|Region of operation
|Assets under management
|US$271.01bn (as of 31 December 2021)
|COVERED IN THIS CASE STUDY
|Asset class and strategy
|Listed equity (active investing)
|Environmental issues: climate change; Social issues: responsible marketing
Why we do Stewardship?
Through stewardship, ChinaAMC seeks to support the long-term sustainable development of our investee companies and increase their enterprise value. We believe that stewardship is a part of our fiduciary duty to our clients. On the one hand, we can help investee companies enhance their ESG performance and disclosure, allow them to demonstrate their intrinsic value more clearly. On the other hand, our engagement work helps us to better understand the companies in which we invest, and the sustainability risks and opportunities they are facing.
How we do it?
We aim to encourage and help Chinese companies reduce sustainability risks and seize relevant opportunities. Due to the limited awareness of ESG issues in China, ChinaAMC’s investment professionals involved in our engagement work are required to play a supportive role to assist investee companies address sustainable development and ESG information disclosure. For example, in light of climate change risks and China’s recent commitment to carbon neutrality, we have made carbon neutrality strategies one of our top topics when we engage with Chinese companies over the last year. However, a lack of knowledge about the issue at many of these companies has made it difficult for investors to target specific carbon reduction goals at early meetings. Therefore, ChinaAMC has started with more general discussions around climate change, followed with policy analysis and case studies of industry global best practice, to gradually educate companies and help them discover their own climate-related risks and opportunities.
For those ESG engagements initiated by ChinaAMC independently, our ESG analysts are the main initiators. They initiated dialogue with investee company either when controversial events are identified by the risk management or ESG teams, or when sustainable risks and opportunities are discovered by the ESG team through industry and stock analysis.
ChinaAMC also participates in collaborative engagements with other institutions (for example through initiatives like the Climate Action 100+), both as collaborator and lead investor. Engaging with companies as a group can significantly strengthen the individual investor’s influence during conversations with companies, given the larger percentage of shares they represent. It can also draw the attention of companies to topics that they may have failed to notice previously. This amplification effect can be even stronger with state-owned enterprises (SOEs) in China.
To alleviate investee companies’ potential anxiety or discontent regarding certain issues, we customise engagement strategies for each company based on its ownership structure, development trajectory and industry environment. For example, for private-owned companies with sufficiently ambitious management teams, a straightforward discussion regarding the challenges the company faces can spur management to take decisive action. When engaging with SOEs, establishing a relationship of trust with the management team before pointing out weaknesses can be a better way to address the issues involved.
The outcome of engagement reviews is provided through internal reports, which enable investment professionals to take note. If engagement activities are deemed unsuccessful, escalation strategies are applied, depending on the characteristics of each case. Escalation approaches include: collaboratively engaging with other investors; submitting a shareholder resolution or proposal; leveraging media tools; voting against related board directors; and divesting.
An engagement with a baijiu company to enhance environmental and social performance
Companies producing baijiu (Chinese liquor) can generate enormous value for their shareholders. However, low ESG awareness means that these companies often face significant ESG exposures. For instance, as beverage manufacturers and downstream users of agricultural products, baijiu companies are exposed to climate risks, water risks and risks relating to packaging material waste. However, few disclosed such risks and their responses to them before 2020. In addition, responsible marketing practices that are common in the global liquor industry are rarely found among Chinese baijiu companies.
In January 2020, we approached Company A, one of the largest high-end baijiu producers in China, with ESG issues. The company’s 2018 corporate social responsibility (CSR) report did not mention any activities to deal with packaging waste or climate change, nor did it provide evidence of any awareness of responsible marketing. During our first conversation with Company A’s board secretary, our ESG team presented a holistic framework of ESG issues that global investors are concerned with, and the specific sustainable weakness observed in the company itself. We quoted some third-party ESG rating results and presented ChinaAMC’s proprietary view, according to our internal assessments, followed up with reference materials.
The outcome of this first engagement activity was fruitful. In its 2019 CSR report, published in April 2020, Company A disclosed significantly improved environment management, covering green packaging, a low-carbon initiative, raw material sourcing, and R&D expenditure on green agriculture, etc. Led by its internal energy and environmental protection department, the company also became the first among its domestic peers to calculate its carbon footprint at every point of the production line. We were also pleased to see that Company A became one of only three Chinese liquor companies to warn in its marketing of excessive drinking, and to explicitly ban marketing to the pregnant and adolescents. The company’s ESG score from a third-party agency was also upgraded after the CSR report was released.
Encouraged by the positive feedback, ChinaAMC’s ESG team followed up with Company A regarding its sustainability practices, including guiding the company on disclosing through the CDP, becoming the first Chinese alcohol beverage company to do so. Subsequently, we discussed ESG issues with the board chairman. In 2021, the company included ESG targets in its five-year plan for the first time and committed to reach carbon neutrality in the next five to 10 years.
Based on in-depth engagement with Company A’s management team, we expect the company will continue to improve its ESG performance. ChinaAMC invested in Company A in 2017. By the end of May 2020, the company’s valuation had doubled. We not only realised attractive investment returns for our clients, but we also supported the company’s growth as an active shareholder.
Challenges and solutions
Challenges to stewardship in China include the immature voting environment in Chinese capital markets. This poses an obstacle to investors influencing listed companies collaboratively. To enable greater influence on investee company management, ChinaAMC has been leading and collaborating with international and domestic institutional investors to co-engage with companies. Meanwhile, we are also developing a more efficient voting process to replace the previous time-consuming approach.
Last but not least, the language barrier and cultural gap make it difficult for overseas investors to initiate and continue conversations with some Chinese companies. To help Chinese companies open to global markets, and to help international investors understand these companies better, ChinaAMC will collaborate with foreign investors and initiate co-engagement programmes.