Asset owners are increasingly being pressed to do more to effect positive change within their portfolio companies on environmental, social, and governance (ESG) issues.
More often, investee companies are being asked to walk the talk on ESG.
For example, the New Zealand Superannuation Fund (NZ Super) told AsianInvestor they are continuing to monitor the situation in China, highlighted in our story on the concerns about continuing alleged human rights and forced labour abuses on the mainland.
“We agree that businesses and investors need to take the ‘S’ in ESG seriously, and we do," said a spokesperson for NZ Super.
"We draw on information from a broad range of sources to monitor our portfolio for breaches of our investment standards, and we remain committed to the principles of sustainable finance and to operating in a transparent fashion.”
Passive investors benchmarking against indices such as MSCI’s Emerging Markets Index are facing questions about how seriously they take their international human rights obligations, when several index constituents are thought to be involved in modern slavery.
NZ Super made it clear they are taking an active stance on this.
“Our managers previously used the MSCI ACWI Investable Market Index as their benchmark. However, in mid-2022 we changed to the MSCI Emerging Markets Climate Paris-Aligned Index. While this index is based on the MSCI Emerging Markets Index, it contains significantly fewer companies."
Eleven of the 13 companies referred to in a report by UK-based research group Hong Kong Watch were removed from the index.
“The two other companies, ZTE and Xinjiang Goldwind Science & Technology, remain on an MSCI watchlist. The Super Fund is also actively monitoring both companies against various ESG criteria and we will continue to do so,” the spokesperson said.
Michael Wyrsch, chief investment officer & deputy CEO at the $8.2 billion Melbourne-based Vision Super, confirmed that his fund is also a shareholder in Xinjiang Goldwind. While sympathetic to the “disturbing issue” of remuneration and the Uyghur situation, he is sceptical of any benefits that would come from divesting.
“I think divesting from 13 companies in China will make about as much difference to the Uyghur people as divestment has made on the tobacco industry."
“I think you need to fight, not run, if you really want change. What that means is lobbying government, putting forward resolutions, firing directors and the like. Ultimately though, we need better ways to bring pressure to bear on companies," Wyrsch argued.
The challenge for the investment community is how to get effective change in places where transparency is limited. Wyrsch said Vision Super votes all its shares, but in China that doesn’t amount to much, and besides, “they don’t care if you vote them or not, they couldn’t care less.
“We’re not a big fund and we don’t have big holdings in these companies. You’ve got to be realistic about what you can achieve. But as a fund, we have to invest.”
Shareholder activism would be more effective, according to Wyrsch, if governments would provide the back-up.
This would involve barring investment or trade in some or all companies that do business in China, in the way the US government signed into law the Uyghur Forced Labor Prevention Act in 2021, effectively barring imports manufactured in Xinjiang.
China has previously denied allegations of forced labour and human rights abuses in Xinjiang.
Shareholder action can be more effective outside China, though, and earlier this month a group of institutional investors co-filed a resolution at the world’s largest coal trader, Glencore, seeking greater transparency on how the company’s thermal coal production aligns with the Paris objective of keeping global temperature increase to 1.5°C.
The investors want clarity on how Glencore’s ongoing pursuit of thermal coal projects aligns with the company’s public commitment to support the Paris Agreement.
The coalition, collectively representing $2.2 trillion of assets under management, includes Legal and General Investment Management, Switzerland-based Ethos Foundation on behalf of large Swiss pension fund members of the foundation, HSBC Asset Management and Vision Super.
“Glencore has a tremendous opportunity to be part of and profit from the energy transition,” said Wyrsch.
“It is well placed with its exposure to many key commodities for the transition including copper and nickel. Its growing recycling business should also see a tailwind from the energy transition. That’s why it is so disappointing to see Glencore continuing to invest in thermal coal, which is a contracting industry.”
According to Naomi Hogan, strategic projects lead at the Australasian Centre for Corporate Responsibility, the recent decision by Glencore to withdraw an application for the huge new Valeria greenfield coal mine in Australia “shows that substantial reductions in coal output are possible and that Glencore is capable of responding to investor concerns and to the global headwinds against new coal.”