Asia-Pacific

Shareholder Dissent on the Increase at Chinese Companies – Fidelity

Engagement and disclosure on ESG factors on the rise, as asset owners encouraged to increase allocations to A-shares.

Stewardship and sustainable investing are fast gaining ground as China opens up further to international investors, according to Fidelity International’s ‘China Stewardship Report 2020’.

Participation in shareholder voting has had a slow, but steady climb in the Chinese onshore market, says the report, with declining ownership concentration allowing non-controlling shares to play a more active role in company governance.

In companies without a controlling shareholder, the average voting participation rate increased to 36.5% last year from 33.1% in 2017, the report said.

Fidelity also noted that while an increasing number of investors are now voting, more shareholders are also voting against company resolutions they don’t agree with, including on ESG issues.

The number of resolutions that received more than 10% ‘against’ votes jumped to 385 in 2019, an increase of approximately 20% from 2017. “Among the measures seeing greater opposition, the most common ones involved board elections, loan guarantees and related-party transactions,” the report noted.

But there are also signs of greater engagement on ESG factors. The number of Chinese signatories in the UN-backed Principles for Responsible Investment (PRI) rose to 51 as of November 2020, up from just seven in 2017.

Local investment management companies are increasingly establishing dedicated sustainable investment capabilities and have launched over 70 ESG-related products since 2005, with one-third of those launched in 2019 alone.

The report asserts that ESG disclosure quality and volumes are rising, with 945 onshore Chinese firms publishing corporate social responsibility reports, or almost a quarter of all A-share issuers.

Calls for greater allocation

Separately, Willis Towers Watson has released research arguing that international asset owners should consider at least doubling their average exposure to China, also warning of the need for “substantial investment and operational due diligence”, especially with regard to ESG factors.

Despite efforts by Chinese policymakers to open up domestic markets over recent years, factors including trade tensions between China and the US have kept average institutional allocations to China at about 5% of growth portfolios. But scenario analysis by the Willis Towers Watson suggests investors should build an allocation of almost 20% of growth portfolios over the next decade.

The firm’s research offers diversification benefits and attractive alpha opportunities as reasons why foreign investors should look to invest more in the Chinese market. The country’s size and its unique political and economic regime mean investors should consider a standalone allocation, it added, noting the tensions between financial market liberalisation and technology and supply chain decoupling.

With 80% of China’s trading volume taken up by retail investors, Willis Towers Watson sees significant potential for institutional investors. But the report warns that several managers have failed the investment consultant’s culture and ESG scores.

“China is under-represented in most global investment portfolios. Its size and scale make it worthy of a standalone allocation, but most asset managers lack the expertise to handle this. Yet, the China A-share market offers a dynamic and broad opportunity set within a ripe market environment for institutional investors to access a new source of alpha,” said Paul Colwell, Head of Advisory Portfolio Group, Investments Asia, Willis Towers Watson, and co-author of ‘The Merits of a Standalone Equity Allocation to China’.

“The key is to find managers who can deliver alpha sustainably over time whilst also taking a disciplined and risk-aware approach,” he added.

 

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