Japan regulator says asset owners should keep tabs on managers’ stewardship

Japanese asset owners should monitor their managers to make sure they’re walking the talk on stewardship, the next revision of the country’s Stewardship Code looks likely to recommend, as a draft version published last week (Japanese) lays out beefed up ESG, stewardship and voting disclosure recommendations.

"To ensure the benefit of the ultimate beneficiary"

A draft, put out to consultation by the Financial Services Agency, said asset owners should “monitor asset managers, making use of asset managers' self-assessment, etc., to verify whether stewardship activities are consistent with their policies”.

It said asset owners should encourage managers to conduct effective stewardship activities “as much as possible, depending on their size and capabilities, to ensure the benefit of the ultimate beneficiary”.

The news is just the latest sign in Japan of increasing pressure from asset owners on asset managers to shape up on performance and stewardship. The country’s giant Government Pension Investment Fund has been rocking the traditional owner-manager relationship, for example, through its performance-based fee structures and suspension of securities lending. 

To date, Japan’s 2014 Stewardship Code and its 2017 revision are widely regarded as having spurred investor-company dialogue and transparency, with the aim of promoting the mid- to long-term value of companies. 

The next revision of the code will maintain its “comply-or-explain” basis, but many investors are expected to comply. 

The draft now out for consultation says investors should “clearly state in their stewardship policies whether or not they consider sustainability issues”, as part of efforts to “gain a deep understanding of their investee companies and promote sustainable growth through “dialogue with purpose”.

This is a step up from the 2017 revision of the code, which said non-financial factors, including risks and opportunities arising from ESG matters, “may be considered relevant” when monitoring investee companies. 

In October the UK revised its Stewardship Code to include a heavy focus on ESG, with RI’s noting at the time that it introduced “ESG expectations as the new normal for investors and rendered the 2012 revision unrecognisable”.

The new Japanese draft code also recommends investors report on their reasons behind voting decisions, their stewardship activities with companies before voting, and make a self-evaluation of their stewardship activities, as RI covered earlier this year. 

The 2017 revision of the code recommended investor signatories provided voting records on an agenda basis. Now over 100 are starting to do so, compared to just 17 at the end of June 2017.

The draft revision also adds in an eighth principle for proxy advisors and pension management consultants with a view to “improving the functioning of the entire investment chain”. 

It asks providers to identify situations where conflicts of interest may arise and establish systems and initiatives to improve the management of conflicts of interest, similar to the investor-focused guidelines for managing conflicts of interest earlier in the code. 

The draft revision does not add further detail on collaborative engagement, which was written into Japan’s Stewardship Code for the first time in 2017, with the FSA saying it would be “beneficial” for investors, and to use it “as necessary”. 

However, Japanese investors are often concerned about other regulation which dictates that there are heightened reporting requirements if investors with more than 5% holdings in a company collectively make “important suggestions” to the management of a company or collude to vote in the same way.

The consultation will close at the end of January next year, with the final revision of the code expected from March.