Why Japan has Changed its Mind on Responsible Investment

Selected by the UK’s Department of International Trade to take part in their FinTech Trade Mission to Tokyo, I have just returned from the FinTech Summit (“FinSum”) in Tokyo which took place last week. Whilst there, I was struck by the level of interest in ESG issues, and ESG data in Japan. ESG refers to Environmental, Social and Governance factors that are used as part of the investment decision-making process. To understand how far Japan has moved in such a short time, consider this. The Tokyo Metropolitan Government has initiated a new Tokyo Financial Award to recognize financial institutions that are developing and providing products and services that meet the citizens of Tokyo’s financial needs. After crowdsourcing Tokyo residents’ opinions on daily financial services and ESG investment, there are two award categories – one for financial services in general, and one for those institutions that are actively promoting ESG investment in Japan. This process, and this award, would simply not have happened previously. In the same week as FinSum, the largest pension fund in the world, the Government Pension Investment Fund of Japan (GPIF), chose the S&P Global Ex-Japan LargeMidCap Carbon Efficient Index and the S&P/JPX Carbon Efficient Index for “the passive investment tracking of its green stocks”. Why does this matter? Because responsible investing, unpopular in Japan previously, is now being driven in part by the actions of the GPIF, which became a signatory of the UN-supported Principles for Responsible Investment (PRI) in September 2015. Since then, the GPIF has been outspoken in its support of ESG, and that support is being translated into changing fund manager mandates, and increased awareness and interest in ESG issues more broadly within Japan. Earlier this year, the Japan Sustainable Investment Forum (JSIF), released data to show that for the period from March 31, 206 – March 31, 2017, the combined total for sustainable investment disclosed by 32 domestically headquartered institutional investors stood at Y136.6 trillion. It is important to compare this figure with that of 2016 which stood at Y56.25 trillion, which itself was 2.1x that of 2015. Interest, awareness, and Assets Under Management are thus all growing quickly. I met with Mr. Masaru Arai, JSIF Chairman and noted how quickly things were moving in Japan, he agreed, and outlined that it appears likely that the Japanese government will be undertaking a series of awareness-raising activities in 2019 to further extol the virtues of ESG investing in Japan. These activities will be coordinated across Government including the Financial Services Agency of Japan, and the Environment Ministry. This is aimed at the broader investment community and builds on the progress made so far with the “Japan revitalization strategy”, one of the “three arrows” of the Abe administration’s strategy for Japanese growth, the active leadership of the GPIF, and domestic corporate governance reforms like updates to the Corporate Governance Code and the Stewardship Code. As Japan looks to regional and global markets for growth and investment, these reforms are designed in part to reflect wider investment norms and are being undertaken quickly. So in sum, if 2018 has seen a transformation in the views and relevance of ESG in Japan then you ain’t seen nothing yet!