Taiwan’s stock exchange is taking on a key role to promote corporate governance practices for local companies with the launch of stewardship principles, and environmental, social and governance (ESG) indexes, to encourage Taiwanese institutional investors to participate in responsible investing.
Joe Cheng, senior vice president of the Taiwan Stock Exchange’s (TWSE) corporate governance department, says the ecosystem of corporate governance in Taiwan was underdeveloped in the past, so institutional investors adopted simple “top-down” strategies, and shareholder interests were commonly overlooked.
The Financial Supervisory Commission (FSC) launched a corporate governance roadmap in 2013 to promote shareholder activism, and revised it earlier this year to emphasise areas such as corporate governance and corporate social responsibility culture, information transparency, board function, and regulatory enforcement.
TWSE has been in a key position to support the financial regulator’s corporate governance reform, according to Mr. Cheng.
“To complement the roadmap, the exchange launched the Taiwan stewardship principles in June 2016, which is aimed at strengthening the role of institutional investors and shaping good stewardship practice,” he says in an interview with Asia Asset Management.
Nearly all large local institutional investors, including pension funds, insurance companies and financial conglomerates, have signed the principles and incorporated them into their investment strategies, he adds. There were more than 80 signatories as of July 2018.
Mr. Cheng says Taiwanese institutional investors have become more aware of the significance of corporate governance in the wake of global financial scandals in recent years.
“The investors now have a better understanding that they need to well implement corporate governance practices in order to deliver better, stable long-term returns,” he notes.
Although some small and mid-sized institutions have not signed on to the stewardship principles due to limited internal resources, he says the revised corporate governance roadmap will encourage all domestic insurers and asset managers to comply with the principles.
He points out that the scope of TWSE’s stewardship principles is less complicated than the United Nations-supported Principles for Responsible Investment (PRI), which require signatories to include sustainable development goals in their investment process.
PRI is one of the major ESG stewardship codes adopted by international asset owners and fund managers, with some 2,000 signatories worldwide.
“Overall, Taiwanese companies have made significant improvement in non-financial information disclosure, electronic voting, and investor communication over the past few years with the implementation of the corporate governance roadmap,” Mr. Cheng says.
“For example, the number of local companies with corporate social responsibility reporting has grown from 170 in 2014 to about 350 currently, while the share of listed companies with English annual general meeting notices has increased from 10% to about 50%, and English meeting handbook at the AGM has increased from 10% to about 30%,” he adds.
Corporate governance indexation
From the passive investment perspective, more investors are looking to gain access to responsible investing through the corporate governance indexes created by TWSE, according to Mr. Cheng.
For example, Taiwan Index Plus Corporation (TIP), the exchange’s wholly-owned subsidiary, launched the TWSE Corporate Governance 100 Index in 2015. The constituents are selected based on results of the corporate governance evaluation system of locally-listed companies.
The index was licensed to Fubon Securities Investment Trust Co. for the launch in May 2017 of Taiwan’s first exchange-traded fund (ETF) that tracks corporate governance. The ETF has been well-received with total fundraising of about US$100 million, Mr. Cheng says.
Last year, TIP and UK-based index provider FTSE Russell jointly compiled the FTSE4Good TIP Taiwan ESG Index, which tracks companies listed on the TWSE that meet globally recognised ESG inclusion standards.
Mr. Cheng notes that this index was used by the Bureau of Labor Funds (BLF), which oversees Taiwan’s public pension funds, as the benchmark for its domestic ESG mandate earlier this year. BLF outsourced the mandate in January to seven local asset managers, with total funding of $1.4 billion.
Mr. Cheng says TWSE will continue to compile customised indexes to meet the asset allocation demands of institutional investors.
TWSE has also set up a corporate governance centre which coordinates with the FSC, non-government organisations and other government financial authorities to assess the corporate governance of 1,600 Taiwanese companies. TWSE has seconded 15 of its employees to work at the centre, Mr. Cheng says.