ESG in Japan:

World’s Largest Pension Fund Leads Rapid Growth

By Masako Oshima

Investment practices in Japan have been changing rapidly in recent years and sustainable investment started to gather attention around 2014.

However, it was after the world’s largest pension fund GPIF (Government Pension Investment Fund) signed the PRI in September 2015 that sustainable investment gained momentum. By 2017 the term ESG investment (sustainable investment is not often used in Japan) which integrates ESG into mainstream investment (often referred to as ESG integration) had become widespread and gained public recognition.

Enhancing medium to long-term growth

The Financial Services Agency of the Japanese government promoted the establishment of Japan’s Stewardship Code (later revised in 2017) in 2014, and Japan’s Corporate Governance Code in 2015. These codes act as 'two wheels on the axle' to enhance sustainable investment on a comply or explain approach. However, in Japan, these were established not only to ensure responsible business practices, but also as a part of Prime Minister Abe's Japan Revitalization Strategy. This economic focus may be the unique characteristic of sustainable investment in Japan. As a way for the Japanese economy to recover from a long recession, investors were encouraged to engage with companies to enhance medium to long-term growth.

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This economic focus may be the unique characteristic of sustainable investment in Japan.

In the past, GPIF largely invested in government bonds, but since 2014 it has shifted some of its assets to stocks, in alignment with the Japan Revitalization Strategy. Together with this shift, it signed the PRI and began to commit to building a more desirable investment chain. As it is in GPIF’s own interest to achieve medium to long-term stability of the market as a whole, it is taking the initiative as a universal owner to demonstrate needed leadership. In 2017, GPIF adopted three new ESG-related indices and initiated their use by its asset managing contractors in their passive investments. Hiromichi Mizuno, the Chief Investment Officer of GPIF, has been elected as a board member of the PRI and is also taking the lead to speak out to the international community on sustainable investment.

Government Support for Sustainable Growth

The Japanese government is also pushing and driving this movement. In 2016, the Ministry of Economy, Trade and Industry established the Study Group on Long-Term Investment (ESG / Intangible Assets Investment) toward Sustainable Growth and released the Guidance for Integrated Corporate Disclosure and Company-Investor Dialogues for Collaborative Value Creation in 2017. For the Japanese government, constructive dialogue between investors and companies is considered as a way to enhance the value of Japanese companies.

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For the Japanese government, constructive dialogue between investors and companies is considered as a way to enhance the value of Japanese companies.

Sustainable Investment Soars

Sustainable investment in Japan is increasing very rapidly. In 2015 it was only about 27 trillion yen, but increased to 56 trillion yen in 2016, and soared to 136 trillion yen (approx. 1.2 trillion US dollars) in 2017 (Figure 1).

The Largest Companies by Market Cap Over 15 Years

Figure 1: Growth of Sustainable Investment in Japan

After GPIF became a PRI signatory it asked its asset managing contractors to also become signatories. Consequently, the number of Japanese PRI signatories has increased rapidly to 61 companies.

Companies are also becoming more and more interested in the disclosure of their ESG information, as this relates to the ESG rating that is eventually offered to investors for consideration in investment decisions. Notably, over 300 integrated reports are now issued in Japan (Figure 2). Previously, members of corporate investor relations divisions often believed investor interest in ESG to be limited, as they rarely received any ESG-related questions from investors. However, this situation is now changing.

The Largest Companies by Market Cap Over 15 Years

Figure 2: Number of Integrated Reports Issued by Japanese Companies. Image © KPMG, Survey on Integrated Reporting of Japanese Companies 2017 (in Japanese).

In the past, efforts towards sustainability were regarded mainly as a way to reduce the negative impact of business on the environment and society. However, many studies are now revealing that the sustainability aspects of a company are connected to its financial aspects, especially when considered in the mid to long terms. The recent recommendation by Task Force on Climate-related Financial Disclosures, which is attracting the attention of leading companies in Japan, also asks businesses for information on financial aspects related to climate change.

The momentum of sustainable investment is rapidly increasing in Japan, but the ratio of sustainable investment against total AUM is still fairly small compared to Europe or the US. Some investors still say that they have not yet gained enough evidence which clearly shows the financial merit of sustainable investment in Japan. Thus, the future of sustainable investment may depend on how the investors can actually accumulate evidence of the financial merit. However, more investors are becoming interested in ESG and more companies are willing to engage in and disclose information on their ESG, so it may work as a pivotal step towards building a more sustainable society.

Director Denise Delaney caught up with SustainAbility partner E-Square Inc. in Tokyo earlier this year while attending Sustainable Brands Tokyo. Hearing about the uptake of ESG in Japan we are pleased to feature a guest article by Senior Consultant Masako Oshima.

About the author

Masako Oshima

linkedin.com/masakooshima

Masako Oshima is an organising manager of the Frontier Network, a network of twelve large Japanese corporations dedicated to pursuing sustainability, at E-Square a leading sustainability consultancy firm in Japan.