20 Feb Why ESG investing in Japan is gaining more traction than other Asian countries
While ESG investment is increasingly prevalent in most countries around the world, Japan is very much helping to drive the trend forward. Changes in attitudes are reflected in corresponding changes in policies by the Japanese Government. And all of this is contributing towards ESG investing in Japan leading the way for the rest of Asia.
Traditionally, Japan has lagged behind other countries in ESG investment, particularly western countries. However, recent Government reforms along with increasing demand from overseas investors and local pension funds, have all contributed towards a sea-change in Japanese ERG investment awareness.
Increasing awareness of ESG investing in Japan
The biggest public pension fund in Japan is the Government Pension Investment Fund (GPIF). This fund is absolutely key to the change in ESG focus across Japan over the last few years. Back in 2015, the GPIF signed up to the Principles for Responsible Investment (PRI).
This international network of investors is supported and backed by the United Nations (UN). The PRI provides the framework for these international investors to work together to implement the six principles. These principles were developed by investors and are:
- To incorporate ESG investment analysis into decision-making processes.
- To be active owners and incorporate ESG issues into ownership policies and practices.
- To seek appropriate disclosure ion ESG issues from the entities invested in.
- To promote acceptance and implementation of the Principles within the investment industry.
- To work together to implement the Principles.
- To report on activities and progress towards implementing the Principles.
Since the GPIF signed up to the PRI, the availability of ESG related investment options has increased steadily.
Japan is leading ESG investment in Asia
Figures from Refinitiv show that by the end of 2019, ESG bond issuance had reached a record £5.3 billion (¥730 billion). Further analysis by the Japanese Sustainable Investment Forum (JSIF) showed that total invested assets related to the Principles increased by 45% year on year to ¥336 trillion.
This makes Japan one of the leading proponents of ESG and sustainable investing in Asia. The sophistication of Japan’s financial sector and its large capital market helps this shift in investment, as institutions are able to devote resources to developing ESG analysis approaches.
Japanese companies have improved corporate governance over the last few years too. This is due to the Japan Stewardship (2013) and Corporate Governance Codes (2015). The sheer increase in high-quality accessible data from Japanese companies is hugely important for this sector. Changes in attitude and acceptance of the need for transparency and corporate governance means that there have been vast improvements in the detail and amount of ESG data available.
However, it’s worth recognising that these reforms and changes towards ESG investment largely down to Governmental changes. In other words, the traditions of the Japanese corporate system haven’t changed overnight. Company management must now catch up with the policy changes.
Japanese companies have long formed networks of cross-shareholdings, so that groups of businesses can effectively protect themselves and each other from the influence of external investors. This system is finally beginning to change, but not fast enough for the Governmental reforms.
A key policy development was the introduction of the Stewardship Code I mentioned earlier. This set a much higher bar across the board for investment managers, which has resulted in a push for better provisions to prevent takeovers and for the presence of truly independent board members.
Former Prime Minister Shinzo Abe also introduced what’s dubbed ‘womenomics’. This reform was introduced to create fairer workplaces for women, something that has long been ignored by the Japanese corporate sector. While there are still relatively few female board members, this situation is slowly improving.
Japanese corporate sector must do more to keep up with policy changes
While Japanese companies are lagging behind in ESG reforms, they are much more open than they were ten years ago. Corporations are willing to discuss a wider range of issues with investors, which makes it easier for these global investors to understand who the ESG leaders are within the Japanese market.
Companies in Japan have a much greater understanding of ESG issues, ranging from board structure and gender diversity to the broader strokes of climate change. In addition, there has been a marked evolution in management practices, which are more open, transparent and of a higher quality than a decade ago. Transparency of ESG reporting is yet another sector that has improved recently, although there is still further to go.
There is a great disparity between those companies that are most aware of ESG investment issues and those still hanging on to outdated ways. The pandemic has pushed the adoption and acceptance of digitisation forward, which has helped companies engage with overseas investors. Some estimates say that COVID-19 has accelerated the digital transformation in Japan by around four years.
Despite all the progress made in ESG investment in Japan, there is still a long way to go before matching ESG leaders across Northern Europe. One of the bigger challenges in the way of doing just this is the language barrier, particularly for smaller companies dealing with the domestic market. There is far less information on companies like these available in English, making communication difficult.
There must also be much more in the way of Governmental reforms and policy changes. The introduction of Prime Minister Abe’s ‘womenomics’ didn’t translate to much actual, tangible change in the workplace or at board level. So, there is still major opportunities for meaningful growth in this area.
And for some companies, COVID-19 has actually slowed the adoption of ESG reforms as they concentrate resources on surviving the crisis. Statistics show that there have been fewer launches of sustainable funds in Japan due to the pandemic. However, when the pandemic is fully contained, there’s little doubt that Japanese companies will renew their focus on ESG investment and sustainable business practices.