This chapter reviews regulatory frameworks for investment management and stewardship across jurisdictions including laws, self-regulatory requirements, guidance, and other mechanisms. In particular, the chapter analyses the emergence and evolution of stewardship codes which are increasingly common in many jurisdictions. The chapter also highlights some recent examples of actions jurisdictions have taken to enhance the regulatory framework for stewardship and institutional investors. Complementing this analysis, it examines the regulatory framework for proxy advisors as key intermediaries in the investment chain. The chapter also discusses the fiduciary duties of institutional investors and how these obligations can shape, and in some cases limit, the scope of stewardship on environmental and social issues without a clear client mandate.
Institutional Investor Engagement and Stewardship
Abstract
Institutional investors have become crucial public equity owners in many markets over recent years. In line with this growth, the influence of institutional investors has taken a crucial role in the corporate governance of companies. Recognising this importance, the G20/OECD Principles of Corporate Governance (hereafter “G20/OECD Principles”) and regulatory frameworks have focussed on how institutional investors oversee and engage with investee companies to enhance and protect the value of investments on behalf of their clients and beneficiaries (OECD, 2023[63]).
The G20/OECD Principles provide a comprehensive framework to help policymakers evaluate and improve the legal, regulatory and institutional framework for corporate governance, with a view to supporting market confidence and integrity, economic efficiency, sustainable growth and financial stability. Chapter 3 of the G20/OECD Principles emphasises the importance of aligning incentives through the investment chain. In response to the growing influence of institutional investors and intermediaries, the G20/OECD Principles recognise stewardship codes and transparency regarding the role of entities and professionals that provide analysis or advice relevant to investor decision-making, including proxy advisors.
Principle III.A. of the G20/OECD Principles recommends that institutional investors acting in a fiduciary capacity should disclose their policies for corporate governance and voting with respect to their investments. Such transparency allows beneficiaries and clients to better understand how their investments are managed and the strategies used for engagement. Principle III.C. recommends institutional investors to disclose how they manage conflicts of interest that may affect the exercise of key ownership rights regarding their investments as these could impact decision making and the discharge of their fiduciary duties. For entities and professionals that provide analysis or advice relevant to decisions by investors such as proxy advisors, Principle III.D. emphasises that conflicts of interest should be disclosed and minimised and methodologies used by these entities and professionals should be transparent and publicly available.
Institutional investors are intermediaries that invest on behalf of their ultimate beneficiaries, which raises specific monitoring and stewardship concerns (OECD, 2023[64]). The regulatory framework relating to investment management and stewardship is formed by a mix of laws, codes, self‑regulatory requirements, guidance and other mechanisms. This stewardship regulatory framework varies across jurisdictions and typically comprises a mix of public and private requirements and recommendations that, among other aspects, aim to improve governance and transparency and address conflicts of interest.
Looking at the 52 jurisdictions included in the 2025 OECD Corporate Governance Factbook, Figure 3.1 shows that many jurisdictions have specific requirements or recommendations for monitoring investee companies, maintaining the effectiveness of monitoring when outsourcing the exercise of voting rights and engaging on sustainability matters (OECD, 2025[22]).
Note: Based on 52 jurisdictions, including all 38 OECD Members, as well as all non-OECD G20 and FSB members (Argentina, Brazil, China, Hong Kong (China), India, Indonesia, Saudi Arabia, Singapore and South Africa), as well as Malaysia and Peru. The figure also includes Bulgaria, Croatia and Romania as OECD accession candidate countries. For the data, see Table 3.17 of (OECD, 2025[22]).
Source: OECD (2025[22]), OECD Corporate Governance Factbook 2025, https://doi.org/10.1787/f4f43735-en.
The main characteristics of regulatory frameworks related to institutional investors’ stewardship is set out in Table 3.1 below, focussing on a selection of jurisdictions that gives a diverse range of examples and market structures. The stewardship framework typically comprises requirements imposed by a public authority (e.g. laws, resolutions, regulations or codes set by public authorities), by private initiatives (e.g. investor associations setting codes, guidelines or other standards), or a mix of these approaches, as is the case in Australia, Brazil and South Africa. In addition, many jurisdictions impose requirements depending on the type of institutional investor (e.g. pension fund, insurer, investment fund and asset manager).
A stewardship code typically contains principles stating standards for the manner and type of engagement of institutional investors with investee companies. Stewardship codes have been introduced in at least 19 jurisdictions and offer a complementary regulatory mechanism to encourage institutional investors to disclose their corporate governance and voting policies and procedures (OECD, 2025[22]). An increasing number of jurisdictions have adopted stewardship codes or required disclosure by institutional investors (asset owners and managers) on how they engage with investee companies and vote in shareholder meetings, as part of the tools within their regulatory framework (Katelouzou and Puchniak, 2023[65]). Stewardship codes vary between being set by public authorities (e.g. Japan and the United Kingdom) or by private sector organisations, such as industry associations (e.g. Australia, Brazil, South Africa and the United States). Signatories may be required to explain in their annual report the extent to which the principles in the codes have been complied with or diverged from and why.
The formulation of institutional investors’ voting policies generally must be in line with their fiduciary duties to their clients and beneficiaries (Section 3.4). The disclosure of voting policies and actual voting records is a crucial aspect that forms the regulatory framework of most jurisdictions (Figure 3.2). Out of 52 surveyed jurisdictions in the 2025 OECD Corporate Governance Factbook, the vast majority (all but six) now require or recommend that some institutional investors disclose their voting policies. Seventy-three percent of this same group of 52 jurisdictions also recommend or require the disclosure of the actual voting records (OECD, 2025[22]). However, often the quality and comparability of voting records vary across institutional investors and jurisdictions. In the United Kingdom, the Financial Conduct Authority (FCA) worked alongside the institutional investment industry to design a voluntary vote reporting template for asset managers in the UK to ensure asset owners have more consistent, up-to-date and comparable data which would position them to make timely and accurate decisions based on the information received.
Note: Based on 52 jurisdictions. For the data, see Table 3.16 of (OECD, 2025[22]). The category “Code & Ind. Assoc. Req.” refers to jurisdictions that possess both a code and a self-regulatory requirement by industry association(s) without comply or explain disclosure requirements.
Source: OECD (2025[22]), OECD Corporate Governance Factbook 2025, https://doi.org/10.1787/f4f43735-en.
Some jurisdictions oblige or encourage institutional investors to vote on specific matters. For example, Switzerland requires pension fund schemes to vote in the interest of their insured persons on specific matters, including the compensation and election of the board of directors and compensation committee members. In Israel, institutional investors, like fund managers, insurance companies, pension funds and provident funds, must vote on certain resolutions. The reverse is also observed in certain countries, where there are constraints on voting for certain investors (e.g. one of the state‑owned pension funds in Sweden, the Seventh National Pension Fund referred to as AP7) (OECD, 2023[64]; Hamilton and Eriksson, 2011[66]).
The rationale behind either making voting mandatory or imposing constraints on voting by some types of institutional investors differs depending on the policy objective and market structure. For instance, making voting mandatory may aim to increase participation from shareholders in the corporate governance of investee companies if there is increasing index institutional investor ownership in the market. Or conversely, some jurisdictions may impose stricter voting requirements for institutional investors with significant shares of the AUM in the domestic market, to prevent excessive influence, for instance, state influence on investee companies’ business strategy (Charléty, Fagart and Souam, 2019[67]; Fukami, Blume and Magnusson, 2022[68]; OECD, 2023[64]; Hamilton and Eriksson, 2011[66]).
Instead of introducing a stewardship code, the EU introduced the Shareholder Rights Directive II (SRD II), which aims to strengthen the engagement of shareholders and increase transparency. This directive has resulted in more jurisdictions requiring or recommending that institutional investors disclose both voting policies and voting records (OECD, 2023[64]). To assist with implementing this directive, the European Fund and Asset Management Association (EFAMA) revised their Stewardship Code in 2018, which aims to be a European reference document for asset managers seeking to comply with the SRD II, in particular the engagement policy requirement (EFAMA, 2018[69]).
Further, requirements or recommendations for institutional investors to monitor investee companies are common in many regulatory frameworks (in 44 of the 52 jurisdictions in the Factbook) (Table 3.1).
Conflicts of interest are an important issue to consider when examining the regulatory framework because they can undermine the trust and accountability required when institutional investors manage investments and for meeting fiduciary duty obligations. Conflicts of interest can occur at multiple levels, including where a bank provides corporate finance advisory services such capital raising but also owns an asset management subsidiary that buys and sells securities (Wong, 2011[70]). This report focusses on conflicts of interest within the investment chain but particularly between asset owners and asset managers and institutional investors that use service providers such as proxy advisors.
The setting and disclosure of conflicts of interest policy is another key element of many regulatory frameworks (a requirement or recommendation to establish such policies exists in 98% of Factbook jurisdictions, and frameworks for such disclosure have increased to 75% of Factbook jurisdictions) For example, the Investment Company Act of 1940 in the United States require registered investment companies to set a conflict management policy.
Constructive engagement, in the form of purposeful dialogues with investee companies on issues like strategy, performance, risk, capital structure and corporate governance, is required in 21 out of the 52 Factbook jurisdictions and recommended in 9 jurisdictions. For example, Japan’s Stewardship Code outlines stewardship responsibilities to include voting, proper monitoring and constructive engagement with investee companies. The overarching aim of the code is for institutional investors to “enhance the medium- to long-term return on investments for their clients and beneficiaries by improving and fostering investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue , based on in-depth knowledge of the companies and their business environment and consideration of sustainability (medium- to long-term sustainability including ESG factors) consistent with their investment management strategies”. Specifically, Principle 4 recommends institutional investors use constructive engagement with investee companies to solve problems and attain a common understanding with investee companies. The code applies to institutional investors (including asset owners and asset managers) and service providers for institutional investors, and it applies on a comply or explain disclosure basis (FSA, 2025[71]).
“Engagement on sustainability issues” in Table 3.1 refers to regulatory or code provisions that go beyond the governance topics cited in the prior paragraphs, to explicitly address environmental or social issues including, for example, climate‑related concerns. It is required or recommended in some way in 29 out of the 52 Factbook jurisdictions, including, for example, in Brazil: Principle 3 of the Association of Capital Market Investors (AMEC) stewardship code states that institutional investors should “[t]ake ESG factors into account in their investment processes and stewardship activities”. It further elaborates that ESG factors are crucial aspects to consider in fulfilling an institutional investors’ fiduciary duty and that they should be transparent about this process (AMEC, 2021[72]).
The regulatory framework relating to “maintaining the effectiveness of supervision when outsourcing” refers to whether institutional investors remain responsible for ensuring that outsourced activities associated with stewardship are carried out in a manner consistent with the institutional investor’s approach to stewardship (Table 3.1). For instance, in the situation where institutional investors outsource some activities to external service providers like proxy advisors and investment consultants, which is the case under the United Kingdom Stewardship Code 2020 and the revised 2026 Code. These types of requirements or recommendations apply to 34 out of the 52 Factbook jurisdictions.
Providing a report of actual activities to clients or beneficiaries is another important transparency mechanism in many stewardship regulatory frameworks (Table 3.1); for instance, it is required in some way in 38 out of the 52 Factbook jurisdictions. An example in Australia is the final principle of the Australian Council of Superannuation Investors (ACSI) Australian Asset Owner Stewardship Code that stipulates that asset owners should report about their stewardship activities to beneficiaries to demonstrate their stewardship commitment and accountability (ACSI, 2024[42]).
Note: “Constructive engagement” in the top row means purposeful dialogues with investee companies on matters such as strategy, performance, risk, capital structure and corporate governance. “FSC” refers to the Financial Services Council in Australia; “ACSI” refers to the Australian Council of Superannuation Investors. When the row is split into two for some of the issues covered in the table, it refers to a framework that applies to different groups of institutional investors. For instance, in the United States, the disclosure of voting policy and actual voting records is a requirement for registered management investment companies and registered investment advisers (proxy voting).
Source: Based on OECD (2023[64]), OECD Corporate Governance Factbook 2023, https://doi.org/10.1787/6d912314-en, Tables 3.11 and 3.12.
Relevantly, recent OECD analysis found that institutional investors hold the largest equity portion (36% of shares) in the 100 listed companies with the highest disclosed GHG emissions (OECD, 2025[45]). This emphasises the importance of corporate governance and stewardship frameworks to facilitate and support shareholder engagement with investee companies. Further, it was found that in markets where most, if not all, high‑emitting companies have a well-defined controlling shareholder, investors’ engagement activities may be less successful. This is because minority shareholders may have less access to the board or management and, therefore, see their engagement efforts as ineffective due to the controlling shareholders’ influence. In a different scenario, where there is no well-defined controlling shareholder at high-emitting companies, engagement activities by institutional investors may be more successful because of their ability to influence the board or management through their voting and engagement strategies. However, the increasing adoption of dual class share structures in some markets may limit the influence of non-controlling shareholders through their engagement and voting strategies with investee companies (Giner, Felleca and Cook, 2025[73]).
3.2.1. Some recent regulatory updates
There are various examples of jurisdictions taking steps to enhance the regulatory framework for stewardship and institutional investors.
In the United Kingdom, the FCA consulted “to build industry consensus on a voluntary vote reporting template for asset managers in the UK.” The proposals aimed to ensure asset owners have more consistent, up-to-date and comparable data, on voting activities, which would position asset owners to make timely and accurate decisions based on the information received, including helping them decide where to invest their money (FCA, 2023[74]). The feedback statement, which includes the agreed vote reporting template, was published in March 2025 (FCA, 2025[75]).
In 2023, Japan published a Policy Plan for Promoting Japan as a Leading Asset Management Center, which includes stewardship activity reforms to enhance effective engagement between institutional investors and companies. The broader aim of the plan is to encourage household savings to flow into more productive investments. A review of progress was conducted in March 2025 (FSA, 2024[76]).
Building on earlier reforms, in 2024, Japan released the Asset Owner Principles which set common principles for asset owners to fulfil their fiduciary duty to manage assets in the best interests of the beneficiaries. The main points include: the clarification of investment objectives; use of specialist knowledge; selection of appropriate investment methods; information disclosure; and promotion of stewardship activities. The principles require asset owners to fulfil their stewardship responsibilities by promoting the improvement of corporate value and sustainable growth of investee companies through constructive “purposeful dialogue” (engagement) based on a deep understanding of investee companies and their business environment either by themselves or through investment management companies to achieve their investment objectives over the long term. To fulfil this responsibility, asset owners are required to consider taking action in line with the aims of Japan’s Stewardship Code, while taking into account their own scale and capabilities and to declare their acceptance of the code (Cabinet Secretariat, 2024[77]).
In November 2024, the United Kingdom’s Financial Reporting Council (FRC) launched a consultation to update the 2020 UK Stewardship Code. The revised 2026 UK Stewardship Code was published in June 2025 and will take effect on 1 January 2026 (FRC, 2025[78]). A notable change includes Principles to be applied specifically by proxy advisors and investment consultants to reflect the importance of the services they provide to institutional investors.
In the European Union, the Sustainable Finance Disclosure Regulation (SFDR) is creating increased transparency obligations for institutional investors regarding mandatory information disclosure to clients on sustainability issues (European Commission, 2024[79]) which is changing how they engage with companies. Institutional investors can use engagement to ensure companies adopt and report on their sustainability practices, which in turn supports institutional investors meeting their regulatory obligations under SFDR.
In 2024, the European Securities and Markets Authority (ESMA) recommended the European Commission consider establishing an EU stewardship code that would apply institutional investors and wider service providers (ESMA, 2024[80]).
As mentioned in Section 3.2, stewardship codes typically contain principles stating standards for the manner and type of engagement of institutional investors with investee companies. Stewardship codes have been introduced in at least 19 jurisdictions and offer a complementary regulatory mechanism to encourage institutional investors to disclose their corporate governance and voting policies and procedures (Fukami, Blume and Magnusson, 2022[68]). Stewardship codes have also been developed by regional or international actors, for instance EFAMA developed a Stewardship Code containing principles for European asset managers’ monitoring of, voting in, and engagement with investee companies, and the International Corporate Governance Network (ICGN) revised their Global Stewardship Principles in 2024.
The first stewardship code was issued by the United Kingdom in 2010, following the global financial crisis. Many jurisdictions internationally have since adopted similar stewardship codes, with the vast majority based on the United Kingdom model. The UK code has played an extensive role, both in terms of content and structure, as a model for codes developed and adopted in other jurisdictions internationally (Katelouzou and Puchniak, 2023[65]). In general, most stewardship codes are principles‑based, so they can be adapted to the specific institutional investor and their investment strategy. This is the case for all the stewardship codes in the jurisdictions and regions analysed in Table 3.2.
There are similarities and differences between stewardship codes across jurisdictions. The motivation and focus of stewardship codes can vary, for instance to encourage institutional investors to actively engage in the corporate governance of investee companies, often through a “comply or explain” approach. However, this approach can be less helpful in effecting change in jurisdictions where there are many companies with controlling shareholder. Some codes encourage institutional investors to adopt a sustainability strategy and engagement approach to influence investee companies while informing beneficiaries, enabling them to direct funds toward sustainable businesses. Stewardship codes might also have an internal investment management focus, which sets out good investment management practices to discharge the institutional investor’s duties to their clients (Katelouzou and Puchniak, 2023[65]).
Table 3.2 highlights a trend over recent years, where most stewardship codes now recommend institutional investors to have a focus on sustainability, although the degree varies widely. For example, the Brazilian Stewardship Code and ICGN Global Stewardship Principles both have a principle that requires a consideration of ESG factors as part of institutional investors’ fiduciary responsibilities. For example, a core motivation for the Code for Responsible Investing in South Africa is to recognise the importance of integrating sustainability issues into long-term investment strategies and the critical stewardship role that institutional investors play in this.
Stewardship codes usually take a comply or explain approach, where signatories may be required to explain in their annual report the extent to which the principles in the codes have been complied with or diverged from and why. As outlined in Japan’s Stewardship Code, “if an institutional investor finds that some of the principles of the Code are not suitable for it, then by explaining a sufficient reason, the investor can choose not to comply with them.” This approach provides flexibility for companies to achieve desired outcomes while addressing their specificities, such as allowing institutional investors to adapt the codes to their particular investment strategies. Another example is in Australia, where the Financial Services Council (FSC) Standard No 23 “Principles of Internal Governance and Asset Stewardship”, which has a focus on the internal governance of asset managers, applies to all asset manager members on a comply or explain basis.
Table 3.2 shows that stewardship codes vary between being set by public authorities or by private sector organisations such as industry associations. Recent research found that the stewardship codes developed in nearly half of the jurisdictions studied were developed by private initiatives (Katelouzou and Puchniak, 2023[65]). Table 3.2 shows that most stewardship codes have undergone regular, well‑defined reviews, resulting in revised versions over time.
There are also cross‑border considerations to the regulatory framework, because the institutional investors controlling a large number of shares in a market may be foreign based. As such, if requirements only apply to domestic institutional investors (such as monitoring and managing conflicts of interest), then voluntary codes, which can also be adopted by both domestic and foreign institutional investors, can be a tool to help to improve stewardship. However, the effect of stewardship codes may be limited as many are of a voluntary nature, especially for foreign institutional investors. Further, in many jurisdictions institutional investors collectively do not have majority ownership of most listed companies (Katelouzou and Puchniak, 2023[65]; Fukami, Blume and Magnusson, 2022[68]). Also, the effectiveness of stewardship codes may differ significantly across jurisdictions depending on the legal frameworks, market maturity and cultural attitudes towards corporate governance matters (Katelouzou and Siems, 2020[81]).
Source: Based on data in Katelouzou and Puchniak (2023[65]), Global Shareholder Stewardship, https://doi.org/10.1017/9781108914819: Table 1.5.
3.4.1. Fiduciary duties
Institutional investors owe a fiduciary duty to their clients and ultimate beneficiaries that they are investing on behalf. Fiduciary duty refers to an institutional investor’s legal obligation to act in their clients’ best interests. Put simply and recognising differences between jurisdictions, this would typically mean institutional investors have a legal duty of care and loyalty to clients when making investment decisions (PRI and UNEP FI, 2019[82]). A duty of care implies that institutional investors must exercise diligence, competence and prudence in managing investments and associated risks. The duty of loyalty requires institutional investors to act solely in the best interests of clients, including when managing conflicts of interest.
Fiduciary duties are an essential part of the investor protection framework, and two aspects of applying these duties should be highlighted. First, considerations about fiduciary duties become more critical the more significant the institutional investor’s discretion to make decisions. This first aspect is considered in the paragraphs below. Second, except in extreme cases of poorly managed conflicts of interest and gross negligence, the courts and regulators will not typically second-guess institutional investors’ investment and stewardship decisions. This effectively means that the disclosure by institutional investors of their stewardship policies and activities – and how their clients consider the published information – may be more critical for investors to fulfil their fiduciary duties than the public enforcement of the legal duties.
On the one hand, if the contract or mandate between the asset owner and the asset manager explicitly establishes a concrete obligation to the manager, there would hardly be a question of whether the asset manager fulfilled its fiduciary duties when meeting the obligation. For example, if it is contractually established that the asset manager should exercise voting rights in all investee companies, there is no fiduciary duties-related consideration if the manager does not vote in some cases (there is simply a breach of a contractual clause). On the other hand, if the contract is silent about competing options, the discussion about fiduciary duties would be more substantial. For example, in the case of managers of mutual funds that are not labelled as “sustainable”, considerations about fiduciary duties may arise if the manager engaged with companies on their environmental performance where it is not clear whether the goal is to maximise or preserve risk-adjusted financial returns.
Therefore, a reasonable solution for complex discussions on institutional investors’ fiduciary duties is to contractually establish how specific matters should be dealt with. For instance, whether institutional investors are expected to be active stewards and if they should consider environmental and social matters in their engagement with investee companies.
In Australia, the Superannuation Industry (Supervision) Act 1993 requires superannuation trustees to act honestly, to exercise a prescribed standard of care, skill and diligence, to act in the best financial interests of the beneficiaries and to give priority to beneficiaries where there is a conflict of interest. Further, the law requires the trustee to formulate an investment strategy, and the Australian Prudential Regulatory Authority (APRA) has clarified that in doing this, they expect a trustee to clearly articulate “an investment philosophy, including the extent to which ESG considerations inform that philosophy. This can help to provide a clear statement to beneficiaries and other key stakeholders by providing longer term guiding principles for investment decision‑makers” (APRA, 2023[83]).
In the United Kingdom, many employees can choose an investment strategy for their pension savings based on its goals, such as sustainability goals. Accordingly, the trustees of pension schemes with 100 or more members are required to publicly state their policy on engagement activities in their Statement of Investment Principles (UK Department for Work and Pensions, 2022[84]).
Without greater precision of clients’ and beneficiaries’ preferences and expectations, however, deliberations about fiduciary duties may need to be handled. This is notably important in the cases of stewardship activities by index investors and consideration of sustainability matters by institutional investors more broadly:
1. If mandates do not explicitly state or define the asset managers’ role in engagement, index managers may prioritise cost minimisation over resource‑intensive engagement activities. However, since active stewardship may be essential to safeguarding and growing long-term portfolio value, it is an open question whether engagement would be seen as a key component of fiduciary duties, including in the case of index asset managers.
2. If there is a lack of clarity in mandates regarding the trade‑offs, including, in some cases, financial losses clients are willing to endure regarding sustainability issues, this can impact how institutional investors undertake stewardship and interpret their fiduciary duties. For instance, institutional investors may struggle to balance financial returns with sustainability goals without clear guidance on clients’ views in relation to the trade‑off they may be willing to accept. This ambiguity can lead to decisions that fail to align with the expectations of clients and institutional investors having a more cautious interpretation of their fiduciary duties.
3.4.2. Limitations of stewardship from institutional investors
Most jurisdictions do not allow institutional investors managing their clients and beneficiaries’ capital to invest with the objective of achieving sustainability-related goals at the cost of risk-adjusted financial returns unless they have a clear mandate from their clients as this would breach their fiduciary duty obligations. This naturally places limits on how ambitious an institutional investor stewardship practice may be to address environmental and social issues at investee companies.
The current ownership structure of the top 100 high‑emitting companies shows that institutional investors hold the largest share, at 36% (OECD, 2025[45]). Some public policy debates around high‑emitting companies, particularly in sectors such as fossil fuels, have identified divestment as one potential avenue that may have reputational and financial consequences for these firms. However, divestment campaigns may have limited impact, as a targeted firm would only be significantly affected if a large share of its investors chose to exit – reducing the liquidity of its stock and thereby increasing the expected return demanded by remaining investors, or in other words, raising the company’s cost of capital. Although divestment campaigns may be associated with lower capital flows to high‑emitting companies (Cojoianu et al., 2021[85]), their effectiveness in changing policy preferences may, therefore, be limited (Schwartz, Lendway and Nuri, 2023[86]).
In contrast, if institutional investors intensify their engagement with high‑emitting companies, it presents an opportunity for ongoing oversight over these companies. If institutional investors were to advocate for strategies that align with value maximisation, such as investing in potentially profitable greener technologies to reduce their emissions, engagement may incentivise investee companies to make such investments. In practice, however, often the engagement’s demands and associated outcomes are focussed on investee companies adopting disclosure, setting environmental objectives or commencing an environmental programme, which are low cost for companies with limited real-world impact (Gosling, 2024[87]; McDonnell and Gupta, 2024[88]).
A recent paper examining the impact of sustainable investing found institutional investors – both traditional and sustainable investors – recognised the priority of financial returns and of delivering on their fiduciary duty, and both types of investors view long-term shareholder value as the main reason for engaging on environmental and social issues (Edmans, Gosling and Jenter, 2024[89]).
3.4.3. Universal owners
The “universal ownership theory” argues that large diversified institutional investors may seek to reduce harmful externalities if the overall benefit to their portfolios outweighs the harm to the companies causing them (Coffee Jr, 2021[90]). Universal ownership theory argues that investors’ financial interests at the portfolio level are optimised by taking an economy-wide view of the impact of investment decisions, managing systemic risks and internalising intra-portfolio externalities. There are two key limitations in the universal ownership theory: first, its implementation may be overly complex and possible in only few cases; second, the fiduciary duties of the boards of investee companies and the rights of shareholders may impose an insurmountable barrier.
With respect to the implementation of the theory at the institutional investor level, it would need to find most companies that are the source of a specific externality in a market with high barriers to entry. This is essential because, in a highly competitive market, a company that internalises externalities would likely become financially non-sustainable in the long-term. Furthermore, the investor would need to calculate the value of the externalities in monetary terms and compare it with the benefit accrued by the other companies in its portfolio.
Even in the implausible case where an investor could find, for instance, a monopolist as the source of significant externalities and present a reasonable assessment that a financial loss in that company would be overcome by the higher financial performance of the other investee companies, the fiduciary duties of the board of directors of the investee companies would likely be an insurmountable obstacle. While a decision to internalise the externalities of company may be justified at the investor’s portfolio level, the board of directors is responsible solely for the financial performance of the company. Furthermore, the shareholders of this company – even if in a minority – have the right to be treated equally and would probably be able to oppose a business decision that provides a private benefit for other investors willing to maximise their portfolios’ financial performance.
Institutional investors often use proxy advisory firms, known as proxy advisors, to help formulate voting intentions on proposals by investee companies, including on the election of directors and policies and practices of the company. Given the large number of potential company proposals for institutional investors to vote on at each shareholder meeting, proxy advisors play a key role in the ecosystem of investor engagement, by assisting institutional investors when taking their voting positions and minimising the cost. Primarily, proxy advisors analyse the resolutions presented at the company shareholder meetings and provide recommendations to their client (i.e. institutional investors) on whether to vote in favour or against the proposal. The proxy advisor owes a fiduciary duty to their client (ISS, 2024[91]). While institutional investors take their advice, the institutional investor needs to form their own view, as they remain responsible for their decision on how they vote.
However, the extent of institutional investors’ dependence on proxy advisors, and the wide‑ranging influence that proxy advisors may have on voting positions by institutional investors, requires the framework that regulates them to be examined. Of particular importance are their management and disclosure of conflicts of interest, good governance practices that ensure appropriate independence and objectivity, transparency regarding their methodology and voting advice, effective communication between proxy advisors and the companies on which they provide voting recommendations to clients; and robust systems and controls.
Two firms dominate the proxy advisory industry: Institutional Shareholder Services (ISS) and Glass Lewis (GL). Together they have been estimated to represent a market share of approximately 90% (Chong, 2024[92]). GL covers over 30 000 meetings each year in approximately 100 markets and their clients collectively manage more than USD 40 trillion in assets (GL, 2025[93]). ISS’ coverage is over 50 000 meetings per year in 100 markets, representing approximately 4 200 clients (ISS, 2025[94]).
ISS discloses on their website their proxy voting guidelines by region, along with policies, FAQs and methodologies for certain topics. They also publish their policies on key topics, such as Sustainability, Climate, Socially Responsible Investment and Faith-Based. An example of one of their regional policies is the 2024 Brazil Proxy Voting Guidelines Benchmark Policy Recommendations, which contains general recommendations that ISS will make for certain key topics in this region, and the factors that will be relevant in them making them. For instance, in relation to climate accountability and board composition in Brazil, ISS will generally recommend to vote against the incumbent chair of the board for companies that are significant GHG emitters (through their operations or value chain) if ISS determines that the company is not taking the “minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy” (ISS, 2024[95]).
Similarly, GL provides on their website their Benchmark Policy by each of the markets that they cover. GL also provides their Thematic Voting Policies on their website (e.g. Corporate Governance Focused, Investment Manager, ESG, Catholic). For instance, the 2024 Investment Manager Thematic Voting Policy Guidelines set out that in relation to shareholder proposals about the environment, they will recommend voting against proposals “seeking to cease a certain practice or take certain actions related to a company’s activities or operations”. They will also generally recommend voting against shareholder proposals that seek to increase environmental disclosure and reporting, or compliance with international environmental conventions or environmental principles (GL, 2025[96]).
To develop their policies, ISS undertakes an annual policy formulation process: a survey of institutional investors and companies about their preferences, a roundtable with the industry, and a comment period on draft recommendations, which then leads to the release of final guidelines (ISS, 2024[97]). Similarly, GL also undertakes a global policy survey with inputs from all GL clients and market stakeholders with the aim to align voting policies with prevailing market sentiment on a range of issues (GL, 2024[98]).
In October 2025, GL announced that it plans two major changes over the next two years. First, it will help clients develop customised voting frameworks that align with their individual investment philosophies and stewardship priorities, moving beyond standard policies. Second, GL will shift from a single house policy to offering multiple research perspectives that reflect a broader range of client viewpoints – from those more aligned with management to others focussed on governance fundamentals. Beginning in 2027, clients will be able to access one or more of these perspectives to inform their proxy voting decisions (GL, 2025[99]).
Some jurisdictions have reformed the frameworks that govern proxy advisors (Table 3.3). For example, in 2011, France issued Recommendation No. 2011‑2006 regarding proxy voting advisory firms. The critical elements recommended by the Autorité des Marchés Financiers (AMF) focus on transparency, including that a voting policy would ideally be established and issued by proxy advisors. AMF also recommends proxy advisors to submit draft reports to companies seeking their comments, but where this is not possible, proxy advisors should state in their report that it was not submitted for review to the company and why. Furthermore, AMF recommends that proxy advisors should implement measures to address conflicts and ensure ethical behaviour (AMF, 2011[100]).
In terms of internal policies, both GL and ISS have policies managing and disclosing conflicts of interest, as well as codes of ethics. For example, GL’s conflicts policy sets out their processes to safeguard and mitigate when actual or perceived conflicts arise, and they also have a Compliance Committee to quickly address all potential conflicts. Both GL and ISS are signatories to the Best Practice Principles for Providers of Shareholder Voting Research & Analysis, which requires them to have and publicly disclose a conflicts policy, among other obligations relating to service quality and communications (GL, 2024[101]; ISS, 2024[102]; Best Practice Principles Group, 2019[103]). They also report against several stewardship codes, for example, from Japan, Korea, and the United Kingdom, as well as the European SRD II (ISS, 2024[102]; GL, 2024[101]; GL, 2024[104]).
Japan’s Stewardship Code explains proxy advisors contribute to institutional investors’ stewardship activities and specifically recommends in Principle 8 that proxy advisors should “endeavour to contribute to the enhancement of the functions of the entire investment chain by appropriately providing services for institutional investors to fulfil their stewardship responsibilities”. For instance, this may be by putting a conflicts of interest policy in place and ensuring the accuracy of company information that is the basis for their recommendations, in the circumstances where a company requests to confirm that information that the proxy advisor is using is accurate (FSA, 2025[71]).
Similarly, the 2017 European SRD II requires proxy advisors to be subject to a code of conduct by Member States and that they should “disclose certain key information relating to the preparation of their research, advice and voting recommendations and any actual or potential conflicts of interests or business relationships that may influence the preparation of the research, advice and voting recommendations” (EU, 2017[105]).
In the United States, the SEC Proxy Rules Governing Proxy Voting Advice (Rule 14A‑2(B)(9) requires, among other transparency-related rules, proxy advisors to disclose any material conflicts of interest.
Source: Based on OECD (2023[64]), OECD Corporate Governance Factbook 2023, https://doi.org/10.1787/6d912314-en; Tables 3.11 and 3.12.