|Harvest Fund Management
|Region of operation
|Assets under management
|US$222bn (as of 31 December 2021)
|COVERED IN THIS CASE STUDY
|Asset class and strategy
|Environmental issues: climate change
Why we do it
We consider stewardship to be an integral part of our fiduciary duty in managing clients’ capital. By proactively engaging with investee companies, we serve as partners, support sustainable value creation, and ensure our alignment with critical decision-making by company management.
How we do it
We prioritise our engagement activities based on the materiality of the ESG issues and our exposure to the individual company, measured by the absolute amount invested or the percentage of our shareholding in the company. Our engagement is triggered under two scenarios:
- to manage tail risks in ESG laggards to protect clients’ capital; and
- where we see an opportunity to create long-term positive impact.
We set engagement targets by identifying relevant industry- and business-specific issues critical to the company’s long-term growth in terms of key opportunities to capture or risks to mitigate. In conducting engagement sessions, we set priorities based on a materiality assessment and formulate an engagement programme to address these issues over the short, medium and long term by crafting customised roadmaps.
In periodic meetings with management, we share local and global best practices classified by industry and stage of growth. We also discuss, among other things, human capital strategy, technology innovation to enable efficient, clean manufacturing and pathways to carbon neutrality, and formulate actionable transition plans and measurable targets to track progress. We define our engagement success through quantifiable environmental and social impact and value created by investee companies, and long-term sustainable returns for our clients.
Furthermore, we find collaborative engagement, such as that pursued by the Climate Action 100+, to be beneficial in allying minority shareholders to effectively communicate with management about concerns and measures to take to improve companies’ prospects. Such collaboration can help provide company management with a comprehensive view of investors’ perspectives and help to prioritise critical management decision-making.
Integration of investment and stewardship
As a research-driven asset manager, we have developed an in-house ESG scoring system and integrated it with investment decision-making through stock selection, portfolio construction and risk management. The ESG framework and scores guide our stewardship efforts in prioritising investment targets and identifying key issues to discuss.
Our dedicated ESG team leads our stewardship programme and reports to the Investment Committee’s ESG sub-committee, supervised by our CIOs and CEO. This governance structure ensures that ESG is fully integrated into our investment process. The Investment Committee discusses investee companies, prioritising our engagement efforts, key ESG issues to highlight to management and progress made. This assessment is translated into investment decisions so that our stewardship efforts are aligned with clients’ long-term interests.
Engaging with portfolio companies to manage climate-related risks and opportunities
One of our priorities in climate change-related engagement is identifying and growing with companies at the forefront of innovation and transformation to address climate change.
We started to invest in and engage with a Chinese solar photovoltaic company in 2013 when the company was still a small player in the market. Our relationship with the company lasted and deepened through the ups and downs of the solar industry. We recognised the management’s vision to lower the levelised cost of energy it could deliver through continuous technological innovation, efficient production and vertical integration, and we supported its practical approach to reducing operating costs to fuel innovation, continuously providing financing to the company to help it through difficult times.
Our stewardship efforts touched on long-term management strategies, operational efficiency, capital allocation, governance and other sustainability issues. We discussed measures such as growing the top line by expanding markets to appeal to sustainability-minded customers, building its brand by leveraging its competitive advantage, improving margins through investment in automation, and managing human capital through incentive schemes. Through our continuous engagement with the management, we have provided insights and support for the company to grow the renewable energy market by continuously innovating, improving access, and lowering cost barriers through disciplined capital expenditure.
This engagement has paid off. Since 2015, the company has been using renewable energy to power its operations. In 2020, it joined the RE100, EV100 and EP100 initiatives and the Science Based Targets initiative, responded to the CDP questionnaire, and committed to a net-zero strategy. The company has reached 41.83% of renewable energy usage, equivalent to a 1,356,216 ton reduction in carbon emissions. In 2020 alone, its energy intensity has fallen 3.39% year on year, saving 120 million kWh of power. It reduced its water intensity by 2.45%, saving 729,000 tons of water and RMB101m in costs. Moreover, it has achieved 100% recycling in its packaging.
After eight years, the company has created value for its stakeholders by providing cost-effective solutions to solar energy independent of government subsidies, helping to significantly improve renewable energy penetration. The company’s revenues have increased 24 times, at a 57% cumulative annual growth rate over 2013-2020. It is now the largest producer globally of photovoltaic wafers and modules, with 36% and 14% market share, respectively. By seizing the opportunities induced by climate change and mitigating risks through active stewardship, we have achieved more than a 100-times return in eight years for our clients while contributing to a sustainable future.
In addition to companies engaged in green business such as renewable energy, we invest and engage with companies that are in the process of transitioning to become greener businesses. In engaging with an agricultural product producer, for example, we introduced global and local best practices regarding the low-carbon transition and ESG disclosure. We helped craft a working plan relevant to its industry and local markets. We then set measurable and attainable carbon reduction targets that evolved as it built its data collection capabilities. In addition to improving its ESG disclosure, the company has taken measures to leverage expertise in environmental practice, select dedicated project owners reporting directly to the board of directors, set up measurable targets linked to management remuneration, and coordinate cross-functional efforts via bonus plans. The results were captured by our internal ESG scores and later recognised by MSCI with improved ESG ratings. Meanwhile, the investment has delivered a five-fold return over three years.
Challenges and recommendations
Our engagement efforts face a number of challenges.
- First, given the shareholder structure in the Chinese market, mutual funds tend to be minority shareholders for many large-cap companies and thus have a limited impact if undertaking engagement individually. We see a need for more collaboration across the industry.
- Second, clearer guidance from policy makers regarding company disclosure and active ownership would help to normalise engagement channels and targets.
- Third, engagement priorities, topics and techniques vary by market and industry. Given differing local characteristics and cultures, domestic institutional investors and expert groups should take leading roles in engagement processes to have the best chance of driving change.
- Fourth, there is a shortage of stewardship expertise. The development of third-party stewardship services could accelerate market development, with more providers specialised in proxy voting and engagement services entering the market.