The limits of a softly-softly approach on climate in China

Asset managers must put pressure on the companies they invest in

With climate risk creeping up the agenda of many Asian regulators at the moment, now would be a good time for the world’s largest asset managers to demand a greater level of transparency from the companies they invest in. Especially those that are based in China.

Last September, president Xi Jinping announced he was targeting 2030 for peak carbon emissions and 2060 for carbon neutrality. A laudable move, of course, but poor climate risk disclosures threaten to hold things back. 

From a vantage point in Hong Kong, it is not hard to see why China might be keen to steer clear of the ‘S’ and ‘G’ monikers of environmental, social and corporate governance (ESG). But ignoring the ‘E’ is less forgivable. 

Last year Ping An Insurance became so frustrated by the lack of adequate climate risk information in the country that it cranked out a report urging regulators to develop a more harmonised and unified set of guidelines about what firms should be disclosing. It noted there are nine separate sets of guidelines that listed companies can choose to follow, creating a large amount of confusion.

The authors of the report have since softened their stance, telling recently that things have improved since the report was first published.

But the fact remains that climate disclosures are still not mandatory in the country, even for listed firms, and many organisations remain selective about what information they choose to share.

Investors into China – which was, according to one UN report, the largest recipient of foreign direct investment in 2020 – have a pivotal role in helping drive things forward.

But many are still opting for a low-key engagement approach in order to enact change: a gentle reminder of climate risk responsibilities here, a spot of outreach there.

While this is very much the Asian way – nudge them in the right direction; steer clear of brash, demonising campaigns – such a softly-softly approach can only take things so far, as this month’s cover story suggests.

Asset managers now need to think of what more they should be doing. There are other options available.

They could, for example, hold directors to account for any shortcomings in corporate policy, voting against them at shareholder meetings (where local rules permit this). They could also consider formally submitting recommendations for change to an offending company – not a course of action usually favoured by large shareholders, especially in Asia, but one that should at least be considered.

If all else fails, then investors could, of course, always get rid of stock that doesn’t fit in with their overall sustainability strategy.

Holding on to the shares of the world’s worst polluters is not only bad for an asset manager’s image. It can also be poor risk management practice, especially for those asset managers that run longer-term investment strategies that may very well be disrupted by the effects of climate change.

Tariq Fancy, who used to be BlackRock’s sustainability chief investment officer, says it is incumbent on asset managers to start thinking about climate risk “sooner rather than later”, and making sure that they have sufficient access to the data sets they need in order to stay on top of the issue.

This means stepping up scrutiny of firms, forcing company boards to tackle the issue head on and working with regulators to improve consistency of disclosures.

The world’s largest asset managers have clout. They need to make sure they use it.

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