Sustainable Investment in China | Companies and Investors on ESG Engagement in China

Although investors are exercising increasingly active ownership over their global investments, there remains little public information on engagement practices between investors and companies in China. To help make progress on this issue, BSR recently completed research on investors’ and companies’ views on ESG engagement in the country.

Generally, the research found that ESG engagement in China is challenging for investors because investors find it difficult to reach the right people within companies to hear meaningful responses to their questions on matters related to the company’s sustainability strategy or performance. For example, investors often find that calls to corporate investor relations departments are never answered. Investors that do get through often face questions about why they’re asking ESG-related questions in the first place, since companies are not used to such inquiries. And if companies do respond, they tend to do so with a simple: “We comply with the requirements of the law.” Furthermore, companies—and particularly smaller ones that are not state-owned enterprises or market leaders—still confuse ESG performance with charitable giving.

For investors who engage directly with companies, governance issues are the easiest to discuss. In particular, the topic of related-party transactions (such as when company chairmen own other businesses for which resources may be siphoned off) is the most common issue of discussion due to its importance to the investor community and high prevalence. Environmental issues are the second most commonly discussed topics, most likely due to the government’s influence, since companies report that investors often ask about how they’re aligned with national environmental policies. Lastly, investors find it most difficult to engage with companies on social issues, and they identified human rights, land acquisition and resettlement, redundancies, equal employment opportunities, labor standards, and working hours as the issues that need the most improvement.  

Challenges to Engagement

Why is it so difficult for investors to engage with companies in China? Here we provide eight major challenges to ESG engagement in the country:

1.     Market Constraints: Chinese companies often argue that ESG improvements add extra costs, and they cannot afford the extra costs because their competitors are not making similar investments.

2.     Lack of ESG awareness: Some companies only communicate to investors on ESG issues once a year. Other companies find that ESG issues are rarely discussed during meetings led by investors.

3.     Lack of market incentives: Without a price premium for good ESG performance, companies find it hard to invest in ESG programs/improvements.

4.     Lack of disclosure: Both companies and investors agree that more disclosure of sustainability information—both positive and negative—is necessary.

5.     Difficulty measuring engagement success: As with all markets, it can be difficult for investors to measure the success of their engagement with companies and particularly difficult to attribute success to an individual investor’s efforts.

6.     Unsupportive external environment: Investors would like the media to play a larger role as watchdogs. They also want government agencies to clearly define the responsibilities and penalties for a company that fails to comply with regulations or when a disaster occurs.

7.     Weak shareholder rights: Investors want greater dialogue on the role of minority shareholders when there is significant government ownership in a given company.

8.     Easier to engage in other countries: International investors find it easier to engage in other countries that are smaller, where they have greater access to management, and where there is a greater level of disclosure.

Overcoming the Challenges

1.     Start with the top.

While investors usually contact investor relations departments first, most agree that Chairmen, CFOs, and CEOs are the best points of contact for effective ESG engagement. ESG-related changes can only be implemented with top-down support.

2.     Build strong relationships with in-person meetings.

Investors must understand companies’ business strategies and demonstrate this understanding to investees. For environmental engagement, it is crucial to know a company’s full value chain.

3.     Focus efforts on companies with the most significant issues.

One approach could be to focus efforts on companies that do not adequately report their performance. Another approach could be to use an annual monitoring-report and risk-categorization system (by industry) to determine the frequency of in-person meetings.

4.     Enhance effectiveness by ramping up engagement during voting season.

Focus your engagements during voting season, or when annual general meetings are held, since companies are most receptive to investor advances during this time.

5.     Tailor your engagement and focus on companies that are willing to listen

Investors stressed the need to tailor the engagement approach to China’s environment, where companies may have a weaker understanding—or lower prioritization—of sustainability. One way to do this is by educating companies on why investors care about certain ESG issues, and how an issue may have material impacts on the company.

6.     Explain the business case (risks and opportunities) for ESG risk management.

Define the consequences of poor management of ESG issues in clear profit-and-loss terms. For example, CNOOC’s share price was initially unaffected by the Bohai oil spill. However, when the government announced a suspension in production, CNOOC’s share price dropped 8.9 percent because investors could easily calculate that 4 percent of production (and profits) had been suspended.

7.     Recognize good performance.

Praise companies when they improve on certain issues, and inform them of their performance relative to their industry peers.

ESG engagement in China is still in its primary stages in China and faces a myriad of challenges. However, our research revealed several case studies that show the positive effects of ESG engagement on a variety of issues. Finally, trends such as increasing collaborative investor engagement, deepening ESG understanding, and broadening social media and government support are paving the path forward for significant ESG engagement in China.