Japan making ESG progress, with GPIF’s help

Doubts persist over Japan’s commitment to boardroom change, says fund house Hermes, but progress is being made, aided by the country's Government Pension Investment Fund.
Japan making ESG progress, with GPIF’s help

By their own admission, Japanese asset owners and the companies they invest in still have a lot to learn about environmental, social and governance (ESG) factors.

For instance, Japan’s Government Pension Investment Fund (GPIF) is the only Asian institution among the 20 founder members of a new global ESG platform announced late last month by the ¥140 trillion ($1.23 trillion) retirement institution.

While the region is a laggard on this front, UK investment manager Hermes said there had been real progress, particularly in Japan, and that reform would be sustained.

In the corporate world, there are still doubts about the strength of Japan’s commitment to change in the boardroom, noted Louise Dudley, London-based global equities portfolio manager at Hermes. “A year after the introduction of Japan’s governance code, it is feared that some corporates are just paying lip service to greater accountability,” she said in a note issued yesterday.

“Cross shareholdings between companies continue to be significant,” she added. “Long-tenured directors still clog the boardrooms. Companies are looking to improve their behaviours ‘when the environment is right’, but with markets as they are, this may take longer than we originally thought.”

Nonetheless she observes that there have been improvements at board level and that the percentage of independent directors is increasing. In fact, according to statistics from the Tokyo Stock Exchange, the number of companies appointing two or more independent directors has reached 78% in 2016, up from 48% in 2015 and 22% in 2014.

Some firms, though, are failing to develop their corporate governance standards. Hermes said electronics giant Toshiba recently came under grave criticism after an investigation revealed a corporate culture where employees were afraid to question superiors. This was seen as a major contributing factor to an accounting scandal at the conglomerate.

A more positive example is the electronics and ceramics manufacturer Kyocera, which has raised the number of its independent directors to two and has had a non-Japanese individual on the board since 2012. There are still no women on the board, but Dudley said they did seem to be working to change that.

Hermes has done its own study of the extent to which ESG factors can deliver better returns to investors. It reckons that well governed companies tend to outperform poorly governed ones by at least 30 basis points per month on average over a period of five years.

In a further illustration of the advances being made in stewardship and ESG practice in Japan, GPIF has established two high-level discussion platforms, one for corporate business leaders and another for institutional asset owners and pension funds.

The Global Asset Owners’ Forum (GAOF) will convene its first meeting next month, hosted by the GPIF and with the aim of teaching Japanese pension executives how to emulate ESG practices adopted in the US and Europe.

Members of the GAOF include a number of US pension funds such as California State Teachers’ Retirement System, California Public Employees’ Retirement System, the State Board of Administration of Florida, State of Wisconsin Investment Board and The Regents of the University of California (USA).

Other asset owner members are Canada’s Ontario Teachers’ Pension Plan, UK-based institutions the Universities Superannuation Scheme and Legal & General Investment Management, and Dutch pension fund managers PGGM and APG. 

In total, GPIF said around 20 asset owners would be involved. However, it told AsianInvestor that no other Asian pension funds or asset owners had been invited to participate. This suggests the fund does not feel it can learn anything from other players in the region about ESG.

Norihiro Takahashi, president of GPIF, said the fund intended to monitor and encourage its external managers’ engagement on ESG factors, “so that they may further foster corporate value and sustainable growth of investee companies". The aim of the forum will be to establish “a sustainable exchange of opinions with non-Japanese asset owners which have [a more] advanced approach in ESG investments”.

The corporate discussion platform, known as the Business Owners’ Forum, has come about, said Takahashi, because GPIF receives many requests from listed companies – such as electronics group Omron, pharmaceuticals firm Eisai and car maker Nissan – seeking a “sustainable and constructive dialogue” with the pension fund.

Late last year AsianInvestor's panel of judges selected GPIF as its institutional investor of the year for Japan, in recognition of the unprecedented revision of its asset allocation and governance structure.

Accepting the award in December, chief investment officer Hiromichi Mizuno said he felt GPIF did not yet deserve such recognition: “We are not there yet. We try to keep working hard and we are really committed to achieving and making what this award really means worthwhile.”

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