BlackRock: addressing ESG risks in China’s energy sector

 

ORGANISATION DETAILS
Name	BlackRock
Signatory type	Asset manager
Region of operation	Global
Assets under management	US$10trn (as of 31 December 2021)

COVERED IN THIS CASE STUDY
Asset class (strategy)	Listed equity (index investing)
Geography	China
ESG issues	Environmental issues: natural capital. Social issues: indigenous groups

 

Why we do Stewardship

As a fiduciary to our clients, BlackRock Investment Stewardship (BIS) undertakes engagement and voting activities with the goal of advancing our clients’ financial well-being. The money we manage is not our own; our clients are ultimately the owners of the assets in which we invest – and they are predominantly long-term investors. We believe that, as stewards of our clients’ investments, we have a responsibility to maintain constructive relationships with the companies in which we invest on our clients’ behalf. To that end, we aim to represent the voice of the long-term investor and are interested to hear from companies about how they focus on the governance and sustainability risks and opportunities that can impact their ability to generate durable, long-term financial returns.

How we do it

BIS is positioned as an investment function at BlackRock and partners with internal investment teams, including BlackRock Sustainable Investing, Fixed Income and Active Equities. BIS’ insights are available to these teams and, when appropriate, we may partner on joint engagements. Our efforts are coordinated globally but locally focused. The BIS team members covering China are based in Hong Kong and closely follow in-market corporate and stewardship developments.

BIS engages with companies to better understand their governance and business models as well as their approach to material sustainability risks and opportunities. Engagement is particularly important for our clients invested in index strategies, which represent a significant portion of BlackRock’s equity investments. Because index funds are designed to track the investment results of indices that are created by third-party index providers, BlackRock does not have the discretion to divest from companies in our index strategies.

Each year, we set engagement priorities to explain our approach to the issues we consider particularly relevant to companies and our clients as shareholders. This transparency helps companies understand our key areas of focus and have a clear understanding of how BIS approaches engagement. We also vote at shareholder meetings, where authorised to do so on our clients’ behalf, reviewing matters on a case-by-case basis, with local norms and regulatory nuances in mind. As explained in our Global Principles and market-level voting guidelines, our activities are intended to advance clients’ long-term economic interests. We also have voting policies on meeting resolutions, such as related-party transactions, that have unique dynamics in the context of Chinese capital markets. Voting on our clients’ behalf is how we signal support for or raise concerns with a company’s corporate governance or the sustainability of its business model.

BIS may work with other investors, particularly on policy matters, when we believe it will help advance our clients’ interests. For example, we are a member of the Climate Action 100+ Asia Advisory Group and provide insight into the characteristics of local Asian markets to help inform engagement priorities.

Case study

Engaging with a Chinese coal company on governance and sustainability risks and opportunities

Background

The company is one of the largest listed coal mining companies in the world. It had obtained an exploration license for an overseas project in Australia, allowing it to explore approximately 90 km² of agricultural land in a designated exploration area. The project came under scrutiny in 2020 when a competitor’s project resulted in the destruction of a cultural heritage site sacred to members of Australia’s Aboriginal and Torres Strait Islander communities as well as broader society, leading to public concern and outcry.

BIS response

In light of heightened concerns about the potential impacts of mining activities on local communities and the environment, BIS held multiple engagements with the company throughout 2020 and 2021 to discuss governance and sustainability risks and opportunities. Leveraging our team’s expertise in Australia, our China analysts identified that the proposed coal mine assets potentially raised material governance and sustainability risks for the company. While BIS is clear that management and the board have sole discretion to set corporate strategy, BIS aims to represent the voice and interests of long-term investors like our clients. To that end, we asked the company how it assessed non-financial factors that could have an impact on the project and its approach to manage and mitigate potential risks. Specific risk areas from a long-term shareholder perspective include: ongoing regulatory changes in Australia regarding the protection of the rights of Aboriginal and Torres Strait Islanders; potential change of climate policies in both Australia and China; and potential negative employee morale and operational disruption as the result of ongoing controversy surrounding the project.

Given the company’s focus on coal, and China’s stated plans to be net zero by 2060, BIS also sought to understand how the company plans to disclose its efforts to decarbonise its value chain over time, including short-, medium- and long-term emissions reduction targets and a good-faith effort to disclose Scope 3 emissions.

The company demonstrated a responsiveness to long-term investor interests and consideration to these matters and has since integrated potential risks into its planning. BIS also published a Vote Bulletin on our website to offer further insight into the engagement process and the related decision to support management at the June 2021 annual general meeting.

Outcome

In April 2021, the company announced it had “reached a A$100 million agreement with local authorities to withdraw its mining lease application and surrender its development consent for the project.” From the long-term investor perspective of natural capital risks, in particular the risks associated with operating in the relevant exploration area coupled with potential impacts on Aboriginal and Torres Straits Islanders, as well as Australia’s cultural heritage more broadly, the company’s actions demonstrate growing awareness of sustainability risk.

Observations on Stewardship Challenges in China

We have observed progress on governance and stewardship in China over the past few years, but there is room for strengthening current practice, including:

Enhanced reporting: The need for comparable and consistent environmental, social, and governance data that is relevant to investment decision-making is crucial for investors to evaluate corporate sustainability performance in China. The recent launch of the International Sustainability Standards Board (ISSB) and plans to develop a global baseline set of corporate sustainability reporting standards, and the expansion of the Partnership for Carbon Accounting Financials to Asia, can be of great benefit to Chinese companies. It would help investors in their stewardship efforts if Chinese companies and policy makers monitor these international developments to support the establishment in the near future of standards for sustainability-related reporting for Chinese capital markets that are aligned with global standards.

Voting infrastructure: In some instances, votes instructed via custodian banks can be rejected by listed companies in China due to technical reasons, thus preventing shareholders from participating in a company’s corporate governance process. Using the local e-voting platform may mitigate the vote rejection issue but it can also exclude certain functions necessary for investors to fulfil reporting obligations required by regulators in different jurisdictions, or by global organisations such as the PRI. Stronger voting infrastructure linkages between China and the global financial system would support investors’ stewardship efforts.

Access to the board: The ownership structure of listed Chinese companies is often highly concentrated, with the presence of a controlling shareholder resulting in some board directors being less responsive to minority investor concerns and requests for meetings. This issue impedes the ability of investors to evaluate board effectiveness. While such board access is not mandatory under the existing regulatory regime, it would help stewardship efforts if policy makers cultivated a regulatory culture that encourages listed companies to go beyond compliance requirements to address minority investors’ concerns.