
Contextualising ESG funds' engagement strategies in Asia
The report examines the engagement strategies of ESG funds in Asia, highlighting the unique challenges posed by regulatory constraints, concentrated ownership, and political influences. Using a structured engagement pyramid, the study categorises ESG fund strategies, ranging from investment screening to direct corporate control. Despite obstacles, notable regional features can support ESG initiatives, such as shareholder voting mechanisms and strategic collaborations. The report provides insights into how ESG funds navigate these challenges to influence corporate governance and sustainability outcomes in Asia.
Please login or join for free to read more.

OVERVIEW
Introduction
ESG-oriented funds have grown substantially, with professionally managed portfolios incorporating ESG factors surpassing USD 17.5 trillion globally in 2018. ESG assets under management (AUM) are expected to reach USD 33.9 trillion by 2026, making up 21.5% of global AUM. However, concerns over greenwashing have led regulators in the US, UK, and Singapore to impose stricter guidelines on ESG labelling.
While studies show that ESG funds support sustainability-related shareholder resolutions more than non-ESG funds, there is limited research on how these funds engage with companies in Asia. Regulatory constraints, concentrated ownership, and political influences create significant challenges in this region.
Regulatory and structural difficulties for foreign ESG funds in Asia
Foreign ESG funds face investment restrictions across Asia. Japan and Korea require foreign investors to disclose shareholdings above 1% and 5%, respectively. China maintains foreign ownership caps in several industries, while India mandates regulatory approval for foreign funds. These barriers can deter collective shareholder action.
Concentrated ownership structures, where firms are controlled by families, the state, or cross-shareholding arrangements, limit the influence of minority ESG investors. In China, 76.7% of firms targeted by activist campaigns from 1994 to 2021 lacked a dominant shareholder, illustrating the challenge of influencing firms with controlling owners.
Political factors also shape ESG engagement. SOEs may prioritise national policies over ESG considerations, while sovereign wealth funds tend to avoid activism to prevent political repercussions.
Data inconsistency remains a challenge. While sustainability reporting in Asia has improved, it often lacks alignment with global frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD). This creates difficulties for ESG funds in assessing corporate ESG performance.
Fitting ESG funds’ engagement strategies into the engagement pyramid
The study categorises ESG engagement into an Engagement Pyramid, ranging from passive to highly active strategies.
At the base, investment screening and divestment allow funds to exclude firms misaligned with ESG principles. APG’s divestment from Korea Electric Power Company in 2020 exemplifies this strategy after the company proceeded with coal plant projects despite investor objections.
Following engagement involves public criticism and direct dialogue with management. Nordea Asset Management engaged Alibaba on gig-worker conditions, leading to higher wages, insurance coverage, and worker benefits in 2023.
Participation in AGMs through voting is another key strategy. The Canada Pension Plan Investment Board (CPPIB) opposed director reappointments at 35 firms in 2022 due to climate risk concerns. However, concentrated ownership often weakens the impact of voting.
Filing shareholder proposals provides a more active approach. In Japan, Amundi Asset Management and others filed a climate-related resolution at J-Power in 2023, though it was rejected. A similar resolution at Toyota secured 15% shareholder support, increasing pressure on the company to improve its climate disclosures.
Board influence remains rare due to capital constraints. However, Oasis Management’s success in replacing directors at Sun Corporation in 2020 with only a 9.2% stake demonstrates potential opportunities.
Asia’s notable features
Despite challenges, specific regional features can support ESG engagement. Related-party transactions often require approval from minority shareholders, allowing ESG funds to influence governance decisions through their voting power.
Unusual voting mechanisms, such as Korea’s 3% rule limiting large shareholders’ voting rights in auditor appointments, create opportunities for minority investors. Align Partners successfully appointed an independent auditor at SM Entertainment despite holding just 1.1% of shares.
Symbolic companies—those closely tied to national identity, such as Toyota and Mizuho Financial—are more responsive to public scrutiny. ESG funds have leveraged shareholder proposals and media campaigns to push these firms towards sustainability commitments.
Collaboration with state-backed investors offers another engagement pathway. In China, domestic asset managers such as China Asset Management Company (CAMC) have promoted ESG initiatives in partnership with state-owned enterprises. Foreign ESG funds may enhance their influence by working with these investors.
Conflicts of interest among institutional investors can hinder ESG engagement. Large investors with business ties to investee firms may avoid supporting ESG resolutions. Public scrutiny of these relationships can pressure institutional investors to adopt stronger ESG stances.
Conclusion
ESG funds in Asia face structural and regulatory challenges, but strategic engagement remains possible. The Engagement Pyramid illustrates a spectrum of strategies, from passive screening to direct corporate influence. While concentrated ownership limits traditional activism, ESG funds can leverage shareholder approval requirements for related-party transactions, target symbolic companies, and collaborate with domestic institutional investors to advance sustainability goals. Further research is needed to assess the effectiveness of these engagement strategies in improving corporate ESG performance and financial outcomes.