Expect more proposals on ESG issues in China, as reforms unleash minority shareholder activism, Allianz GI says

Under the mainland’s revised company law enacted in December, from July 1, the minimum ownership threshold for submitting shareholder resolutions to be voted on at shareholder meetings will be lowered from 3 per cent to 1 per cent.

The move, together with the China Securities Regulatory Commission’s (CSRC’s) 2022-25 action plan to enhance listed companies’ governance, will allow many more minority shareholders to put forward proposals to be voted on by all shareholders.

However, as the law stipulates that a board has the right to reject resolutions it deems to be outside the remit of a shareholder meeting, or in contravention of laws and regulations, or the provisions of a company’s articles of association, the impact of resolutions will be subject to individual boards’ execution of power.

“The reform, aimed at attracting more foreign investment and improving the capital efficiency of state-owned enterprises, is also aligned with regional trends,” Liu said. “For example, governments in South Korea and Japan have been promoting better corporate governance in recent years.”

Over the past five years, foreign investors have consistently owned less than 5 per cent of the market capitalisation of mainland-listed equity assets, he added.

Fewer than 5 per cent of the 10,515 proposals at mainland-listed firms’ shareholder meetings in which Allianz GI took part were initiated by shareholders. Most were initiated by controlling shareholders for the election and removal of board directors.

“This highlights the need for more institutional investors to take an active approach in the stewardship of their assets,” Liu said, adding that so far there have been no examples of shareholder proposals on environmental and social topics.

The Germany-based investment firm, with €533 billion (US$577 billion) in assets under management, will consider expanding its practice of publicly announcing some of its voting intentions before companies’ general meetings in more Asian markets, including China, this year.

It already uses its proxy voting right to vote against top executives if, for example, a company has a single-gender board or, in the case of a high greenhouse gas emitter, if it fails to have a credible net-zero emission strategy in place.

Such strategies, which typically are adopted after years of engagement with listed companies on environmental, social and governance (ESG) issues, also include writing to the board and questioning management at general meetings.

Last year, Allianz GI voted against management or abstained in 19 per cent of the 1,320 shareholders meetings held at mainland-listed firms.

On the mainland, climate change and action will continue to be the top ESG engagement issue for Allianz GI next year, followed by biodiversity, the circular economy and resource use, Liu said.

Climate risks and opportunities management is the most material issue for mainland companies, he added, given many are highly exposed to energy-intensive industries and have just six years to reach a peak in absolute emissions nationwide.

“Most of the small and mid-cap stocks are not included,” Liu said. “This makes it difficult to apply exclusion and best-in-class investment strategies that require comparison with peers, due to insufficient comparable data.”

This poses a challenge and requires robust stewards at fund managers when managing mainland A share funds that are Article 8 funds subject to strict EU regulations for preventing greenwashing, or the act of making unsubstantiated sustainability claims, he added.