Here’s what the West can learn from Japan about ESG investing
Japan has flown under the radar as a market for ESG strategies but there have been more afoot at a government and government pension fund level.
Japan’s Government Pension Investment Fund (GPIF), the largest of its kind in the world, has been allocating funds to ESG investment since 2017.
“GPIF is increasingly recquiring companies to be better governed,” Robert Swift from Asian equities focused fund manager Delft Partners told Stockhead.
It has also asked all external asset managers it uses in Japan to consider ESG as a fundamental measure of investment strategies.
And only last month the government followed suit with GPIF. It announced it would start using its foreign reserves – which are second only to China’s – to buy securities which meet ESG criteria.
“Revitalising new ESG investment will help achieve a greener society and carbon neutrality in 2050,” Japan’s finance minister Shunichi Suzuki said.
“As the ESG bond market grows, I believe investment in ESG bonds will increase from now on.”
While the Environmental and Social aspects of ESG have attracted the most attention from investors in the West, Delft’s Robert Swift says Japan has focused heavily on the Governance aspect.
Of course, the environmental aspect has become increasingly important (with Japan recently pledging carbon neutrality by 2050) but good governance now has the promise to pay off – literally.
“One of the indices in Japan that the GPIF uses to gauge management success is the Nikkei 400 Index,” he explained.
“And the 400 Index is slightly unusual in that the member constituents and weighting of member constituents is based upon size of business but also on a number of other metrics that have relationships with governance.
“So is the company showing return on capital, is the company conforming to best practice in governance?”
Swift says the behaviour of companies will gradually shift even if it is only to get into this major indices and obtain all the benefits it delivers.
“As more and more money is managed using this index then the companies will themselves change,” he said.
“There’s a lot of evidence they’re trying to get into the index and consequently changing.”