The race is on for socially responsible investing in Japan

Seiji Kawazoe

For a long time, ESG investing was not very popular in Japan, especially among institutional investors. 

The first ESG offerings mostly grew within retail investment products such as environmental thematic funds or positive screening strategies focusing on companies with a high standard of corporate social responsibility (CSR). 

After the introduction of Abenomics and its inclusion of capital market reforms, interest in ESG investment has increased. The desire for economic and structural changes, especially improvement of corporate governance, are seen as key drivers for these changes.

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In particular, the stewardship code and the corporate governance code were introduced with a view to encourage engagement between investors and companies, as well as to open up dialogue designed to change the behavior of companies to improve their return on equity (ROE) as a key indicator of profitability and corporate governance.  

Notably, these changes and reforms are being driven in the institutional markets in Japan, where the Government Pension Investment Funds (GPIF), one of the largest institutional investors in the world, is leading the way.

The fund announced it had become a signatory of the Principles for Responsible Investment (PRI) in September 2015, and it has also established a Stewardship & ESG division, in order to integrate environment, social and governance issues into its investment process effectively.

The Pension Fund Association, which covers the private pensions sector in the country, is also moving along the same path as the GPIF. As they are major institutions both in the public and private pension sectors respectively, the mainstreaming of ESG investing is taking root and gathering pace. 

The Japanese investment industry is also responding and adapting to these trends. Many investment managers are driving industry changes.

On our part, we have developed a qualitative judgment criterion for our active Japanese investment products called MBIS, which stands for quality of Management, stability of Business basis, Industrial situation and Strategy of the company.

We have also begun to make international norms or rules-based engagements which cover both active and passive investments, as well as establishing a stewardship development department, which voices investors' views more transparently.

These ESG platforms have now became an integral part of our investment management organisation, coming to terms with global industry trends. 

The changes in the investment industry in Japan are a reflection of the real world, where Japanese companies are facing a shrinking domestic market due to the negative demographic trends of a growing aging population which are likely to continue for years to come.

Companies are therefore in desperate need to turn their business focus to regional or global markets, in order for them to survive. As such, the mindset of management is likely to be more ESG driven with the aim to regain competitiveness in the global markets.