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Lost in translation? An inside outsider's perspective on “ESG investing” in Japan

Arisa Kishigami looks at the big picture on sustainable finance in Japan

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Having spent the last 15 months sharing global developments with the Japanese RI community, perhaps it is high time to reverse the direction of the information flow. 

Thanks to the visible action of Japan’s Government Pension Investment Fund (GPIF), most people will be aware of the rising uptake of ESG investing in Japan. Within just a year of GPIF making its first ESG-considered index investments in 2017, the estimated total sustainable investment AUM for Japan grew to be the largest in the Asia Pacific region.

One could argue that these figures come largely from the high levels of stated investor-company engagement activities and “ESG integration”, and therefore may not reflect substantial changes in asset allocation - thus running the risk of not containing much substance.

Yet what gets disclosed gets attention, and what gets measured gets debated. In recognition of this, the revised Japanese Stewardship Code requests all managers to disclose the details of the voting direction and reason, as well as questioning the role of proxy advisors and investment consultants whose roles can be essential in delivering such action and transparency. Having also positioned the consideration of sustainability (including ESG factors) at the heart of principles of stewardship responsibilities, it is perhaps one of the most explicit and one-to-watch Stewardship Codes globally.

But whilst the Code has certainly been the backbone of the ESG-aligned investment by GPIF and engagement activities by its many existing and potential external managers, the trickle-down effect to other public pension funds has been less exciting.

This may change, with the additional amendment to the law underlying the management of public buffer funds in Japan. Prior to the amendments, these public pension funds were given the flexibility to consider ‘non-financial’ information at their discretion, focused only on equity investing. With the update in February this year, this passage has been extended to all assets under management, requesting all funds governed by this policy to take necessary action related to ESG aspects as they are perceived relevant in enhancing long term profits for the beneficiaries. This is by far the most explicit support in Japanese pensions regulation for the incorporation of ESG and other “non-financial information”, and may be the final push needed for action in the public asset owner space.

There is a sense of stress amongst the sustainability practitioners, teams and company management, as the EU taxonomy (and other regional variations), the TCFD recommendations, the constantly evolving world of data providers and standards, and the accelerated attention to social issues as a result of Covid-19 forms an ever-growing sustainability ‘alphabet soup’ - in an alphabet not native to the local tongue.

So, what’s the current status of the Japanese companies that would be the target for investment, lending and insurance underwriting both domestically and globally? Sadly, there are several statistics to show how far behind Japan is, especially when it comes to human and labour management.

Yumiko Murakami, Head of OECD Tokyo Centre, was not shy to share some of these during the recent RI digital Japan conference. According to OECD data sources, Japan is second from the bottom in both the percentage of women in management as well as women on boards, despite the relative improvements since the inception of the Corporate Governance Code. It is also in the bottom third when it comes to attractiveness for highly skilled migrant workers, and overseas university students. 

Know the Chain’s assessment of supply chain labour management shows Japanese companies in the research universe to have a dismal average score of 17 out of 100, exposing the weaknesses in both supply chain management and the addressing of social issues (but to put things in context, the global average score is also a low 29 out of 100).

When it comes to the environmental side, and in particular in relation to climate change, there is no shortage of commitments being made. Japan boasts the highest number of non-financial companies directly supporting the TCFD, the second largest commitment to adopt Science-Based Targets and the third largest to make commitments to moving to 100% renewable energy via the RE100 initiative. 

Yet there is a sense of stress amongst the sustainability practitioners, teams and company management, as the EU taxonomy (and other regional variations), the TCFD recommendations, the constantly evolving world of data providers and standards, and the accelerated attention to social issues as a result of Covid-19 forms an ever-growing sustainability ‘alphabet soup’ - in an alphabet not native to the local tongue.

In an effort to alleviate this sense of stress and stimulate meaningful action, both public and private players have invested their time to create guidance documents filled with context, definitions, comparisons and case studies.

The JPX Practical Handbook for ESG Disclosure takes the reader through a four step process of understanding and executing ESG related actions. With all the noise and pressure to address the maze of individual data points, it is a welcoming piece that encourages companies in making sure the board level oversight and business strategy is thought through first. The multiplicity of meanings applied to the industry buzzword “materiality” is explained (page 24-25), which may be worth noting in your discussion with the companies within Japan and beyond.

TCFD Guidance 2.0, the second iteration of guidance published by the TCFD Consortium, is a substantial 120 page document. Whether it’s about understanding Japan’s energy policy within which the energy sector sits (page 84-84), or grappling with the approach to highly diversified companies of which there are many in Japan (page 61), this document may serve as a useful basis to have a more nuanced discussion with a Japanese company as an investor, bank, or insurance company.

A slightly less expected place to find a useful document is the Life Insurance Association of Japan’s Climate Change Starters Guide, which begins with a sound summary of the issues and importance of climate change, addressing the dual roles of an insurance company as an insurer and institutional investor, with content relevant beyond the insurance industry. Perhaps one of its key notes of advice is the need to identify individuals that can create a collaborative structure within the organisation. Whether a manufacturer, an asset manager or an insurance company, scenario planning and implementation cannot be done solely by the sustainability practitioner, nor by the investor relations department. Obvious though it seems, the art of internal collaboration is perhaps one of the biggest challenges organisations face globally, and the suggestive key team structures mentioned in the final (page 66) pages of this document may help kick start the process.

All three of the documents mentioned above have an abundance of case studies – from Kao’s ESG materiality matrix, to NYK Holding’s carbon free vessel plans, which can be used as the basis of understanding where existing practice is, and where future discussion could be led. Having identified iron & steel, electricity, chemicals, petroleum and coal, automobiles and general trading as industries that LIAJ members felt they needed to engage with regarding the TCFD requirements, perhaps it is a document that ESG data providers and global CA100+ supporters should turn their attention for reference and collaboration too.

And last but not least, the Ministry of Foreign Affairs last month released a national action plan regarding business and human rights. Its significance perhaps may lie in the fact that it has recognised the need to listen to the SMEs (which for reference is defined as under 300 employees for manufacturing, and under 100 for wholesale in general) who represent 70% of the labour force in Japan. It plans to create a portal that collates all information relevant for business and human rights as an effort to help educate such SMEs with limited burden. One of its actions is to encourage responsible business practice through promoting human rights due diligence including within supply chains, which is an action to be led through all of the ministries, including MOFA and METI. 

Those of you with seasoned business relationships in the Japanese market will know that, whilst it may take 20-30 years of careful planning to take the first step forward, when a tipping point is reached things can move at an exponential rate. 

While one can’t deny a slight concern about the current hyped-up attention on all things ‘ESG’, there is also a glimmer of hope that a real-effort tipping point is on its way. Perhaps we can all reduce the “lost in translation” phase by utilising efforts documented in both English and Japanese and work together for a real impact implementation of responsible financial activities.


Note: For ease of communication with your Japanese counterparts, please find below the Japanese links to the key guidance documents referenced above. 

JPX Practical Handbook for ESG Disclosure

TCFD Guidance 2.0

Life Insurance Association of Japan’s Climate Change Starters Guide

MOFA’s National Action Plan on Business and Human Rights

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