More investors consider nonfinancial factors in decisions

by Kazuaki Nagata

Staff Writer

Although it may seem slow to overseas investors, the ESG (environment, social and governance) investment started picking up in Japan just last year.

Hiromichi Mizuno, chief investment officer at the Government Pension Investment Fund (GPIF), who is a master of ESG initiatives in Japan, wants to take it to the next level in 2018 so that Japan can catch up with other countries and possibly get ahead of them.

To do that, he stresses that the domestic corporate sector needs to boost its efforts to disclose more information on how they are contributing to the environment and social sustainability.

Government Pension Investment Fund Chief Investment Officer Hiromichi Mizuno
Government Pension Investment Fund Chief Investment Officer Hiromichi Mizuno | GPIF

“Two or three years ago, every time GPIF mentioned ESG, we really didn’t get very positive reactions from Japanese corporate leaders. But now, I think we are getting much more supportive reactions,” said Mizuno in a recent interview. “I think they started realizing that our push for ESG helps them communicate with foreign investors.”

ESG investment targets businesses that value environmental, social and governance factors. In other words, it focuses on how these companies are focused on long-term-growth business models that also help the world become more sustainable rather than pursuing short-term profits to the detriment of society.

Some data still highlights indifference among Japanese companies. However, Mizuno said their interest in ESG is growing, saying that the concept of ESG should match with traditional values of Japanese companies who often stress how their business is environmentally friendly based on a sustainable vision.

ESG investment in Japan began to grow last year, mainly due to the GPIF’s massive promotion. The world’s largest pension fund, with about ¥155 trillion under management, selected three ESG indexes covering firms that meet certain environmental, social and corporate governance criteria. It began investing ¥1 trillion in them in July.

The indexes are called the FTSE Blossom Japan Index, the MSCI Japan ESG Select Leaders Index and the MSCI Japan Empowering Women Index.

With ESG investment heating up, some firms have started disclosing more ESG-related information, as it can help them score better on ESG evaluations from investors.

For instance, Mitsubishi Corp. released an ESG data book on Dec. 22 that includes details like how much paper, water and electricity it consumes at its offices and the average annual work hours and overtime of its employees.

Still, how seriously Japanese corporations are thinking about ESG remains unclear, according to a November survey by Reuters.

The survey shows that 72 percent of 247 companies said they were not selected for ESG indexes, and 83 percent of the unselected firms said they were not interested in being chosen.

The Reuters poll says one company manager told Reuters that corporate earnings and ESG factors don’t really relate to each other while another said their job is to make profits and pay taxes rather than making efforts for ESG.

Mizuno said that companies should get more serious about ESG and more aggressive information disclosure is necessary.

“If you ask me what the most important thing is, we need to have corporate leaders to buy into ESG,” he said.

While some domestic firms appear to remain reluctant, global investors have already been pouring their money into businesses with strong ESG efforts.

According to the Global Sustainable Investment Alliance, a group that compiles a biennial report on global ESG investment, the volume of ESG investment jumped to $22.8 trillion in 2016 from $18.2 trillion in 2014. But Japan’s figure accounted for only 2 percent of the 2016 figure.

ESG initiatives were accelerated after the global financial crisis triggered by the fall of Lehman Brothers in 2008, as the investment industry was criticized for only focusing on companies’ short-term profits and ignoring sustainability. Additionally, the 2015 Paris accord to fight global climate change also triggered a boost in the trend.

Mizuno, who became the GPIF’s chief investment officer in January 2015, has been promoting the ESG movement.

Under the current law, GPIF cannot directly purchase financial assets, so it makes investments through asset management companies. Mizuno said the pension fund demands that those asset managers take ESG factors into consideration and talk to companies on such issues.

“We’ve made it very clear that ESG integration is part of our principle,” he said.

Mizuno added that promoting ESG will help market growth over the long term because it is about reducing long-term risks, such as global warming and lack of corporate governance, which might threaten companies in the future.

This makes sense for investors like GPIF, whose investment style is mostly passive, that usually follow the average of certain indexes, such as Nikkei and Topix, rather than actively making investments in individual equities by closely watching short-term volatilities.

“GPIF will not benefit from a company creating a short-term profit at the expense of society or the environment,” said Mizuno.

The pension fund’s presence in Japan’s equity market has expanded in the past few years since it raised its ratio of domestic stocks to 25 percent from 12 percent in its portfolio in 2014. Due to the current ultra-low interest rates, it became harder to secure profits from the domestic bond market.

Due to its huge presence in the market, GPIF calls itself a “perfect example of a universal owner.”

Thus, it’s better for GPIF if many companies produce steady growth and stabilize the markets to boost long-term investment results.

“GPIF’s portfolio only becomes sustainable when the system becomes sustainable. That’s where we started,” he said.

Yet there is a question of how much ESG can actually eliminate risks since it would be difficult to grasp what is really going on within the companies.

For instance, a series of scandals that have occurred at major Japanese firms recently — such as Toshiba Corp., Nissan Motor Co. and Kobe Steel Ltd. — indicates that even those companies seen as industry leaders had problems and those problems will not surface easily with officially disclosed information.

Some of the scandals only came to light due to whistleblowers.

Mizuno said he is not pessimistic about Japanese companies because the whistleblowers indicate that workers are increasingly becoming aware of the issues of compliance and corporate governance.

“I’m hopeful that Japanese corporations are going through a transition period, so that the things they used to hide are now coming to the surface,” he said, adding Japanese companies traditional values should work well with ESG.

Even before the ESG initiatives began, many Japanese firms boasted about their environmentally friendly technologies and visions that would foster long-term growth, so what they need to do is to push themselves a bit harder to be more transparent with these aspects to attract investors.

“This is my challenge to Japanese companies. If the Japanese companies are as good as they always say, we can help improve their disclosure and their score should improve dramatically in the most efficient way,” said Mizuno.

ESG rating rankings by FTSE and MSCI show that Japan was ranked at eighth and fifth as of June, respectively, and 2018 is the year to make a leap, Mizuno said.

“I want Japan to become the fastest-improving country in terms of global ESG rankings (in 2018),” he said.