As growing geopolitical tension and government control has caused some investors to exit China, Norway’s $78 billion pension fund KLP is stepped up engagement with Chinese mining companies at risk of breaching labour rights and responsible extraction.
Growing geopolitical tension and government control has caused investors to exit China. But Norway’s NOK 786 billion ($78 billion) Kommunal Landspensjonskasse (KLP), the fund for local government employees and healthcare workers, has no plans to exclude China from its index strategies. Instead, the fund has stepped up engagement with Chinese mining companies at risk of breaching its key concerns around labour rights and responsible extraction and mineral processing.
Kiran Aziz, KLP’s head of responsible investment, travelled to China last year to engage with companies that fall into the MSCI China Index and is convinced engagement is more important than ever.
These companies are responsible for up to 90 per cent of the global market share of the minerals they are mining, many vital to the green transition. The organisations are not used to engaging and have had no contact with investors before, she says. Moreover, new Chinese-owned mining companies continue to appear in the value chain.
“We are unsure of corruption, and these companies’ corporate culture. We spend a lot of time and effort here,” she says.
Over the past 18 months KLP has tried to engage with all 32 listed Chinese metal and mining companies in its portfolio. Of these, 24 never responded to the investor’s requests for information and dialogue, or were inaccessible through all available communication channels.
“Of the eight that either responded in writing or whom we were able to meet in person at industry seminars, five engaged in meaningful dialogue and exchanged information,” she says.
In an effort to ratchet up the pressure, she is now working with Chinese pension funds, some of which have recently visited Norway to discuss KLP’s approach to engagement and best practice.
“Engagement is very much based on relationship building, interaction, and building trust is important,” she says, declining to name the local pension funds but describing a proactive and positive discourse.
Engagement with US companies is no easier
Aziz’s determined engagement with investor-shy companies is just as challenged in other geographies too.
“The US hasn’t been any easier,” she reflects.
Many US companies do little over and above integrating existing regulations, and engagement begins and ends around their level of compliance.
“US companies have an offensive approach and are not very open to dialogue. We explain that our expectations go beyond compliance because regulation has to be applied to anyway,” she says.
In contrast, she describes companies in the Gulf as more open to dialogue and some of the biggest state investors eager “to learn.” KLP has just begun investing in Saudi Arabia for the first time. It currently excludes 12 companies in the region including Saudi Aramco, Emirates Telecom Group and Saudi Telecom, citing issues including the treatment of migrant workers, surveillance of the population, dominant state ownership and weak transition plans.
Why EU regulation may not help
Aziz only gives a cautious welcome to new EU rules on corporate sustainability reporting and disclosure. It remains unclear how the new regulation will ultimately help investors, she says.
“We will have to wait a few years before we can see what value we can extract,” she says.
She welcomes the regulation for creating a level playing field around corporate disclosure but says reporting has required a great deal of effort (for institutional investors and corporates) and interpretations of the regulation will differ. Moreover, the quantity of regulations and standards means much of the regulation overlaps.
“The assessments we do of corporate disclosure data will be different to other investors and we don’t know if it will lead to value for the end user.”
She worries that the focus on reporting has steered companies away from transitioning to a green economy. “You need a balance between reporting and enforcing reporting, and doing the actual work,” she says. “It’s difficult to say if EU regulation will lead to changes in the strategic priorities of companies.”
She also warns that reporting should not be seen as a substitute to investor engagement. A company’s level of reporting and disclosure might garner a positive ESG rating on MSCI and with other data providers. But that won’t reveal the tone and culture at the top which only becomes apparent through engagement.
“It is very important institutional investors continue to engage because when an investor chases for information it has an impact on management and the board. We hear this off the record. Although engagement comes with limited tools it sends a signal to companies to change their behaviour.”
For example, KLP owns 1 per cent of Norwegian energy group Equinor which has published its transition plan. Unconvinced that the company’s short and long term targets go far enough, KLP voiced its concerns and decided not to support it. In contrast the Norwegian government, which owns 56 per cent of the company, voted for the transition plan.
It leads Aziz to one final reflection.
“We do our part, but we also rely on government and policy makers to step up. You can’t put all the pressure on institutional investors,” she concludes.
