In This Issue
Reducing ESG Risk in China
As this newsletter has made clear in previous editions, environmental, social and governance (ESG) risk is on the rise in China, and even as the consequences become more severe for companies, there are growing implications for the financial sector as well. Whether it is investing, lending, or the overall strategy of the institution, the financial sector is grappling with how much of a role it can or should take.
In November, BSR used the opportunity of the UNEP FI Global Roundtable to bring together financial institutions with companies and other stakeholders to explore opportunities for learning and collaboration on ESG issues. We examined a number of trends, including the development of different standards by banks and other companies, the links between these standards, and how issues like transparency are affecting investment decisions. Here, we share lessons from that event.
Also in this issue, we hear from the Principles for Responsible Investment (PRI) on why and how investors are engaging companies on ESG issues, as well as results from one successful three-year engagement on anti-corruption between PRI signatories and companies. Throughout 2013, BSR has collaborated with Greenpeace and MSCI to establish the China Sustainable Finance Network (CSFN), which is exploring a range of topics including climate change, the links between coal and water, the green credit policy, and how to integrate ESG into private equity.
If you are not part of CSFN and would like to attend one of our 2014 events, please contact Adam Lane. We wish you all a successful 2014.
Responding to Increasing Social and Environmental Risk in China
BSR brought together 14 speakers and 120 participants for a half-day seminar on managing social and environmental risk in China. Here, we review the current efforts to manage social and environmental risk in China, with perspectives from the financial industry, as well as other industries and NGOs. (Article includes links to presentations from the event.)
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Insight From the UN PRI
Investor Engagement with Companies can Improve ESG Performance
By Fiona Reynolds, Managing Director, PRI
The PRI defines responsible investment as an approach that explicitly acknowledges the relevance of ESG factors to investors and to the long-term health and stability of the market. In practice, we find that how investors choose to implement that approach varies widely. Traditionally, responsible investors apply so-called “negative screens,” excluding companies that engage in activities they disagree with, such as tobacco or weapons manufacturing. Others use positive screens to seek investments in companies that have high social or environmental standards or performance.
In more recent times, mainstream investors have been adopting responsible investment. An approach often employed is “engagement,” whereby investors seek to influence corporate behavior for the better, whether via one-to-one meetings with companies, by participating in collective engagement with other investors, or by actively voting their shares at shareholder meetings. Another mainstream approach is “ESG integration,” whereby investors integrate an analysis of ESG factors into their investment decision-making for the purpose of making better investment decisions.
There is a large and growing body of academic research examining the effectiveness of these approaches. In their 2012 paper "Active Ownership," London Business School’s emeritus professor of finance Elroy Dimson and his fellow researchers looked at the effects of intensive shareholder engagements on ESG issues at major publicly traded U.S. companies during the decade to 2009 and found that these created shareholder value, with an average one-year excess return of 4.4 percent.
The PRI stands ready to help pension funds and managers with policy formation, advice on voting, and how to approach engagement. Our Clearinghouse service has developed a number of themes for in-depth collaborative engagement with companies. There are clear benefits to investors acting collectively on issues of concern, as we found with the recent success of a three-year engagement on bribery and corruption risk.
This three-year engagement by PRI signatories resulted in improved transparency and disclosure of anti-corruption strategies, policies and management systems by several global companies with significant exposure to corruption risk.
The engagement was undertaken by a coalition of 21 investor signatories representing US$1.7 trillion in assets. They approached 21 companies across 14 countries in March 2010 to encourage them to demonstrate appropriate anti‐corruption controls. According to the group, three quarters of the companies targeted have "significantly improved" their transparency as a result of the interaction. By early 2013, 16 companies improved their performance against a set of indicators, and 10 improved their score four-fold. The leading company improved its score six-fold.
The findings were released earlier this year as another group of 12 investors, collaborating through the PRI, start to engage with companies on anti-corruption issues. They will target up to 50 firms across a wider range of sectors and countries.
News to Know
72 Companies Named in MEP Polluter Blacklist (October 14, 2013, China Water Risk)
The Ministry of Environmental Protection (MEP) released a new blacklist of 72 key companies that had been found guilty of committing environmental violations during the MEP’s supervision in 2013 (through August 31). More than 320,000 companies in 20 provinces were inspected, and the MEP discovered and took action on 2,483 violations. These companies were from a variety of industries, including mining, butteries, leather tanning, electroplating, and pharmaceuticals.
New Report Measures Green Credit footprint of Chinese Banks (November, 2013, BankTrack)
Green Watershed’s latest report on the green credit footprints of Chinese banks assesses their social and environmental responsibilities. The report is based on tracking and monitoring the implementation of environmentally responsible banking by 16 Chinese listed banks over the last five years (2008-2013).
Jinchuan’s IPO Suspended after Breaching Environmental Standards (December 3, 2013, MetalBulletin)
The Ministry of Environmental Protection (MEP) said that the nickel and cobalt major had failed to meet the conditions of its environmental influence assessment, according to a statement released on Monday December 3.
Socially Responsible Investment Survey on Chinese Funds 2013 Released in Beijing (December 10, 2013, China Social Investment Forum)
With responses from 27 funds, the report reviews the funds’ responsible investment knowledge, strategy and implementation.