s worst mining waste spill in the last two years, at a Zijin-owned copper mine, should serve as a wake-up call to investors. Zijin clearly had not invested enough attention or resources toward mitigating and managing its environmental impacts, but, even more importantly, Zijin was quick to attempt to bribe journalists and government officials to cover up its mistakes. Zijin’s shortcuts and response to the crisis say a lot about the quality of the company’s management. Investors should engage with companies to understand and influence management’s approach to identifying and mitigating risk, and to handling crises when they do occur.
• Encourage Active Stakeholder Engagement. Companies need to engage with a broad variety of stakeholders to understand trends in regulation and ESG issues that may affect their business. Minority investors, particularly international investors, can play an important role, providing updates on global trends, sharing global best practices as well as helping companies identify other important stakeholders to engage with. Investors should not only encourage such engagement, but also make specific introductions if possible and where helpful.
• Engage with the Government and Other Majority Investors. Minority investors can engage with the majority investors, in particular SASAC, as well as with other minority investors to create a more effective lever to influence companies. The PRI’s Clearinghouse is one channel for investors to collaborate while the Carbon Disclosure Project is another option for investors to work together to engage companies.

Investors should neglect neither their fiduciary responsibility nor their opportunity to add (and generate) value in their investments. In BSR’s work with investors in China, we have found that steps such as these can have a substantial influence on companies and that, if they engage effectively, minority investors can—and should—play an important role in China.