Proxy advisors and pension consultants must play “important role” in stewardship, says new Japanese code

ESG namechecked in country’s revised definition of “stewardship responsibilities”

Japan's Financial Services Agency (FSA) has finalised the latest version of the country’s stewardship code, adding ESG explicitly into its definition of “stewardship responsibilities” and highlighting the role of investment consultants for pension funds and proxy advisors in supporting institutional investors to be good stewards of capital.

It is the second iteration of the code, which was developed by a dedicated Council of Experts – a group of 23 representatives from pensions, investment, finance, government and civil society – and is aimed at institutional investors in Japanese equities.

Proposed updates were put out to public consultation in December. The Council received 67 responses by the end of January, when the consultation closed. It met three times between October and March to develop the updated code.

The original proposal defined “stewardship responsibilities” as:

“The responsibilities of institutional investors to enhance the medium- to long-term investment return for their clients and beneficiaries (including ultimate beneficiaries; the same shall apply hereafter) by improving and fostering the investee companies’ corporate value and sustainable growth through constructive engagement, or purposeful dialogue, based on in-depth knowledge of the companies and their business environment.”

However, from the amendments published this week, it appears that the feedback prompted an extension of the definition, to include “consideration of sustainability (medium- to long-term sustainability including ESG factors) consistent with their investment management strategies”.

The code itself comprises eight principles. The final principle is newly added, and is aimed at “service providers for institutional investors”, which it says “should endeavour to contribute to the enhancement of the functions of the entire investment chain by appropriately providing services for institutional investors to fulfil their stewardship responsibilities”.

“Parties such as proxy advisors and investment consultants for pensions which provide services at the request of institutional investors, etc. to contribute to the institutional investors’ effective execution of stewardship activities are expected to play important roles in enhancing the functions of the entire investment chain running from their clients and beneficiaries to the investee companies,” the Council says.

Proxy advisors should ensure they have sufficient resources, “including setting up a business establishment in Japan in order to provide asset managers with proxy recommendations based on accurate information on specific companies”, the code states.

It also specifies that asset owners should “encourage asset managers to engage in effective stewardship activities to secure beneficial owners’ interests while taking their viewpoints into consideration”.

“When asset owners directly manage funds and exercise their voting rights, in line with their size and capabilities, etc., they should engage in stewardship activities such as holding dialogues with investee companies,” it adds.

The new code also requires more transparency around “voting rationale”.

Investors and companies are being asked to sign up to the new code, by notifying the FSA. Existing signatories have until the end of September to comply with the updates.  

Earlier this month, the Japanese Ministry of Environment, announced the first revision of its national Green Bond Principles, extending it to cover sustainability-linked loans, among other things.