Japanese refinements show a commitment to ESG

Changes to policies and attitudes show how Japan is becoming a leader in ESG investing in Asia

Historically, Japanese companies have lagged their Western counterparts on ESG awareness, but in recent years this situation has been improving, driven by government reforms, demand from local pension funds and the expectations of foreign investors.

On the investment side, Japan’s biggest public pension fund, the Government Pension Investment Fund (GPIF), was instrumental in pioneering a stronger ESG focus, having signed the Principle for Responsible Investment in 2015.

Since then, the availability of ESG investment options has steadily grown, with ESG bond issuance hitting a record of ¥730bn (£5.3bn) in 2019 (according to Refinitiv).

A study of 43 asset managers operating in Japan conducted by the Japan Sustainable Investment Forum (JSIF) revealed total assets invested according to sustainable investment principles rose to ¥336trn in 2019, a 45% increase from the previous year.

“Japan has become one of the leaders in Asia,” Yo Takatsuki, head of ESG research and active ownership at AXA Investment Managers explains.

“It’s helped by the fact that Japan has a large capital market and a sophisticated financial industry. This means that financial institutions have put an increasing amount of resources into developing their approach to ESG analysis.”

Over the past decade, Japanese companies have made improvements in the area of corporate governance as a result of the Japan Stewardship and Corporate Governance codes launched in 2013 and 2015, respectively.

In addition, Mayur Nallamala, head of Asian equities at RBC Global Asset Management, said there is much better data available on Japanese companies today than a decade ago, with improvements in terms of “both the coverage and detail of ESG data available”.

“We have also seen an improvement in data availability from third-party ESG vendors and sell-side coverage in response to demand from fund managers,” he says.

Government reforms

However, according to Eric Leve, CIO at San Francisco-based boutique wealth and asset manager Bailard, the majority of improvements in ESG to date have been driven by government reforms rather than company management.

“The old keiretsu system isn’t going away overnight,” he says.

“Japanese companies have long possessed cross-shareholdings to protect themselves from the influence of outside investors. However, the anti-takeover measures supporting this system are incrementally whittling away.”

Most of the traction has been happening in the area of governance, Leve claims, while efforts “in the realm of ‘S’” have been “tepid”.

On the governance side, one of the key developments has been the introduction of the Stewardship Code, which set a higher bar for fiduciary duty among investment managers. For example, the code has pushed for better anti-takeover provisions and the presence of independent board members.

Another key development in this area was the launch of “Womenomics” by Prime Minister Shinzo Abe, a reform which aims to make the workplace fairer for women.

Archibald Ciganer, manager of the Japan Equity Strategy at T. Rowe Price, says: “While disclosure remains an issue, our analysis shows that female board representation, while still relatively low, is improving.”

He adds that “the variance between the most, and least, progressive companies is considerable”, which provides opportunities for active managers to pick those companies that take diversity seriously.

Corporate improvements

However, Takatsuki says Japanese companies are now far more open to engaging with investors on a wide range of issues than they were a decade ago, making it easier for global investors to pick ESG leaders in the Japanese market.

“There are far fewer hurdles now than there was a decade ago,” he says.

“Japanese companies now have an improved understanding of ESG issues such as climate change, gender diversity and board structure. The quality of management practices around sustainability risks as well as transparency of ESG performance reporting has also evolved a lot.”

Additionally, managers report that the global pandemic has led to advances in technology that have been making it easier for investors to engage with Japanese corporates.

“Covid-19 has led to an improvement in the adoption and usage of technology in engaging with investors which is a long-term positive, making it easier to participate in discussions with management,” Nallamala says.

In fact, Keita Kubota, head of Japanese equities at Neuberger Berman, believes Covid-19 has accelerated corporate Japan’s digital transformation by “at least three or four years”.

“We think this trend spells opportunities for companies exposed to the digital transformation theme,” he says.

“However, it also creates sustainability challenges for other companies that don’t have blue chip-sized resources to fund the transformation.”


Yet despite the improvements, there is still quite a way to go before Japan can compete with ESG leaders in Northern Europe, according to Takatsuki. One of these hurdles is the language, especially for smaller, domestic-facing companies.

“Information on these companies is not available in English to the same degree as it is in Japanese,” Takatsuki explains.

“It certainly helps to be able to communicate with management in Japanese.”

Government reforms will also need a push in the right direction. For example, according to Leve, ‘Womenomics’ has “turned out to be mostly talk, and there is still a great opportunity for growth”.

Additionally, though Covid-19 has accelerated improvements in some areas, in the short-term it has slowed progress on ESG reforms as companies are forced to focus on operating challenges, according to Nallamala.

Morningstar figures show the pandemic has led to a slowdown in the number of sustainable fund launches in Japan in the second quarter of the year, while the sustainable fund market recorded outflows.

However, managers believe that once the pandemic is over, Japanese companies will renew focus on sustainable business practices, focusing especially the ‘S’ in ESG.

Nallamala says: “We expect as we come out of the pandemic, companies will be even more focused on ESG factors, including employee health and safety, supply chain management and governance.”