Some people, however, depending on how they regard Japan, may see this notion of harmony as a way of exerting control. But is that enough to make Japan a laggard in terms of environment, social and governance (ESG) considerations? Is control more important for companies than longevity, which they regard as secondary to the need to achieve growth at any price? We think not: we take a more positive view because ESG-related notions are nothing new in Japan. Indeed, they are popular, and so companies are increasingly factoring them into their business approach.
What has changed fundamentally since 2012 – when the Abe government came to power, strongly promoting the Abenomics agenda – is that institutional investors and particularly Japan’s largest pension fund GPIF (Government Pension Investment Fund) have taken an interest in companies that factor in and develop ESG criteria in the conduct of their business. If those companies were starting from scratch as some seem to believe, they would not have progressed far enough for us to be writing about responsible investment in Japan in 2019.
The best example, and by far the most commonly cited one, is that of Hiro Mizuno, GPIF’s CIO, who has become one of the main proponents of responsible investment. He strongly supported the launch of the JPX 400 index, which consists of Japan’s top 400 companies in terms of governance and respect for minority investors. For the person in charge of investments for the world’s largest pension savings portfolio, that was natural. But Hiro Mizuno did not stop there. He and his teams worked to guide their investments using new indexes, such as FTSE Blossom Japan (consisting of companies showing solid commitment to ESG practices), MSCI Japan ESG Leaders and, no less importantly, MSCI Japan Empowering Women. In late 2017, Hiro Mizuno sent an even more radical message by announcing, during the PRI (Principles for Responsible Investment) conference, that GPIF would factor ESG criteria into all its investments going forward.
It goes without saying that GPIF’s stance is having a huge impact on the way companies operate, the way their boards of directors work (since they must now include independent directors), their recruitment and wage policies and their remuneration of senior executives. The impact is being felt especially keenly among the community of investors, institutional or otherwise. Aside from any trend-setting effect or influence that GPIF may be having, the result for investors is an improvement in corporate governance as companies factor in ESG criteria. The most obvious demonstration of these changes is that companies are making better use of surplus liquidity on their balance sheets through constantly rising share buybacks and dividend payments. From the social point of view, women are playing a greater role in the workforce and more of them are reaching high-level managerial positions, gradually contributing to the shift encouraged by GPIF in the wake of Abenomics. Companies with poor environmental records are being punished by excluding them from the aforementioned indexes, but also by the fact that company valuations are increasingly reflecting the attention paid to companies’ carbon footprints by an investor community that has become more critical, and above all more selective.
As regards factoring in ESG criteria becoming the new normal for Japanese companies, then, the recent developments discussed above suggest that Japan needs a structural shift in order to change direction.
Cédric Le Berre
Senior Analyst