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In This Issue
Editor's Note
The Opportunity for Private Equity from Responsible Investment in China
USD$16 billion of private equity capital was invested in China in 2011. According to the EU Chamber of China, the country now represents five percent of global private equity investments compared to its previous level of just 1.5% in 2007. With significant influence over the companies they invest in as well as direct financial risks and opportunities from the performance of the company, PE firms can be a strong driver for responsible investment in China.
In this issue’s feature article, BSR Advisory Services Manager Adam Lane explores the business case for private equity and how leading PE firms are implementing responsible investment in China. The article comes after a recent event hosted by BSR in association with the UN-backed PRI, Beijing PE Association, and Magic Stone Alternative Investments.
Feedback and comments on this newsletter are encouraged and should be directed to Adam Lane at alane@bsr.org.
In Depth
How Private Equity is Investing Responsibly in China
At BSR's recent forum in Beijing, the focus was on the overall context in China for responsible investment and how private equity in China is investing responsibly.
Learn more →
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Insight From the UN PRI
ESG and Executive Pay: The Missing Link
By James Gifford, Executive Director, PRI
The recent focus by investors, policymakers and the media on executive remuneration has demonstrated the challenges in assessing complex pay packages and corporate performance. It’s clear that existing remuneration plans for senior executives do not necessarily promote sustainable value creation for their companies, and the consequences of inappropriately designed and misaligned remuneration policies in recent years have been severe for investors and the market as a whole.
There is growing awareness that misaligned incentives are a key obstacle to creating a sustainable financial system, and investors have a crucial role to play in rectifying many of these deficiencies. However, the policy and public debate has so far largely overlooked the extent to which companies should consider linking remuneration criteria to strategic performance indicators relating to broader ESG and sustainability issues, and whether investors need to send stronger signals to companies of their desire to see this happen.
With this in mind, the PRI and UN Global Compact Lead have facilitated a project between a group of five companies and 11 institutional investors to create a set of overarching principles outlining how companies should link ESG metrics to executive pay, and have recently published a new guidance paper* in order to help investors begin a dialogue with managers on these issues.
The group set out with a shared belief that existing remuneration plans for senior executives do not necessarily promote sustainable value creation for their companies. While emerging practices are taking shape, and there remains no universally agreed guidance on how to link ESG metrics to executive pay, the consensus is clear: including ESG issues within executive management goals and incentive schemes is an important factor in the creation and protection of long-term shareholder value. And companies should focus on identifying and integrating ESG metrics that are generally forward looking, clear, attainable, replicable, comparable and time-bound.
Considering the influence of ESG factors on corporate performance and reputation, ideally all companies would link executive compensation to key ESG metrics. However, companies from different sectors and industries are affected by particular market forces in different ways, and face varying degrees of materiality for particular ESG issues. Like traditional financial and operational measures of performance, board level oversight appears to be a key factor in ensuring ESG metrics are both relevant and embedded in a company’s broader strategy. There are signs that some boards have started exploring different ways for integrating ESG factors in incentive mechanisms for senior management, but this is not the case for the vast majority of companies today. Investors that participated in the project considered it crucial that boards consistently discuss and monitor the selection, design and verification of ESG metrics and goals to be linked to executive compensation, as they would for any other measure of performance.
Today's unfolding sustainability challenges present both risks and opportunities for companies and increasingly, investors are likely to engage with boards to seek assurances that managers are suitably incentivised and rewarded for their ability to position the company to overcome these. Ensuring ESG issues make up a meaningful component of overall remuneration will give investors confidence that parties throughout the investment chain, including the managers of the companies in which they invest, are acting in their long-term interests.
*PRI - Integrating ESG issues into Executive Pay
News to Know
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The Hong Kong Exchange publishes results of consultation on ESG reporting, alongside new ESG Guidelines for listed companies (August 31, 2012, Hong Kong Stock Exchange)
Following 106 responses to its consultation, the Exchange published its Consultation Conclusions on ESG Reporting Guide for companies listed in Hong Kong. The Guide is divided into four areas: Workplace Quality, Environmental Protection, Operating Practices and Community Involvement. Each of the areas is divided into three sections: aspects, general disclosure recommendations and key performance indicators. The Guide will be a recommended practice.
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New China Environmental Protection Index to Be Launched (September 3, 2012, China Securities Index Co)
Shanghai Stock Exchange and China Securities Index Co announced the upcoming launch of SSE Environmental Protection Industry Index, CSI Environmental Protection Industry Index on 25 September 2012.
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Chinese campaign groups are concerned about the environmental impact of a new waste incinerator being built in Beijing and funded by the German state bank, KfW. Despite KfW’s response that it is confident its technical expertise and project-management strengths, combined with German technology, will ensure the scheme reaches the highest standards, the Chinese campaigners are requesting to see the environmental impact assessment.
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Shareholder group ousts CEO and board at China renewables firm (October 3, 2012, Responsible Investor)
A group of investors has won a boardroom battle at New York-listed China Hydroelectric Corp. The group has secured an agreement under which China Hydro’s Chief Executive will depart immediately and that the shareholder group will get its candidates onto the company’s board.
On the Horizon
Upcoming Events
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China's Energy & Environmental Challenges: Coal Value Chain and US-China Collaboration on Energy (October 23, 2012 | Beijing)
AmCham China and the Carnegie-Tsinghua Center for Global Policy are organizing the next event in their China and the Environment Series. This event focuses on China’s energy and environment challenges in the 21st century and US-China collaboration in the energy sector and includes a speaker from the US Department of Energy.
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7th Annual Carbon Forum Asia (October 30-31, 2012 | Bangkok)
Organized by the International Emissions Trading Association (IETA) and Koelnmesse in partnership with Asian Development Bank, Carbon Forum Asia is is a Trade Fair and Conference for the Asian and global carbon, energy and financial community. In 2011, there were 1,028 participants from 54 countries.
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China Social Investment Forum (November 2, 2012 | Beijing)
Organized by Avantage Ventures, the Forum’s theme is Creating Social Change Capital and focuses on impact investment in China: investments that create positive social change as well as financial returns.
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