With more market players taking into consideration the environmental and social impact of their investment decisions, Tokyo Stock Exchange Inc. and its parent company made available a handbook to assist listed firms identify, track and disclose their ethical credentials.
Investing while taking environmental, social and corporate governance standards into account, widely referred to as ESG investing, has become more prevalent in Japan in recent years as issues like climate change and human rights abuses prove to be both opportunities and risk factors for publicly listed companies.
“Although many companies were aware that they must work on ESG information disclosures, they had trouble finding where specifically to begin,” said Makoto Miki, secretary general of the sustainability committee at the Japan Exchange Group Inc.
About 98% of 48 asset management firms in Japan utilized ESG data in their investment decisions, according to a questionnaire distributed by the Economy, Trade and Industry Ministry in 2019. But 85.4% of the firms said information disclosures were insufficient.
The handbook, given to 3,700 listed companies last year, explains in four steps how to identify ESG issues that are relevant, how to connect the issues to a business strategy and to create oversight, and lastly how to best disclose achievements.
It emphasizes the importance of focusing on ESG issues that are deeply related to the companies’ business strategies so that investors can use the information as part of their mid- and long-term valuation calculations.
As a best practice case study, the handbook looks into the operations of a household appliance-maker with a global supply chain.
The company issues annual updates on how it oversees and improves its suppliers’ employee education programs, efforts to adhere to human rights standards and measures to address its environmental and climate change-related impacts.
“We are more than happy if the handbook helps to accelerate the information disclosure in the Japanese market,” Miki said.
Globally, ESG investing assets stood at $30.7 trillion at the start of 2018, a 34% increase from 2016, according to a biennial Global Sustainable Investment Review issued in 2018. The three largest regions based on the value of their sustainable investing assets were Europe, the United States and Japan.
In Japan, the figure quadrupled in the two years to $2.2 trillion, or 18% of the total professionally managed assets, the report said.
Brokers said investing in green energy companies is expected to rise in Japan, with Prime Minister Yoshihide Suga committing the country to achieving carbon neutrality, or net zero emissions of carbon dioxide, by 2050, in line with similar climate change-addressing goals set by other countries.
Although the release of carbon dioxide and other emissions is unavoidable in some businesses, awareness of ESG issues has been rising rapidly among Japanese companies, says Futoshi Saito, associate councilor of the responsible investment section of Sumitomo Mitsui DS Asset Management Co.
“As an investor, I expect that companies planning or acting (to achieve the goal) will foster innovation. And where innovation occurs, there will be investment opportunities,” he said.
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