Japan panel expects institutional investors to adopt the ideas and methods of responsible investors

A report backed by the Japanese Ministry of the Environment says it expects institutional investors to adopt the ideas and methods of responsible investors as a response to the rising awareness of international crises shaped by global sustainability issues impacting financial and economic activity.

Japan’s “Working Group on Incorporating Issues Regarding Sustainability into Investing” (ESG Working Group), whose secretariat is based in the Ministry, has produced a guide for actors in the institutional investment chain to improve their fundamental understanding of ESG investing and use it effectively.

It is expected that the guide, which has only been published in Japanese so far and will be published in English this month, will inform Japanese companies and investors on why responsible investment is important, while acting as a practical guide for its implementation.

The guide was developed after ESG investing accelerated in Japan following the establishment of the Stewardship Code in 2014, the Corporate Governance Code in 2015, and the subsequent signing of the Principles for Responsible Investment by Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world.

It seeks to establish ESG investing as a long-term endeavour by emphasising the building of “constructive relationships” between the various players in the investment chain based on mutual understanding and trust. It says relationships that drive the “purposeful exchange of meaningful information” among the market participants will stimulate the effectiveness of the investment chain.The report says: “If asset owners and investment managers have a common understanding of the investment time horizon, this facilitates the mutual agreement about the importance of non-financial information, and common perspectives and thinking on risk and return.”

It says a mindset is needed that genuinely debates the barriers to building these constructive relationships.

More practically, it says inter-connections, or so-called information “nodes” created between companies and investors will drive the evolution of the investment chain as a social framework. Responsible investing, it says, both encourages the enrichment of such connections, but strengthens the sustainable growth of the economy as a whole. It uses existing regulation as an example: The Corporate Governance Code recognises that publicly listed companies addressing sustainability issues fulfil one important part of risk management. “But to properly handle these issues also benefits ‘the entire economy and society, which will in turn lead to further profit for companies, thereby creating a virtuous cycle’.”

Consequently, the guide argues that sustainable growth and healthy development of the Japanese economy in the 21st century depends largely on the extent that the investment chain is able to deal with “issues surrounding sustainability” as they evolve.