Investor engagement – the purposeful interaction between shareholders and investee companies – is widely regarded as one of the most important mechanisms in capital markets to positively impact on company performance.
In China, it is a relatively new concept. While the potential value of climate engagement (eg, under the auspices of Climate Action 100+) in China is clear, there has been limited research on the factors that influence the effectiveness of this engagement.
In 2022, we interviewed 25 industry experts on the issue. They comprised 12 large asset managers, of whom six were headquartered in China, nine large- and mid-cap listed companies across a range of sectors and four third-party service providers.
The high-level conclusion was clear: while the Chinese government’s policies on climate change are well developed, investor engagement strategies need to be tailored to the broad characteristics of the Chinese market and to the specific characteristics of the companies being engaged with.
Local market context
China’s equity market – the second-largest in the world as measured by the market capitalisation of listed companies – has three important characteristics that shape the nature and form of investor engagement.
First, China has the largest number of individual investors in the world, at more than 200 million. As a result, the market has tended to be retail-led and momentum-driven. This is changing, however, with the market now seeing a greater proportion of shares being held by institutional investors and by overseas investors, resulting in a stronger focus on business fundamentals than was the case in the past.
Second, the share structure of listed companies in China is usually characterised by the single largest shareholder holding a controlling stake. The consequence is that the dominant agency problem in China is the horizontal agency conflict between controlling and minority shareholders.
Third, China has gradually developed its legal and regulatory frameworks to facilitate investors’ participation in corporate decisions.
For example, company law allows shareholders separately or aggregately holding 3 percent or more of the shares of a company to submit shareholder proposals, and the Chinese Code of Corporate Governance encourages institutional investors to exercise their shareholder rights and report on their engagement and voting activities.
Engagement upside and limitations
Both company and investor interviewees agreed that climate action could benefit companies through better risk management and, to a lesser extent, through accessing climate-related opportunities.
When discussing the value of climate engagement, interviewees presented limited evidence that the engagement had led to actual environmental improvements (eg, emissions reductions).
Instead, they emphasised knowledge and relationship-building. Listed companies highlighted the opportunity to learn about international ESG rating mechanisms, disclosure frameworks and best practices, while investors referenced the opportunity to validate their desk research, to learn more about industry exposure to climate change, and to get a closer look at the culture of the company.
One interesting insight from the interviews was that institutional investors’ engagement was seen as reflecting positively on the investee company’s reputation. One listed company representative explained: “If those well-known investors are willing to invest and engage us, they think that our company is long-term viable. We even experienced a share price surge after releasing the meeting minutes of a star asset manager’s visit.”
Investor interviewees concurred. They explained that they found it more meaningful to assess engagement success in terms of incremental steps rather than final outcomes – commenting, for example, that gaining access to the right people in the target company is often an important first step.
These interviewees noted that many of the subsequent engagement successes they had achieved related to process measures such as raising the awareness of the companies’ board and management team on climate-related opportunities and risks, improved climate governance and improved emissions reporting. The most common outcome reported was improvements in companies’ ESG ratings.
Engagement strategies and cultural norms
Interviewees agreed that one-to-one meetings – ideally face-to-face, but otherwise online – are the most effective way to engage with Chinese companies.
The use of written letters does not appear to be a particularly appropriate strategy for the Chinese market, with feedback suggesting that letters can lack a personal touch. The company interviewees confirmed that they do not like template-type letters containing long lists of actions or recommendations, as these are seen as complaint letters suggesting that executives have not done their jobs.
One listed company representative summarised their view: “Compared to dialogue and conversation, written letters more or less give people cold and hard feelings. We recognise that this is just one way of communication and will respond if needed, but we are cautious about any responses in writing since it runs into the risk that it may get extracted and receive improper media exposure.”
When selecting the means and approaches of engagement adopted, mutual understanding and trust were considered by interviewees as being critical to success. Interviewees’ views on proxy voting and shareholder proposals pointed to a similar conclusion. From a cultural perspective, most investors feel that voting against directors is too personal and hurts relationships.
However, this view was not universally held. One international asset manager interviewee commented: “Although our vote won’t change the result, we were once approached by a company to give a ‘for’ vote for their director, as not showing a 100 percent unanimous vote will make people ‘lose face’. We use this as a leverage point to convey what we expect them to improve on.”
Investor interviewees had varying views about which individuals they should engage with on climate issues. Some indicated that engaging with the board of directors and executives is generally more effective, while others felt that talking to technical teams on climate issues is more useful.
Others suggested that the best strategy is to talk to all levels across multiple departments for issues as complex as climate change. One asset manager interviewee said: “We need to engage with the top to set the tone right, with the middle to know the dynamics that make things happen, and with the frontline who are empowered to deliver. Just like the story of ‘the blind men and the elephant’, if we only touch one part, we can’t see the whole picture.”
‘First engager advantage’
One of the new insights from the research was that of “first engager advantage”, with companies being particularly appreciative of the investors who first brought specific issues to their attention and then continued to work with them over time.
One corporate interviewee positively described their experience of working with an international investor to improve their company’s poor ESG scores after the scores were flagged by the investor. “Several other asset managers also joined the efforts later on,” they said. “It’s great to see our rating was finally upgraded last year, which was not possible without this US investor.”
Interviewees generally agreed that the best engagement teams were those that contained a mix of fund managers, ESG analysts/specialists and fundamental/financial analysts. Such combined teams were seen as bringing balanced insights of financial and non-financial/ESG aspects to the engagement target companies.
Company interviewees did not express a preference for engagement by domestic or international investors, noting that speaking Chinese is not a prerequisite for successful engagement (although it clearly helps the engagement conversation).
Climate engagement goals
The investor interviewees – given that Chinese companies are still at the early stages of managing climate-related risks and opportunities – saw improving Scope 1 and Scope 2 emissions disclosure as a key engagement priority.
Interestingly, many reported that Chinese companies tend not be responsive to engagement focusing on disclosure and transparency, suggesting that investors need to focus on other topics before pressing for improved disclosures.
One international asset manager said: “There is tendency for investee companies to be a bit defensive on this. I feel it’s probably because they have an internal issue to get the complete data, or they don’t want to share because they want to look good in front of us.”
Most companies base their greenhouse gas targets on China’s national target rather than on international frameworks.
A number of investors and companies commented that most companies are interested in how they perform relative to their local or regional peers, aiming to be just above average.
One asset manager explained: “Like the ideas in Confucianism, where the doctrine of the mean was understood as a primary virtue, some companies don’t want to be the target of Climate Action 100+, as they don’t want people to pay attention to them.”
Long-term relationship
It is clear that investors can engage effectively with Chinese companies on climate-related issues, if they understand this engagement as part of a long-term relationship and approach this in a respectful, patient and long-term manner. However, it is also clear that engaging in this way may only deliver slow and incremental change.
Balancing and reconciling these twin imperatives of relationships and outcomes stands as the key challenge for investors engaging on climate change in China.
Wei Liu has recently completed a Master of Studies in Sustainability Leadership at the University of Cambridge Institute of Sustainability Leadership (CISL). Dr Rory Sullivan is CEO of Chronos Sustainability.
This article is based on Wei Liu (2022), Key Factors That Determine Successful Investor Engagement on Climate Issues with China’s Listed Companies. Dissertation submitted in partial fulfilment of the requirements for the degree of Master of Studies in Sustainability leadership.
