Need for Japanese Companies to Step Up Social and Governance (Mr. Nishimura – Nomura)

Globally, utilities sector has high ESG scores….Our analysis using ESG (environment, social and corporate governance) scores from ECPI, an Italian independent research provider, shows that of the eight sectors used by
ECPI, utilities has the highest score in terms of averages across Japan, North America, and Europe. We think this is because many companies in the sector serve the public interest to a high degree and therefore pay attention to environmental and social concerns. In contrast, the financial sector had the lowest average score. We consider this a reflection of the numerous financial scandals in recent years.

By region, European companies have the highest scores, North American companies the lowest Looking at average ESG scores for each of the three regions, Europe's score was the highest and North America's was the lowest. This same pattern was evident at thesector level as well. In terms of the standard deviation of ESG scores, which shows the variation among companies within each sector, Europe had the most sectors with the highest standard deviation of the three regions for ESG and E scores, while North America had the most sectors for SG scores.

Japanese companies need to put more effort into SG activities Japan had the highest ESG score of the three regions for the pharma & chemical sector. Japan also had the highest E and SG scores for the sector, indicating that
Japanese companies rank highly in terms of ESG even on a global comparison in a sector in which many companies give high consideration to the environment and have robust governance systems in place. Overall, (1) Japan's ESG score is below the three-region average, (2) Japan's E score is above the three-region average but its SG score is below the average, and (3) Japan has the lowest standard deviation of the three regions for many sectors. In view of these results, we think Japanese companies need to step up their efforts in SG activities. Also factoring in the criticisms often leveled at Japanese companies by investors, we think Japanese companies need to
review and improve their corporate governance to raise their overall scores.
Stock selection should combine analyst ratings and ESG scores

Looking at Japanese companies, we find that Nomura fundamental analyst ratings do not fully factor in ESG considerations. However, as seen in the series of corporate scandals in recent years, information falling within the sphere of ESG obviously can have a substantial impact on shareholder value. We therefore think investors need to combine analyst ratings with ESG scores when selecting stocks.

kengo.nishiyama@nomura.com

Download the report:

http://bdti.mastertree.jp/f/kj5g7s32

The Board Director Training Institute (BDTI) is a "public interest" nonprofit in Japan dedicated to training about directorship, corporate governance, and related management techniques. It is certified by the Japanese government to conduct these activities as a regulated nonprofit. Read a summary about BDTI here, and see a menu of its services for both corporations and investors here.

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