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ASrIA Editorial: Two Environmental Accidents in China Illustrate that Disclosure Needs Three Not Two to Tango

Date: July 27, 2010

By Dave Doré, ASrIA

Hey baby, how about this dance?
Why? 'cause it takes two to do this dance!
-- Louis Armstrong, 'Takes Two to Tango'

Increase in disclosure risk relating to corporate environmental performance

Weeks before the July oil pipeline explosions in Dalian's Xingang harbour and a major toxic chemical leak at a copper plant in Fujian, IHS Global Insight issued its Top 10 Emerging Banking Risks. Bank analysts would not be surprised to find China among the top ten: "the surge in lending during 2009 and 2010 has dramatically escalated crisis risk in China." Likewise, investors encounter disclosure risk related to corporate environmental performance.

Take the chemical leak at a Zijin Mining Group's copper plant in Fujian which started on 3 July. Listed in Hong Kong (HK.2899) and Shanghai (SHA.601899), Zijin Mining is China's largest gold producer by capacity (over 75,000 kg of gold produced in 2009) and second largest copper producer. Faced with the environmental crisis, Zijin executives chose not to inform the China Securities Regulatory Commission (CSRC) about the acid leakage into a reservoir and nearby Ting River until 12 July. The delayed disclosure appears to have contravened the Shanghai Stock Exchange (SSE) Guideline on Environmental Information Disclosure by Listed Companies, issued in May 2008. Meanwhile, the CSRC is examining whether company executives breached disclosure rules.

Investors did not take kindly to the nine-day delayed announcement, sending shares tumbling 20% to HK$4.47 on 19 July. Shares have recovered to HK$4.99 as of 23 July. The most recent CSRC probe comes almost four months after another CSRC investigation into Zijin Mining's alleged violations on information disclosure of securities laws and regulations. According to Caixin, Zijin Mining ranked first on a Ministry of Environmental Protection list of 11 companies with severe environmental problems in a May report.

Investors need to demand more corporate disclosure on environmental and social issues

Contrast Zijin Mining's inexcusably slow response with the relatively robust response of PetroChina and Dalian Port two weeks later in the aftermath of a July 16 pipeline explosion in Dalian's Xingang harbour. China Securities Journal reports that the explosion happened when Shanghai-based Q.Pro Inspection & Technical Services Co. incorrectly injected a catalyst into the pipeline to remove sulphur from Venezuelan crude oil. Investors well remember PetroChina's lacklustre response in the wake of the November 2005 explosion at a subsidiary's nitrobenzene plant along the Songhua River.

Curious to learn about PetroChina's major shareholders (See below.) I dusted off my copy of PetroChina's Q1 2010 Report.

Top ten PetroChina shareholders holding shares without selling restrictions

Source: PetroChina (Figures as of 27 April, 2010).

Index funds need not be passive (and powerless) when it comes to voting their shares

Institutional investors need to take a more active role in questioning their investee companies' environmental policies, strategic planning and emergency response planning. One of the most direct ways investors can influence corporate behaviour is through proxy voting. "The proxy," Mary Schapiro, Chairman of the U.S. Securities and Exchange Commission, explains in a recent hearing, "is often the principal means for shareholders and public companies to communicate with one another and for shareholders to weigh in on issues of importance to the corporation."

From an outside-in perspective, there is a possibility that one or more of PetroChina's major shareholders quietly raised issues about the company's environmental performance. But the fact that most in the top ten are passive investors (i.e., index funds) need not mean they reflectively vote with management. It may seem counterintuitive but passive investors can be powerful allies able to generate shareholder value through better understanding and risk management of environmental, social and corporate governance issues.  

Chinese asset owners should match growing corporate sophistication

There is evidence that Chinese corporates are getting more sophisticated with environmental disclosure, as requirements to report and disclose environmental information are expanded. For instance, the report Hong Kong's Role in Mending the Disclosure Gap highlights that PetroChina disclosed the diesel oil leakage accident that contaminated the Yellow River at the end of 2009. Much of the pressure has come from government efforts: the State Council's Open Government Information Regulations; the Ministry of Environmental Protection's Information Disclosure Measures and Guidelines on Strengthening Environmental Protection Supervision and Management of Listed Companies and so forth.

More government legislation or regulations, therefore, is not the panacea to ensure greater corporate disclosure. Rather, pressure from one critical group of Chinese investors, namely pension funds, could prove decisive. The RMB 777 billion National Social Security Fund (NSSF), for example, could be a leader in demanding more corporate environmental and social disclosure. Their role as a universal owner - with exposure along the entire value chain, from upstream companies in metals & mining and oil & gas to downstream consumer goods companies – means that requiring greater disclosure is in its own interest. We made this point in our recent The Time to Lead is Now report.

It takes three not two to tango

Managers need to disclose their environmental performance and asset managers and owners need to let executives know that this information is used and valued. Sorry, Mr. Louis Armstrong, it takes not two but three to tango.