The Economist has published two articles on ESG, one focusing on its expansion in Japan led by the GPIF and the other focusing on the impact of passive funds on the effectiveness of ESG investment overall. I was [accurately] quoted in the former – ” Nick Benes, who heads the Board Director Training Institute of Japan, an educational body, says he is “all for” the enthusiasm for ESG in Japan. But he frets that Japanese companies are focusing on environmental and social aspects at the expense of governance. “That is the real driver of sustainability,” says Mr Benes. “But here it’s a big, bold E and S, and a small, plain G.”
Category: ESG
Progress: GPIF Refers to “Corporate Governance Codes” for the First Time
The GPIF should be highly commended for including reference to “the corporate governance codes of each country” to its recent statements regarding its stewardship policy and its proxy voting policy. This is a major step forward, considering the politics that it faces and the long-standing and unfounded claim by leaders in the industrial community who claim that if the GPIF had its own “principles and guidance for governance and proxy voting”, that would be “intervening in managerial decision making. Even though the reference in the recently-released principles bends over backwards to encourage “giving a full hearing to explanations of non-compliance”, if you know the full background, this is significant progress. (For the first time, the GPIF has uttered the words “corporate governance code” in writing!)
FT: “Companies fail to buy into Japan’s stewardship code”
“Minuscule adoption of code a hit to Abe corporate governance efforts”
“…..Nicholas Benes, one of the architects of Japan’s corporate governance code and head of the Board Director Training Institute of Japan said: “In order for the stewardship code to function as it was intended and be effective as hoped for, the most important part of the ‘investment chain’ that needs to be signed up are the end asset owners — a large proportion of which are corporate pension funds … they are the ones that dictate policy to the fund managers that have signed the code”.
Unless the corporate pension funds — as the biggest customers of the asset managers — are actively demanding better stewardship, fund managers would inevitably cut corners on engagement and proxy voting, Mr Benes added…. ”
Attribution Analysis of Change in CG Scores 09/2015-09/2016
Titlis has updated corporate its governance ratings for 500 major public companies in Japan as of September 2016. The CG scores improved 3/100 pts from a year ago, steadily but at a slower pace than expectations at the inception of Corporate Governance Code. According to the attribution analysis of the changes in CG scores for a year, the category (factor) of the Board of Directors was the largest contributor and the categories of Incentive of Remuneration, Takeover Defense, and Share Cancellation also inched up scores.
Cross-shareholdings should be considered the effect of share price plunges. The resolution of cross-share holding is extremely slow. We should keep eyes on enhancement of CG.
http://www.titlisgroup.com/mwbhpwp/wp-content/uploads/CGR-attribution20161008.pdf
Report: Investor Obligations and Duties in Asian Markets
By Peter Knight, President, Generation Investment Management, Fiona Reynolds, Managing Director, PRI, Nick Robins, Co-Director, UNEP Inquiry into a Sustainable Financial System and Eric Usher, Head, UNEP Finance Initiative
Executive Summary:
In China, Hong Kong, India, Malaysia, Singapore and South Korea there are compelling national interest reasons for policy makers to promote the incorporation of environmental, social and governance factors into investment practice. Issues include addressing air quality, improving citizens’ long-term health, reducing inequality, providing for an ageing population and attracting the international capital necessary to meet economic growth targets. Investing prudently requires ESG factors to be considered in investment decision-making and to be part of the dialogue between investors and companies. This is consistent with the legal framework in all the markets studied in this report.
However, despite growing awareness of responsible investment, many investors have yet to fully integrate ESG factors into their investment decision-making processes. Public policy and regulation are a key influence. Currently, these markets have few formal requirements to integrate ESG factors, but investor obligations and duties are dynamic concepts that continuously evolve as society changes.
By working together, policy makers and investors can shape investment frameworks to clarify the obligations and duties investors owe to beneficiaries – obligations to embed ESG factors into investment decision-making, ownership practices, and ultimately, the way in which companies are managed.
”Will better corporate governance boost Japanese equity returns?”
Despite the fact that many folks are still pessimistic as to whether corporate governance reforms will bring a surmountable positive change to the Japanese economy, there has been some notable changes as the writer of this article, Louise Dudley, Hermes Global Equities Portfolio Manager, below puts it. It will take time and patience but will be worth it in the end.
Schroders: ”Investing in the future: Japan’s focus on sustainability”
”Schroders is proud to be one of a very small group of UK companies with a corporate history stretching back more than 200 years. Astonishingly, Japan is home to as many as 3,146 companies which were founded more than 200 years ago; some of which can be traced back more than 1,000 years.
Of course most of these are small, family-run and operate in niche areas, such as hotels and restaurants. Nevertheless, we can consider whether this Japanese aptitude for corporate longevity can tell us anything about the sustainability of Japanese business models in the future, and their ability to reward shareholders over time.
Forbes： U.S. Companies Joining FTSE4Good Index, Banks and Japanese Companies Exiting
“Green” indices are rising in popularity as investors increasingly seek to put business in context of its surroundings, and its wider impact. FTSE4Good, the global index provided by FTSE Russell, measures how a company operates in terms of environmental, social and governance (ESG) factors rather than what it makes — and ESG risk is everywhere, quite apart from “climate risk,” now at the forefront of attention.
Tougher inclusion criteria has just resulted in the removal of 43 companies from the index, with a startling number from Japan, where the picture of the extent of corporate governance reforms remains unclear. Its latest review sees 77 new additions to the FTSE4Good Global Index, of which 26 companies are from the United States, making it the largest contributor………..”
“What They Do With Your Money: How the Financial System Fails Us and How to Fix It”
Based on the theory that responsible behavior by institutional investors hinges in turn on stimulating a population of active citizen investors, I am attaching two of my recent articles drawn from the new book “What They Do With Your Money: How the Financial System Fails Us and How to Fix It”, by Jon Lukomnik, David Pitt-Watson and me (Yale University Press, just out). The official book launch took place on June 7.
The first article, published on the Harvard Law CG blog, sets out the costs to society and individuals when citizen investors are missing in action, and offers several proposed fixes:
https://corpgov.law.harvard.edu/2016/06/02/how-the-financial-system-fails-us-and-how-to-fix-it/
”RAN Finds Japanese Companies Misreporting Sustainability, Linked to Deforestation”
NGO Rainforest Action Network (RAN) claims that many Japanese companies are either “systematically misreporting compliance” under Japan’s Corporate Governance Code, or have a “fundamental lack of understanding as to what constitutes meaningful sustainability reporting and stakeholder engagement.”