Q&A on environmental, social, and governance (ESG) trends in Japan with industry experts Hirose Etsuya, ESG Senior Executive Officer, Quick, Masaru Arai, Chairman of Japan Sustainable Investment Forum and Magnus Cattan, Head of Fixed Income an Data Services (APAC), ICE.
Japan is one of the fastest growing markets for ESG adoption among companies. Mr. Hirose-san and Mr. Arai-san what do you think is driving this trend?
Mr. Hirose-san: "I believe a key driver was the Japanese stewardship code which launched in 2014, and is revised every three years. This code boosts ESG investment and engagement between investors and corporates. Many asset owners such as GPIF and insurance companies have become PRI signatory, therefore the mandate from asset owners to investment managers for ESG investment has increased. The idea of fiduciary duty has changed to take account of sustainability, for example “Fiduciary duty in the 21st century” which has been issued PRI in 2015 states “Failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty.”
Mr. Arai-san: "The Government Pension Investment Fund (GPIF), the world’s largest public pension fund, became a signatory of PRI in 2016 and with this, asked its outside managers to integrate ESG issues and engage with the investee companies. This event triggered the current rapid increase of sustainable investment in Japan, and leading investment managers started to organize ESG investment teams to meet the GPIF’s demand."
In a survey from our recent “ESG Japan Trends Webinar” we found that the attendees ranked client and investor demand as the main driver of their firm’s taking ESG issues into consideration in their investment analysis and decisions.
Mr. Arai-san, through your 18 years in responsible investing how have you seen investor and client demand increase? What is driving this appetite?
Mr. Arai-san: "The GPIF has taken further steps to integrate ESG issues into fixed income investment as a follow-on initiative to the joint research "Incorporating Environment, Social and Governance (ESG) Factors into Fixed Income Investment" published with World Banking Group in 2018. We’d seen ESG in equities, but this has driven investment managers to start incorporating ESG issues into other areas like fixed income, real estate, private equity and alternatives.
Although their activities are limited to Japanese assets, we have an impression the Japanese managers have caught up with non-Japanese PRI signatories in incorporating ESG issues into their investment. Some corporate pension funds have started ESG incorporation to their assets and the ESG investment trust funds offered to retail investors, we saw this shoot up in 2020. Most leading Japanese investment firms now believe that ESG incorporation is a must for them.
This trend is supported by better disclosures by Japanese companies on ESG issues in their annual reports and integrated reports. The Japanese TCFD supporting companies, including some financial institutions, reached 201 in May 2021. In 2020, the number of A-class Japanese companies in CDP climate change, water security and forestry were 271, 106 and 16, respectively."
In the same survey we found 57% of attendees felt that lack of appropriate quantitative ESG information was the top challenge that restricted their firm’s ability to use ESG in their investment analysis and decisions.
Mr. Hirose-san - Where do you think data providers fall short in providing this information?
Mr. Hirose-san: "Many data providers just provide ESG scores and ratings. On the other hand, limited numbers of companies have published their ESG data in Japan. Therefore, we need to see an increase in companies' ESG element data disclosures, so investors don’t have to rely so heavily on scores and ratings.
In addition to that, there is a lot of information and varying guidance ESG and ESG reporting, and investors need to be better educated on ESG and how to integrate ESG issues to their investment decision."
Magnus - How is ICE trying to solve this challenge?
Magnus: "Market participants have more and more access to data, but not all data is created equal – it can be inconsistent or insufficiently standardized to enable effective comparison across companies. Through our ESG Reference Data service, we provide detailed ESG attributes and indicators that may be financially-material, such as greenhouse gas (GHG) emissions reported, board diversity, benefits and many others, sourced from both company and publicly-available third-party sources. We are focused on providing organized, granular and timely data to our customers to aid in their decision-making by providing."
We also found that “Social” was ranked the most challenging and difficult to analyze and integrate out of the “ESG” due to lack of metrics.
Mr. Arai-san - What challenges have you experienced trying to analyze social data points?
Mr. Arai-san: "Most investors and non-financial companies have focused on climate change issues, and they have little idea of which topics are essential in Social and how to evaluate them. E issues often have precise data, and S issues often need comparison and analysis of descriptive statements by companies. I would recommend Japanese investors refer to the GRI metrics on Social."
Magnus - How does the ICE ESG Reference Data help solve for this challenge?
Magnus: "We often hear this from clients and it’s not surprising given social metrics are often harder to quantify and measure. Through our ESG Reference Data service we capture many social data points such as benefits, diversity and inclusion policies, etc. from multiple data sources such as company-reported and publicly-available documents. We then integrate these into a data model and provide them to our clients in a consistent format allowing them to compare social data points like-for-like across different companies."
What do you think are some of the main challenges you see to further adoption of ESG going forward in Japan?
Mr. Arai-san: "There is still a lack of experience in Japan when it comes to ESG investing and analysis. Japanese investors need to learn how to evaluate non-quantitative information and integrate them into their portfolio. I’ve started seeing firms training their more junior team members in sustainable investing, which is a positive move."
Mr. Hirose-san: "To help drive further adoption in Japan I’d like to see more companies disclosing ESG data, more knowledge within the institutional investor community of ESG and ESG integration, and more adoption of corporate pension fund signatories of PRI and stewardship code."
Hear ICE and QUICK Corporation provide an overview of the ESG trends in Japan, with a keynote address from Masaru Arai, Chairman of Japan Sustainable Investment Forum.
Better understand the ESG risks and opportunities of globally-listed corporations with our ESG Reference Data which provides detailed ESG attributes and indicators.