Asset owners in push to lift ESG standards in corporate Japan
Japanese corporations are feeling the pressure to improve their environmental, social and governance (ESG) standards, as the country’s stock market has become attractive for investors in 2023.
In fact, Japanese companies themselves have displayed willingness to deliver on the increased ESG demands from more active and assertive investors.
“We are seeing signs that earnings are increasing, and the payout ratio is also ticking upwards for Japanese norms. Companies are handling shareholder differently, for instance in investor relations meetings, with better, proactive and transparent communications,” Andrew McCagg, senior client portfolio manager at Nomura Asset Management, told AsianInvestor.
Also read: Global asset owners pile pressure on Toyota over climate lobbying
Among domestic investors, Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund with total assets above ¥219 ($1.5 trillion) as of end-June 2023, naturally stands out.
In its latest annual ESG report released September 25, GPIF emphasized that beginning with annual securities reports and similar disclosures for the fiscal year that ended on March 31 2023, Japanese companies are required to disclose their views and initiatives related to sustainability.
“Japan’s efforts may not be as eye-catching as those in Europe and the United States, but they have sparked little backlash or vacillation and seem to be progressing steadily, step by step,” Masataka Miyazono, president at GPIF, says in the report.
GOVERNANCE PUSH
While environmental standards have been broadly adopted by Japanese corporations and investors alike, governance standards still have some room for improvement.
“Governance, the G in ESG, has been the biggest issue for corporate Japan but it is rapidly improving. Independent board members are rising and returns to shareholders have seen a similar development,” McCagg said.
The number of independent members of boards of directors in Japan has been increasing in the past 10 years. In March, the Tokyo Stock Exchange gained public attention by requiring companies with a price-to-book ratio (PBR) below 1.0 to disclose and implement improvement measures.
“Although everyone is aware of this issue, I presume it has always been a difficult one to address and attempt to improve the situation, since it might be interpreted as a criticism of some of Japan’s foremost companies. In that sense, I would like to express my respect for the forthright action taken by the Tokyo Stock Exchange,” Miyazono said.
Approximately half of the listed companies in Japan have PBRs lower than 1.0, indicating that their shares are valued at less than liquidation value.
“We think that dialogue between companies and investors will play a major role in addressing the low PBR of Japanese companies, a substantial challenge facing the capital market. In this context, we would like to ask our external asset managers to pursue even more active engagement,” Miyazono said.
GPIF conducts an annual survey of companies in order to get their feedback on the stewardship activities of external asset managers and to monitor the nature and progress of their engagement.
WOMEN WANTED
One of the main ESG issues in Japanese corporations is the inclusion of women in the workforce, and particular in top management. According MSCI ESG Research, in 2023 the proportion of women on the board of Japanese companies was 14.3% while the share of women in senior management was just 6%.
These relatively low numbers have started to raise issues with active investors. In April 2023, Norges Bank Investment Management (NBIM), operator of the Norwegian government pension fund with an AUM $1,39 trillion as of end-June 2023, said it will oppose the appointment of board chairs in Japanese companies that do not have female board members.
That message followed a letter to the Japan Financial Services Agency and the Japan Exchange in December 2022.
“Based on our experience engaging with companies across our portfolio and in Japan, we believe diverse boards tend to be more effective and conducive to the formulation of resilient long-term strategies,” said in the letter.
“Female leadership is starting to move. As companies start the process of nurturing future leadership, it takes time for them to rise the ranks, but we are starting to see a development in the middle management layer,” McCagg said.
With a dwindling population, Japanese women are very much needed in the workforce. Although lagging, political initiatives are trying to improve the situation.
The Intensive Policy for Women’s Empowerment and Gender Equality 2023 (Basic Policies Related to Women 2023) announced by the Japanese government in June 2023, state that prime market-listed companiesmust appoint at least one female executive by around 2025 and at least 30% female executives by 2030.
For the domestic market, GPIF has adopted the MSCI Japan Empowering Women Index (WIN) in 2017 and the Morningstar Japan ex-REIT Gender Diversity Tilt Index (the GenDi J index) in 2022.
In 2019, GPIF joined the 30% Club Japan Investor Group, a group that aims to increase the ratio of female executives in Japanese companies.
In its own ESG Report, GPIF disclosed gender pay gap indicator for the pension fund in the same way as for other companies. The gender pay gap for fiscal 2022 revealed that female employees earned 70.6% of their male counterparts.
GPIF said the pay discrepency was due to the pension fund having a fewer number of female investment specialist personnel employed on a fixed-term basis, who command high salaries.
“The figure is nothing to be proud of. However, we think that an accurate understanding of the present situation is the first step in finding a solution. Creating workplace environments where everyone, not only women, can find fulfilment and work with a sense of purpose will not only boost business performance but also increase the sustainability of the organization,” Miyazono said.