Growing ESG Investment Leading to Transformation of Japanese Companies

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The environment surrounding the CSR (Corporate Social Responsibility) activities of Japanese companies is changing significantly. In response to increasing social expectations calling for companies to disclose their achievements related to the creation of long-term value and sustainable development, practical movements are arising. Here is a summary of the current situation in Japan, compiled by Toshihiko Goto, Chief Executive of Sustainability Forum Japan.

Japanese companies are currently experiencing revolutionary upheaval in the field of CSR activities. This social earthquake comes from major changes in the public expectations of companies. Society is urging companies to make clear statements or disclosures of their efforts to create long-term value and sustainable development.

Various moves related to CSR activities have been made by society in recent years:

• In May 2013, the non-profit Global Reporting Initiative, GRI, whose mission is to make standard practices for global sustainability reporting, issued its G4 Sustainability Reporting Guidelines.
• In December 2013, the International Integrated Reporting Council released the report "International Integrated Reporting Framework" to promote integrated thinking of financial and non-financial information based on environment, society and governance (ESG).
• In February 2014, the Financial Service Agency of Japan unveiled Japan's Stewardship Code and has asked institutional investors to sign this code.
• In November 2014, the European Union amended a directive, the Markets in Financial Instruments Directive (MiFID), and made the disclosure of information on environment, labor, human rights and corruption prevention obligatory.
• In December 2014, the Tokyo Stock Exchange and the Financial Service Agency jointly released a draft of the Corporate Governance Code.

After the United Nations unveiled the Principles for Responsible Investment (PRI) scheme in 2006, ESG-focused investment has expanded in Europe, accounting for a half of the investment market. The United States is also seeing growth, reaching almost 30 percent. ESG investment in Japan has yet to reach even one percent, including Socially Responsible Investment (SRI).

Despite of these stagnant conditions, the launch of the Stewardship Code by the Financial Service Agency has had a positive influence on the market. As of the end of November 2014, 175 investors has signed up to adopt the code.

However, with limited ESG literacy among Japanese investors and financial industries, constructive dialogue with investee companies was difficult, leaving much to learn during negotiations.

In this situation, the Government Pension Investment Fund (GPIF), managing about 130 trillion yen (about U.S.$1.20 trillion), announced that it would examine the utilization of ESG investment to increase the stock management percentage to achieving accountability for pension scheme members. The decision by the GPIF accelerated investment activities throughout financial market.

On the other hand, investee companies have bigger interest than financial industries on issues such as integrated thinking for creating long-term value. Since the middle of 2013, many leading companies have been studying what to include in their material topics or materiality. I now have more opportunities to participate in dialogue with companies.

Symposiums and seminars carrying such keywords as materiality, KPI, integrated thinking and ESG-focused investment are likely to quickly fill to capacity.

It is expected that such financial transformations will bring innovations among Japanese companies.

Toshihiko Goto, Chief Executive
Sustainability Forum Japan