How are institutional investors shaping capital markets and why does it matter?

The new OECD report Institutional Investor Engagement and Stewardship examines how institutional investors engage with listed companies and how effective stewardship can strengthen the efficiency and resilience of capital markets. 

Asset managers alone hold 65% of listed equity in the United States and 59% in the United Kingdom. In emerging markets, their presence is also growing – 28% in South Africa, 23% in Brazil and 21% in India. Asset owner institutions hold 41% of the listed equity in Luxembourg and at least 10% in several other markets.

This concentration of ownership brings both opportunity and responsibility. When institutional investors engage effectively with companies, they can strengthen corporate governance and improve long-term performance. 

First, foreign institutional investors hold more shares in listed companies than domestic investors in almost 80% of OECD, G20 and Financial Stability Board (FSB) economies. Only a few countries such as Argentina, the People’s Republic of China, South Africa and the United States buck this trend, with domestic institutional investors holding larger equity stakes.

Second, concentration is increasing. The top 20% of assets managers now control 38% of all assets under management (AUM) across markets, up from 32% a decade ago. Their total AUM has grown 84% over the same period, reaching unprecedented levels. 

Third, index investing has surged. Index strategies now account for USD 26.7 trillion in AUM, with nearly 80% invested in listed equity. This shift matters because index investors face different engagement incentives than active managers. For example, they are not remunerated for identifying poorly performing stocks.

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Institutional investors engage with companies in multiple ways. Active investors typically focus on company-specific issues, while index investors often use topic-based engagement on broad themes. Engagement can be individual or collaborative, and it may occur privately (e.g., meetings) or publicly (e.g., statements).

When private engagements fail to achieve the desired outcome, some investors escalate to public action, especially in the form of shareholder resolutions. Analysis of 2024 shareholder meetings shows that management-initiated proposals are more frequent and usually approved, while shareholder-initiated proposals are comparatively rare and often fail. This pattern holds across thirteen jurisdictions examined in the report. 

Institutional investors owe fiduciary duties to their clients – legal obligations to act in their best interest. In theory, this is simple: put the client first. In practice, it is not always obvious what investors can do.

Institutional investors cannot pursue sustainability goals that compromise financial returns unless they have an explicit client mandate to do so. This means that when mandates are vague – for example, when they do not specify whether to engage on specific sustainability issues – investor discretion increases, and fiduciary duty becomes even more critical.

The challenge is that courts and regulators rarely second-guess investment decisions unless there are clear case of neglect or conflicts of interest. This makes transparency essential. Investors may need to disclose how they exercise stewardship to ensure their actions align with client expectations. Therefore, effective engagement requires clear rules, transparent practices and well-defined duties.

Jurisdictions worldwide are developing regulatory frameworks to support effective stewardship. These frameworks typically combine laws, self-regulatory rules and guidance to achieve three core goals: improving governance, increasing transparency and addressing conflicts of interest.

Stewardship codes have emerged as a key tool. These codes set principles for how investors should engage with companies, often using a “comply or explain” model. They increasingly incorporate expectations around sustainability issues such as climate change. 

The path forward requires collaboration between policymakers, regulators, investors and companies to build frameworks that support effective stewardship and market efficiency.

Here are three areas where policymakers could focus:

1. International co-operation may be important to identify good policies and practices for developing stewardship frameworks. With foreign institutional investors owning more shares than domestic ones in almost 80% of OECD, G20 and FSB economies, divergent national rules create complexity and potential conflicts between investor expectations and company practices.
2. Greater convergence in sustainability-engagement frameworks could improve capital market efficiency. When environmentally and socially focused asset owners and managers align their approaches at the mandate and contractual stages, markets may function more smoothly.
3. Effective engagement frameworks can address concerns about institutional investors engaging on environmental or social issues. Clear frameworks legitimise investor action on financially material issues, while preventing overreach into issues that do not affect financial returns or that conflict with client mandates.