Unlocking the potential of investor stewardship in China: towards a more sustainable economy

Institutional investors can be important actors in ensuring effective corporate governance, the development of the real economy and the achievement of sustainability and climate goals. In their roles as owners of and lenders to companies in the real economy, they can use their rights and influence to drive positive change among investees in a process known as stewardship. 

The case for stewardship, or active ownership, is set out in Part I. It is defined as the use of influence by institutional investors to maximise overall long-term value, including the value of common economic, social and environmental assets, on which financial returns and clients’ and beneficiaries’ interests depend. It is derived from investors’ fiduciary duties, and is reflected in the PRI’s Principle 2, which requires signatories to be “active owners and incorporate ESG issues into [their] ownership policies and practices”. 

Through engagement with company management and voting at company meetings, as well as employing other tools, investors can use stewardship to improve risk and return, fulfil their fiduciary responsibilities, meet regulatory obligations and deliver real-world ESG outcomes. 

To encourage institutional investors to engage with investees in a constructive and responsible manner, some 23 countries and regions have adopted stewardship codes to further guide investor stewardship activities. These share some common principles but are also tailored to the specific contents of each jurisdiction.

Stewardship in China

Despite the rapidly growing size and sophistication of financial markets and institutional investors in China, limited regulatory attention has been paid thus far specifically to stewardship practices. However, within China’s existing regulatory framework, regulators are increasingly recognising the need for investors to manage ESG risks and impacts and support solutions to broader economic, social and environmental issues, including systemic ones. Recent regulatory developments for the asset management sector have laid foundations that could be used to clarify institutional investors’ stewardship responsibilities. 

Meanwhile, market participants in China are already pursuing a wide variety of stewardship practices, including in relation to ESG factors and sustainability outcomes. Part II of this report draws on case studies of nine signatories active in China. It examines why they practise stewardship, how they do so, the challenges they face and some potential solutions.

Part III maps existing Chinese regulations against core stewardship principles common to other jurisdictions and identifies gaps and key areas for future policy reform.

Recommendations

Finally, Part IV offers five recommendations for Chinese policy makers for developing and improving the regulatory framework for effective stewardship. To do so, financial policy makers in China should:

• Recommendation 1: Develop a stewardship code
• Recommendation 2: Improve the sustainable investment policy framework and stewardship infrastructure
• Recommendation 3: Adopt a phased approach towards effective implementation of the stewardship code, avoiding mechanical box-ticking compliance
• Recommendation 4: Ensure a joined-up approach from financial regulators to create a common language for stewardship
• Recommendation 5: Encourage investors to leverage collaborative engagement to maximise the influence of minority investors