As China’s onshore market opens-up and participation from overseas investors increases, we are seeing a greater focus on the importance of investment stewardship and engagement. In this report, we reveal how investors, companies and regulators are playing a part in building a solid foundation for sustainable investment in China.
Stewardship is the bedrock of sustainable investing and requires a long-term view. The premise is that responsible voting and active engagement will drive better corporate behaviours and more sustainable financial returns over time. This in turn contributes to the healthy long-term development of capital markets.
When it comes to China, many people may initially picture a huge, freewheeling market where millions of retail investors revel in speculation and sustainability is an alien concept. But developments on the ground in China show how stereotypes like this are swiftly becoming outdated.
Through a proprietary survey of voting data and anecdotal evidence from corporate engagements*, this report demonstrates how investors, companies and regulators in China have all played a part in building what is today a solid foundation for sustainable investment and engagement. The picture that emerges is one of steady progress across the board when it comes to investment stewardship in China.
This evolution has been underpinned by developments across three main areas. First, the key starting point has been a steady decline in ownership concentration, which has opened the door for non-controlling interest to play a more active role in the governance of companies. Second, despite prevailing stereotypes, the market has gradually rebalanced away from being retail-driven: individual investors owned 95% of free-float shares in 2003, but this fell to 70% in 2010 and stands at just over 50% today. Third, foreign participation has jumped over the last few years as China opens its financial borders, which has helped bring domestic practices more in line with global standards.
Average controlling interest as a % of total shareholding across all A-shares declines in China
Source: Fidelity International, ZD Proxy, Wind, November 2020.
Institutional ownership across all A-shares rises in China (as a % of free-float)
Source: CICC, July 2020
Changes in voting patterns
Voting participation has been slowly but steadily rising in China's onshore market. Excluding controlling interests, the average voting turnout has risen to 26.2% of non-controlling shares last year, up marginally from 25.5% in 2017. The change has been more pronounced at companies without a controlling shareholder, where voting participation jumped to 36.5% from 33.1% in 2017.
The rising trend of participation in shareholder votes suggests that more shareholders and asset managers active in China are taking the responsibility of ownership more seriously - and exercising their ballots instead of simply voting with their feet and divesting, as they may have done in the past.
Indeed, we are also seeing more shareholders casting votes against resolutions they dislike, instead of swallowing them in silence. The number of resolutions receiving more than 10% "against" votes has increased by about 20% from 2017. Among the measures seeing greater opposition, the most common ones involved board elections, loan guarantees and related-party transactions.
Companies are growing more responsive
Companies aren't just getting more responsive in matters of voting; on ESG issues, too, our study sees firms making more and better disclosures. Although ESG disclosure is not yet mandatory in China, a growing number of listed companies are making voluntary filings. Last year, a total of 945 onshore firms disclosed their ESG performance in so-called Corporate Social Responsibility reports, accounting for more than a quarter of A-share companies. That is up 18% from 801 firms in 2017.
Companies and managements are responding to rising participation among investors by making it easier to take part in voting and to initiate ESG engagement. While improvements like this may appear small, for minority shareholders they represent a welcome and tangible step toward streamlining the procedural elements of investing in China.
Stewardship has already come a long way in China, but there is still ample scope for shareholders to increase their participation as corporate stewards in China's onshore market. This is a matter of both participating more in the voting process and amplifying their votes on issues of core concern. It is also a matter of engaging more directly and effectively with companies. In this regard, the full report offers some practical examples of what this looks like in practice.
Download the full version of our China Stewardship Report 2020 here.
*The study encompassed 6,922 shareholder meetings and 43,280 resolutions made from 2017- 2019 by 676 companies that were or have been constituents of the MSCI China A Onshore index during this period (including 79 A-share companies with dual H-share listings in Hong Kong).
This content is for investment professionals only and should not be relied upon by private investors.
This information is for investment professionals only and should not be relied upon by private investors. Past performance is not a reliable indicator of future returns. Investors should note that the views expressed may no longer be current and may have already been acted upon. A focus on securities of companies which maintain strong environmental, social and governance (ESG) credentials may result in a return that at times compares unfavourably to the broader market. No representation nor warranty is made with respect to the fairness, accuracy or completeness of such credentials. The status of a security's ESG credentials can change over time. Changes in currency exchange rates may affect the value of investments in overseas markets. Reference in this document to specific securities should not be interpreted as a recommendation to buy or sell these securities, but is included for the purposes of illustration only. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM1220/32771/SSO/NA