China's state pension fund should adopt a stewardship code and play a bigger role in driving environmental, social and governance standards in China.

That's the view of the Asian Corporate Governance Association (ACGA), a non-profit body pushing for better governance standards across Asia since its founding in 1999.  

“I don’t see corporate governance gaining a huge amount of popularity among asset owners [in China]," Jamie Allen, ACGA's secretary general, told AsianInvestor on the sidelines of a press briefing on Tuesday. "It will be good to see the National Social Security Fund (NSSF) talking more about governance issues.” 

“If one of the leading asset owners in China gives a very clear signal to companies that this is important," he added, "gradually companies will start taking it more seriously, and they won’t just tick the box.” 

China is in a very hierarchical system. People generally follow what the above requires them to do, Allen said.

It makes sense to have large asset owners in any market drive environmental, social and governance (ESG) standards there, particularly someone like NSSF who gives out mandates to asset managers domestically, a Singapore-based head of corporate governance at a global fund house, told AsianInvestor on condition of anonymity.

ACGA noted that China is among one of only three leading countries in Asia that has not yet adopted a stewardship code, which encourages investors to use their shareholder voting rights to influence the behaviour of their invested companies in a constructive way.

In order for a stewardship code to be meaningful, big institutional investors need to take the lead in any market, ideally pension funds since they are long-term investors, Nana Li, senior research analyst at ACGA, told AsianInvestor.

Even if China adopts a stewardship code, it will not be meaningful without the support of an influential institutional investor. The code is a principles-based one; there is no punishment when investors in the country do not follow it, she said.

RECENT DEVELOPMENTS

NSSF had $270 billion of assets under management as of end 2016, AI300 data shows, and by the time this article went to press it had not replied to AsianInvestor’s query over whether it plans to adopt a stewardship code.

That's not to say that the Chinese authorities have been standing still on the issue.

Earlier this month, the China Securities Regulatory Commission finished a one-month consultation about better corporate governance in listed companies. The China Banking and Insurance Regulatory Commission, on July 9, also issued a new rule about the duties of independent directors at insurance companies for stronger corporate governance.

In addition, the Asset Management Association of China (Amac) has just finished consulting the investment industry this Monday on proposed new green-investment guidelines. The guidelines are expected to help fund managers choose good-quality stocks and will be instrumental in improving the governance of listed companies.

“China does appear to be at a turning point,” Allen said. “In the last year or 18 months, we have seen some [change in] policies …. I am feeling somewhat more positive now than I was a year ago.” 

Still,  NSSF’s involvement in ESG matters may only come slowly, Allen said, noting the low transparency of the asset owner and referencing the experience of some of its Asian peers.

NSSF, which has published its annual report no later than the end of June since 2004, has not yet released its report for 2017. A spokesman at NSSF told AsianInvestor earlier this month that it would be uploaded onto its website in due course, without giving more clarity about the date.

To be fair, it’s only recently that Japan’s Government Pension Investment Fund (GPIF) has played any role in promoting better corporate governance, and it’s the same for other asset owners across Asia, he said.

GPIF doesn’t want a return tomorrow at the expense of the future sustainability of the company being invested into or the capital markets system,” its CIO Hiromichi Mizuno told AsianInvestor. As a result, the pension fund now demands that all of its fund managers follow ESG protocols when managing money on its behalf. The pension fund goliath also accepted a stewardship code in 2014.

For more insights on investing in China, AsianInvestor is hosting its 5th China Global Investment Forum in Beijing on September 13. For more details, visit the website or contact us on +852 2122 5262.