Active Ownership

We exercise shareholder rights, through external managers, in our public equity holdings in a manner that helps safeguard the long-term value of our investments, as we believe that responsible corporate behaviour guided by ESG factors will help create shareholder value in the long term.

Our Implementation
  • We require our external managers of Hong Kong equities and China active equities portfolios to comply with the Principles of Responsible Ownership (PRO) promulgated by the Securities and Futures Commission on a “comply-or-explain” basis. Our external managers of developed market equities portfolios need to adhere to generally accepted international ESG standards.
  • We require our external managers to discharge active ownership responsibilities through exercising voting rights and engage with the underlying investee companies concerned on our behalf.

Review of External Managers’ ESG and Stewardship Practices

We attach high importance to good ESG integration and stewardship practices of our external managers. Since adoption of the PRO in 2016, we have seen advancement in managers’ ESG practices. We have refined our manager engagement focus from general ESG control-centric to a risk-based approach that addresses assets and portfolios of the Exchange Fund which are exposed to higher ESG and climate risks.

Under the enhanced engagement framework, we review a manager’s justification for investing in companies associated with high ESG or climate-related risks, as well as its engagement work and voting records on the “focus companies”.

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  • 2022: Pilot engagement identified good ESG practices of emerging market managers

    A pilot engagement was conducted on selected managers of equities portfolios in emerging markets. Some useful observations and takeaway points were noted:

    • In general, active managers conducted bottom-up fundamental analysis, including an ESG assessment prior to investing. They also considered the value accretion opportunities from investing in “ESG improvers”, i.e. companies with attractive valuation where potential return would get a boost from expected ESG improvement. More importantly, ESG incorporation did not mean compromising on investment return. As demonstrated by one of the active managers, by selecting quality companies during the investment decision-making process, a portfolio’s investment return could outperform by more than 10% in 2021, and achieve a better ESG profile over the performance benchmark.

    • As reported by some active managers, public ESG data for emerging markets could be outdated, and the low availability and poor quality of ESG data highlighted the importance of engagement with companies in these markets. In order to conduct informed ESG assessments of “focus companies” operating in the emerging markets, conversations to better understand the company fundamentals are essential and could not be replaced by the use of public ESG data alone. Active managers also found engagement to be useful for encouraging companies to adopt better ESG practices.
  • 2021: Review of voting practices brought positive actions on climate change

    We reviewed the active ownership practices of a group of managers managing equities portfolios in advanced economies. The review also assessed the managers’ climate risk management.

    The review found that, in general, the managers’ active ownership practices were acceptable. We, however, noted an exception whereby one manager had voted against the climate-related shareholder resolutions in most cases, despite the manager’s public pledge projecting itself as a responsible asset manager with distinctive objectives and targets in climate change. When queried about the apparent inconsistency between its public pledge and proxy voting practice, the manager positively responded that going forward, it would support shareholder resolutions that bring positive actions on climate change as far as possible. The manager believes that concerted efforts among shareholders can accelerate the transition to greener outcomes.

  • 2020: Review to improve managers’ ESG framework and practices

    A group of selected external managers became the first to undergo the engagement programme that systematically examines various aspects of their ESG practices, such as their ESG assessment framework, engagement with investee companies, and work on proxy voting.  The exercise identified managers with questionable practices that necessitated follow-up action:

    • We detected that a manager had room for improvement in its ESG framework, specifically in establishing a more systematic approach to assess investee companies. We followed up on this with the manager, which embarked on a company-wide review to implement a more robust ESG framework. In particular, the manager engaged an external consultant to provide advice in the ESG process, demonstrating the manager’s determination to expedite implementation of the improved framework. The manager also set up a new ESG committee comprising senior management, affirming both its commitment to ESG and the backing from its senior management of the endeavour.

    • Having reviewed the voting practices of a manager, we identified areas for improvement in the manager’s voting policy and brought these up with its Head of ESG for review. Specifically, the manager’s voting decision was 100% in favour of the management’s proposal and deviated from its own proxy voting guidelines. The manager later undertook to enhance the company’s voting policy by incorporating the expectation that there would be greater involvement of its ESG team members and the possibility of voting against the management where governance issues are material.

Last revision date : 13 June 2023