Anticipated Surge in ESG Proposals in China’s Stock Market Due to Governance Reforms

China’s stock market is set to witness a notable increase in shareholder resolutions focused on environmental and social issues starting next year. This change is attributed to impending corporate governance reforms, enabling a broader base of minority shareholders to table proposals for shareholder meeting votes. According to Chris Liu Jianyuan, a stewardship analyst at Allianz Global Investors (Allianz GI), the revised company law, effective from July 1, will reduce the minimum ownership threshold for submitting shareholder resolutions from 3% to 1%.

This development, coupled with the China Securities Regulatory Commission’s (CSRC) action plan for 2022-25 to bolster governance among listed companies, is expected to empower more minority shareholders in influencing corporate decisions. However, the efficacy of these resolutions will largely depend on individual boards’ discretion, as the law grants them the authority to dismiss proposals deemed irrelevant or contrary to legal and regulatory standards or the company’s articles of association.

The reform, aimed at attracting foreign investment and enhancing the capital efficiency of state-owned enterprises, aligns with similar governance improvements in regions like South Korea and Japan. Despite foreign investors owning less than 5% of mainland-listed equity assets, the move signals a significant step towards active stewardship and ESG advocacy.

Allianz GI, managing assets worth €533 billion, has expressed intentions to expand its practice of disclosing some voting intentions before companies’ general meetings to additional Asian markets, including China. The firm leverages its proxy voting rights to address governance issues, such as gender diversity on boards and credible net-zero emission strategies among high greenhouse gas emitters.

With climate change poised as the foremost ESG engagement issue for Allianz GI in China next year, the reforms are timely. Mainland companies, especially those in energy-intensive industries, face critical climate risks and opportunities. The announced reforms by mainland bourses, mandating ESG disclosures for roughly 450 companies by 2026, present both challenges and opportunities for investors employing exclusion and best-in-class investment strategies.