Stockholm (NordSIP) – For a sustainable asset owner, investing in China presents a conundrum. The country often holds the key to solving the global climate crisis, being essential in scaling up renewable energy, for instance. Apart from acting as the world’s factory floor, it is also where many of the metals and minerals we desperately need for the green transition are either extracted, processed, or both. Yet, that comes at the risk of creating new environmental and social problems. The dilemma is real.
Norway’s largest pension company, KLP, is one responsible asset owner to take the challenge face on. “For any investor holding a reasonably diversified portfolio of assets like us, China is simply impossible to ignore,” says Arild Skedsmo, Senior Analyst – Responsible Investments at KLP Asset Management AS. “Even if we opted out of emerging markets altogether, once you consider the value chains of the companies in our portfolio, many of those inevitably lead us back to China.” Once you acknowledge the imperative of managing the portfolio’s exposure to China, you need to devise a strategy for how to do this. KLP’s approach is to engage with Chinese companies, focusing on the environmental and social aspects.
Just back from the heart of China, Chengdu, where he attended the International Forum on Sustainable Mineral Supply Chain (SMISC Forum) alongside his colleague Kiran Aziz, Skedsmo is enthusiastic and eager to share the outcome of the trip.
Lost in translation no more
“We have been trying to engage with Chinese companies on a number of issues. We have noticed, however, that, unlike their Western counterparts, the Chinese tend not to respond to our engagement emails,” explains Skedsmo. “Admittedly, these are often huge companies that are not used to being held to account or told what to do by minority investors like us. Add to this a certain hesitancy to communicate with people they don’t know due to cultural, political, or simply linguistic reasons, and the result is that we have had very limited success in our attempts to engage with the Chinese.”
Meeting face-to-face is a crucial first step in establishing a dialogue, and the 2023 edition of the SMISC Forum in Chengdu provided an opportunity for KLP to do it. “To start with, we were impressed by the conference’s ambitious agenda,” says Skedsmo. “All the difficult topics were on it: from analysing ESG risks and challenges in supply chain governance in the mining industry to discussing trends in legislation, policies and rules and exploring the cooperation mechanisms for upstream and downstream partnerships and multi-stakeholder participation.”
However, the most important result of the trip was establishing a connection and making the companies feel comfortable in the dialogue with KLP. “We emphasised that we were not there to criticise them for any legacy problems they might have and that our main concern was with their plans to tackle sustainability issues in the future,” explains Skedsmo. “We found most of the participants in the conference surprisingly open and responsive.” He was also happy to establish contact with some Chinese asset managers at the conference as they can act as “translators” between foreign asset managers and local companies.
Pushing through the value chain
“Some of the companies pointed to pressure from their customers, such as car companies, as motivation for their recent improvements”, says Skedsmo. “In many cases, Chinese companies have done a lot to improve the sustainability of production at home, but we noticed less enthusiasm in taking responsibility for complex upstream supply chains, often based on mining in less developed countries. Alongside pressure from end users, investors should send a clear message that we expect companies to take responsibility, not only for their own direct operations but also for the value chain they depend on. I think this is critical to drive real change where it matters the most.”
According to Skedsmo, this approach is similar to how KLP has previously worked with deforestation, for instance. “As investors, we have been able to put pressure on food retailers. They then push through the value chain to improve the sustainability of soy or palm oil farming.”
“It is easy to give up on engaging with Chinese companies,” concludes Skedsmo. “With thousands of companies in the portfolio, when some don’t respond to your emails, the natural reaction is to drop them. Yet, China is too important to ignore. Meeting in person is a step forward in our engagement process that will, hopefully, yield results.”