Navigating ESG Engagement in Asia: Challenges and Opportunities for Sustainable Investors

Sustainable investing in Asia presents unique challenges and opportunities for ESG-oriented funds. In our paper ‘Contextualising ESG Funds' Engagement Strategies in Asia.’we analyze how ESG funds navigate Asia's distinctive business landscape to advance sustainability objectives.

ESG funds operating in Asia face four significant obstacles. First, foreign investors encounter varying degrees of regulatory barriers across Asian jurisdictions. While Singapore maintains minimal restrictions, countries like Japan, China, South Korea, and India impose more stringent requirements, including disclosure obligations and shareholding caps. Second, Asian firms are typically characterized by concentrated shareholding patterns—Korean chaebols, Japanese zaibatsu, Indian industrial houses, and state-controlled entities in China and Singapore. This concentration limits the influence of minority shareholders like ESG funds. Third, state-owned enterprises and sovereign wealth funds predominate in Asia, potentially prioritizing national agendas over ESG concerns. Foreign funds risk accusations of political interference when promoting sustainability initiatives. Finally, the region's diverse regulatory frameworks create a confusing landscape of disclosure standards, making it difficult for investors to access reliable and consistent ESG information.

We introduce an ‘Engagement Pyramid’ framework that classifies ESG funds' engagement strategies based on their level of involvement in corporate processes. At the base level is ‘Observing’, which involves investment screening and divestment based on sustainability criteria. Moving up, ‘Follow Up’ entails public criticism through media campaigns and management dialogues. ‘Participating’ involves attending shareholder meetings and exercising voting rights, while ‘Contributing’ means filing shareholder proposals to influence corporate policy. ‘Owning’ requires acquiring sufficient shareholding to appoint directors, and at the highest level, ‘Controlling’ involves directing the board and initiating litigation.

Through analysis of 16 ESG funds active in Asia, we demonstrate that most engagement activity occurs at the lower to middle levels of the pyramid. The strategies of ‘Follow Up’, ‘Participating’, and increasingly ‘Contributing’ are most commonly deployed, while ‘Owning’ and ‘Controlling’ remain rare due to the challenges of concentrated shareholding structures.

Despite these challenges, our research identifies five notable features of Asian markets that ESG funds can strategically leverage. Given the prevalence of related-party transactions (RPTs) in concentrated ownership structures, minority ESG funds can exercise voting power in these transactions to extract ESG concessions from controlling shareholders. Certain jurisdictions like South Korea have special voting provisions that limit controlling shareholders' voting rights. For example, the ‘3% Rule’ restricts any shareholder from voting more than 3% of total shares when appointing statutory auditors or audit committee members, enhancing minority influence.

Many Asian conglomerates hold significant economic and political importance, making them sensitive to reputational damage. Public criticism or shareholder proposals can influence these ‘symbolic companies’ despite minority investors' limited voting power, as seen with Japan's Mizuho Financial Group and Toyota. In state-dominated markets like China, ESG funds can become strategic investors or collaborate with state-backed institutional investors to pursue sustainability goals with government support. Finally, by publicly highlighting conflicts affecting institutional investors with business ties to investee companies, ESG funds can exert pressure on these institutions to support sustainability initiatives.

Our analysis in the paper offers valuable insights for ESG funds seeking to navigate Asia's complex investment landscape. Success requires contextualizing strategies to account for Asia's distinctive ownership structures and regulatory environments. For example, when APG Asset Management engaged with HDC Hyundai Development over safety concerns, it filed targeted shareholder proposals that were ultimately accepted by management and approved at the AGM. Similarly, Nordea Asset Management's dialogue approach with Alibaba led to improved working conditions for gig workers on its Ele.me platform.

The research illuminates how ESG investors can adapt their engagement strategies to Asia's unique context. Despite challenges posed by concentrated ownership and regulatory restrictions, funds can leverage distinctive features of Asian markets to advance sustainability objectives. As sustainability investing continues to grow in importance globally, understanding these nuanced regional dynamics will be crucial for ESG funds seeking to effect meaningful change in Asian markets. The Engagement Pyramid and the five notable features in the Asian jurisdictions provide a valuable framework for funds to strategically assess their level of involvement and choose appropriate engagement tactics based on local conditions.

A copy of the full paper can be found here. 

Luh Luh Lan is an Associate Professor at National University of Singapore, Faculty of Law

Ernest Lim is a Professor at National University of Singapore, Faculty of Law.