Institutional investors hold a substantial proportion of equity in listed companies globally and, therefore, are well-placed to promote sound corporate governance practices and the management of sustainability‑related risks and opportunities, not only through capital allocation but also by engaging with companies on these matters. While exiting the investment in a company may have little effect if other investors are willing to buy securities issued by the same company, engagement by some large shareholders may be able to influence important change in the strategies of companies.
As of 2024, asset managers hold significant equity stakes across both advanced and emerging markets (Figure 1.1). The institutional investor ownership landscape is characterised by high levels of concentration, although the degree varies across markets (Figure 1.2). The assets under management of the largest 20 asset managers have increased 84%, from USD 30 trillion in 2015 to USD 56 trillion in 2024 (Figure 1.4). The largest institutional investors may potentially play a role in addressing some of the world’s collective action challenges. Reducing GHG emissions is one of these challenges that could be addressed, and some institutional investors have been moving toward this goal. However, how far in that direction investors may move and whether they should engage in other sustainability-related matters raises some complex questions.
Policymakers and market initiatives have dealt with the increasing importance of institutional investors. For instance, regulation requiring institutional investors to report on voting policies and actual engagement activities to their beneficiaries has become common (Section 3.2). A soft law approach is widespread in many jurisdictions, primarily through establishing stewardship codes (Section 3.3). There are, however, two significant questions that have remained unresolved. First, how to mediate conflicts between the expectations and information needs of investors and companies based in different jurisdictions (in almost 80% of OECD, G20 and FSB economies, as shown in Figure 1.3, the equity share in listed companies held by domestic institutional investors is smaller than that of their non-domestic counterparts). For instance, while institutional investors seek sustainability-related material information, they should ensure disclosure does not place unreasonable costs on companies (Section 2.5). Second, what disclosure rules should apply to the largest institutional investors to ensure they fulfil their fiduciary duties, respond to their clients’ sustainability concerns, and do not create economic inefficiencies (Section 3.4).
Given the abovementioned questions, further co‑operation in identifying good policies and practices for the development of voluntary and regulatory frameworks that foster effective stewardship could be beneficial. First, greater convergence of frameworks for sustainability-related engagement could aid greater alignment between environmentally and socially concerned asset owners and asset managers, both when initially awarding mandates and during the contractual agreements, supporting improved efficiency and integration of capital markets. Second, effective frameworks for engagement could relieve the impression that large institutional investors have undue influence to establish de facto environmental or social rules for the corporate sector (Section 2.5), but also give investors legitimacy to act on financially material issues and avoid backlash when doing so is in line with their fiduciary duty.
