Sanpo Yoshi: Japan has long done ESG by a different name

By using the 400-year-old concept, Japanese companies have developed practices ESG-conscious investors would be proud of

Although a series of corporate scandals in Japan in 2017 have caused some to see the country as an ESG laggard, Japan’s application of some very old traditional principles that pre-date the modern Western conception of ESG and sustainability can actually cause it to be considered a leader.

These attitudes have their roots in a 400-year-old concept called Sanpo Yoshi, meaning ‘three-way satisfaction’: good for the seller, buyer and society. The principle originated with itinerant merchants called Omi Shonin in western Japan at the dawn of the country’s modern economy era. These men were cogs in the giant wheel of early Japanese industry, from ensuring infrastructure for manufacturing like silk-weaving to enabling the flow of the western goods which suddenly flooded Japan as it reopened after 400 years’ isolation.

These young entrepreneurs travelled far and wide for business, meaning that building long-term trusting relationships with the communities they travelled to was essential in order to generate success. By basing their trading principles on Confucius’ ‘Golden Rule’ (‘do unto others as you would have them do to you’), they were accepted across Japan and grew to become immensely successful.

These principles have stood the test of time and have had a significant impact on the emergence of ESG principles as we understand them today. By encouraging CEOs and other leaders to run their business with an eye on employees and wider society as well as shareholders, Japan has developed unique practices that ESG-conscious Western companies would be proud of.

For example, Japanese CEOs are paid far less on average than their US counterparts, with the average pay of a Japanese CEO standing at JPY188m in 2019 compared more than JPY1,400m of an equivalent US CEO. What this means in practice is that Japanese CEOs are less interested in profit and personal gain and thus can afford to demonstrate a higher level of care about the social purpose of the companies they run.

Unique initiatives

Furthermore, many Japanese entrepreneurs are very frank and honest and do not ‘sell’ to customers in the same way as their counterparts in the US, as they will often put their customers’ needs first. For example, Lasertec, a supplier of inspection tools used in semiconductor miniaturisation has installed equipment worth three years of revenue, but will not register this as revenue until and unless its customers are entirely satisfied. This ensures that the company strives to make the best products possible, as well as ones that are sustainable for their customers.

Other companies have also taken unique initiatives based on the principles of Sanpo Yoshi before the modern conception of ESG appeared. Sysmex, the world’s largest blood testing company, made a name for itself in the 1970s by providing quick and multifaceted blood tests to help address several health challenges facing the Japanese population. This gave Sysmex a strong reputation for caring about its customers, which helped it to grow to the world-leading company it is today.

Another example can be seen with Daikin, the world’s largest air conditioner maker that also makes refrigerants. In the second half of the 20th century it became clear that commonly-used refrigerants were depleting the ozone layer. As Daikin had an impulse to help society, they reacted quickly to develop alternative refrigerants that do not damage the Ozone layer, building the world’s first commercial-scale plant for a key alternative in 1997.

What this goes to show is that where Western companies have had to incorporate ESG into their business practices (and have even had to invent a name for the concept), this philosophy has always been (and continues to be) built into the fabric of Japanese business. Indeed, many Japanese companies such as those above have instinctively had purpose, a social role and an environmental context without shouting about it. That is what Sanpo Yoshi is all about.