January 31, 2008


SRI to Achieve Sustainable Society Nurturing Dreams and Hopes of Young People -- The Good Bankers Co., Ltd.

Keywords: Newsletter 

JFS Newsletter No.65 (January 2008)
Toward a Sustainable Japan--Corporations at Work Article Series No.68

Japan's first financial product featuring socially responsible investment (SRI) was launched in August 1999. Named the Nikko Eco Fund, it attracted 23 billion yen (about US$204 million), over four times the initial expectations, within two weeks after it was launched. In this issue, we introduce the Good Bankers, Japan's first investment advisory company specializing in SRI.

The eco-fund market (investment trust funds investing in selected companies with commitments to the environment) grew to 200 billion yen (about US$1.8 billion) within only six months after the Nikko Eco-Fund was launched, stimulated by the entry of other companies. The funds had attracted attention as a new market that connects environment and finance. At one point, the market size shrank due to the bursting of the dot-com bubble, but it has been expanding again in Japan since the launch of the Principles for Responsible Investment (PRI) lead by the Finance Initiative of United Nations Environmental Project (UNEP-FI) in April 2006.

The PRI consists of six investment principles for institutional investors, compiled by the UNEP-FI office with support from 20 leading financial investors in 12 countries, invited by former UN Secretary General Kofi Annan, as well as other investment groups, international organizations, scholars and citizens' groups. The purpose of the PRI is to reflect environment, social responsibility and governance (ESG) in investment decisions, by doing the following:

- incorporating ESG issues into the process of investment decisions,
- reflecting ESG issues in the behavior of shareholders,
- requesting the information disclosure on ESG issues to the targets of investment,
- striving for the diffusion of PRI as an asset management industry,
- collaborating with other stakeholders to increase the effect of PRI performance, and
- disclosing information on PRI performance.

Against the backdrop of worsening environmental problems caused by global warming, many think that by changing the orientation of pension funds (which account for a large segment of the world's capital market) the PRI are promoting major changes to help humanity achieve sustainable economy and society globally. The number of PRI signatories was initially 50, but has grown to about 250, accounting for total operating assets of US$10 trillion as of October 2007.

Long-awaited SRI for Japanese Investors

SRI funds has taken a long time coming to where it currently is. Socially responsible investments started in Japan with the Nikko Eco Fund, and developed over nearly nine years to the point where SRI funds are now included in the portfolios of the major institutional investors. SRI appeared relatively recently in Japan (1999), compared to the 1920s in the United States. Japan has a total of 1,535 trillion yen (about US$13.6 trillion) in private financial assets, and is often seen as having a traditional culture of living in coexistence with the environment. So why did it take so long for the country to connect its large capital markets with environmental and sustainability issues?

Mizue Tsukushi, the CEO of the Good Bankers Co., identifies the reasons as the lack of capacity of financial institutions, and a very low public awareness of how one's financial activities affect society. She also thinks that religious beliefs created the foundations of SRI overseas, and that religion is still closely tied with national and personal characters. "In contrast," she says, "while Japan's original religion, Shinto, was deeply rooted in people's lives until the end of World War II, we lost Shinto's religious sentiments since the US occupation policy intentionally detached the religion from our lives. Some say that Japan may have lost its potential affinity for SRI because of that."

"The connectedness between people and religions gives people the awareness that human beings are not everything. A sense of reverence makes people feel that there is something beyond human knowledge," she says. "In prewar times, the daily lives of Japanese people were controlled by Shinto and Buddhism, and people felt reverence for nature. Once such feelings were detached from our lives, however, we came to seek only economic growth, which has led to severe environmental destruction."

SRI can be described as "solving and improving social issues by using the financial system." The launch of the Nikko Eco Fund and its amazing investor response show that economic power can be utilized to address environmental issues--one of the biggest social issues at that time--and shift our society towards sustainability.

"We have received comments from the market that seeing our fund was something like the veil falling from investors' eyes and that this is what they really wanted. Furthermore, securities firms have said they were surprised that nobody complained about this fund even if it fell below par value, unlike many complaints about other financial products when their value dropped. It shows that Japanese investors were ready for SRI, and that they are emotionally prepared to accept it," says Tsukushi.

Sustainability? For Whom?

In 2004, when Japan's aging society and falling birthrate emerged as top public concerns, the company launched a "Family Friendly Fund" as a Mitsubishi UFJ SRI financial product, developed together with Mitsubishi UFJ Asset Management Co., Ltd. By developing this product, the Good Bankers offered an opportunity for investors to invest in corporations that allow their employees to choose diverse, flexible work styles, so that they can balance work and family depending on their stages of life, be it child-rearing, or caring for aging parents, etc. Thus, the company has been acting as a forerunner, influencing Japanese SRI trends.

Both the Eco-Fund and Family Friendly Fund are products designed to address social issues through the financial system, aiming to attain a sustainable society, including the sense of sustainability in individual lives. "Sustainability can now be regarded as a connected whole, not just as environmental sustainability," Tsukushi says.

When the Nikko Eco Fund first appeared on the market, most fund investors were individuals, including many young persons and women. According to Tsukushi, this tendency is shared by many other countries, and in this regard, cooperation between the younger generation and women will be the key to creating a sustainable society.

One of the major issues Japan is now facing is a gap between haves and have-nots. According to statistics in the year 2000, among 25 countries in the Organization for Economic Co-operation and Development (OECD), Japan's relative poverty rate (ratio of population with less than half the median household disposable income) ranked second following the United States. The gap is especially wide in the younger generation. An increasing number of young people have little hope for their future.

As an SRI investment advisory company, when the Good Bankers assesses a company's sustainability, they focus on the status of its young and female employees. "Sustainability is an issue that affects the young, as it is they who own the future. Women are also connected to the future because they bear children. National governments and businesses are sustainable only when they can create an environment and society where the young can have hopes and dreams in their future. They have no sustainability if they can see no future," says Tsukushi.

It is the task of an investment consulting company to create assessment standards to gauge a company's sensitivity to the situation of young and female employees. The Good Bankers updates its standards every year. But Tsukushi says, "If we need to act quickly to reflect changes in the world, sometimes we change in our standards immediately if they will have a big impact, without waiting a year. We have 150 assessment standards for eco-funds, but each investment advisory company has its own unique knowledge and expertise for indicators."

SRI: Both a Social Movement and Way of Asset Management

Less than a decade since the launch of Japan's first eco-fund, all major financial institutions in Japan today have a lineup of SRI products. It took 40 to 50 years for major financial institutions in the United States to deal with SRI, even though efforts started earlier in that country. "Japan was a slow-starter of SRI funds, but it is a quick learner too," Tsukushi says.

After building practical rating systems, the company would like to shift its focus to the dissemination of information. SRI is gaining attention, but the idea has not yet deeply penetrated into society.

"Essentially, SRI deals with money. It has the characteristics of a social movement, but at its core it is basically a way to manage funds. We need to build an SRI market that attracts more people, by increasing the number of businesses suitable for investment in positive ways, and by diversifying the risks more," says Tsukushi.

It is said that retirement allowance of Japanese baby boomers will amount to 50 trillion yen (about US$442.5 billion) within three years. As this is a generation conscious of politics and society, if SRI-related information can reach them, an increasing number of people can be made aware that they are able to change society with their money. That will greatly change our world for the better.

(Written by Reiko Aomame)