ESG (Environment, Social, & Governance) standards are coming to the forefront of business considerations in Japan. Now is a great time to expand your business here to help shape Japan’s future approach.
Overview
With a record JPY ¥2,023 trillion (USD $17.02 trillion) in financial assets held by Japanese household at the end of 2021, asset managers with innovative products should be able to identify business opportunities for their companies to expand into the Japanese market. In addition, the concern for securing post-retirement savings, and the government-driven shift from savings to investment amongst the Japanese population are contributing to an upward momentum for increased levels of investment by individual investors. At the same time, the 2017 investment policy announced by the Government Pension Investment Fund (GPIF) to focus on ESG aspects is rapidly reshaping investment approaches by institutional investors. However, some Japanese companies are still slow to adopt ESG principles, resulting in a diversion of investments overseas where the principles are more deeply embraced or embedded. This current and unique Japanese condition presents a favourable business platform for ambitious UK financial and finance-related services with ESG investment commitments on a global scale.
This article looks at the ESG principles and investment in Japan and aims to show how the Japanese market has abundant opportunities for UK firms with ESG expertise to capitalise on.
ESG Investment in Japan: Context
In June 2017, GPIF published its Stewardship Principles, requiring its external asset managers to incorporate environmental, social, and governance (ESG) factors into their investment decision-making process so that long-term investment returns are secured.
Furthermore, in the New Form of Capitalism policy that Japanese Prime Minister Fumio Kishida announced after taking office, a strong emphasis on having, all companies, small, medium, and large-sized, embrace ESG principles has caused a rethink within corporate Japan. His policy is aimed at remedying the current imbalanced approach through directing attention to human capital investments such as women’s empowerment and reskilling so that creativity and innovation, that can help to solve many of the social issues present in Japan and other developed markets, can continue.
Despite of the huge amount of attention, there is no single list of ESG goals or examples, and the concepts often overlap. That said, each component can be vaguely described. The E (Environment) is about issues regarding the quality and functioning of the natural environment and system. The S (Social) includes areas such as diversity and inclusion to the treatment of their workforce, customers, suppliers, communities, and shareholders at large. The G (Governance) concerns with the entire structure and management of companies from top to bottom. For this, ESG is generally understood as a set of factors that measure the non-financial impacts of particular investments and companies that helps to discover business and investment opportunities.
With GPIF, the biggest pension fund in the world with USD $1,719 billion worth assets under its management, its approach to this set of principles plays an influential role in shaping the investment environment in Japan. The Japanese market subject to these principles maintains JPY ¥825 trillion held by Japanese asset management companies, the annual rate at which the market has been growing in the past decade is around 10%. The Japanese market is forecast to grow further partially thanks to the two factors mentioned earlier.
ESG Investment in Japan: Where things stand
The Japanese market has already been recognised as the most ESG conscious market in the APAC region even before the GPIF announcement and one might naturally be induced to wonder how foreign firms could come into Japan and start doing business from scratch.
Two conditions seem worth noting. A Stable and Promising Future and Lagged Behind Elements.
A Stable and Promising Future
Japan boasts the 3rd biggest economy in the world and offers a stable and promising investment environment. The country is categorised as highly politically stable and its government’s use of ESG investment as a means to achieve carbon neutrality by 2050 and advance Kishida’s policy looks to last for many years to come. Coincidental to this is increased interest in investing due to the concerns of a dearth of post-retirement savings, and the government-led shift from savings to investments. Investment interest from individuals across the country whose overall households’ financial assets exceeds JPY ¥2,023 trillion (USD $17.02 trillion) is likely to push the demand for some Government-led investment schemes such as NISA (Nippon Individual Savings Account) and iDeCo (individual-type Defined Contribution pension plan), which would inevitably lead to more active asset management business. At the same time, the so-called “Five Whales” of the five biggest Japanese pension funds with a combined asset under management of JPY ¥812 trillion will likely follow suit on the ESG path set by GPIF, which presents huge potential for foreign asset management companies.
Lagged Behind Elements
Given the stable investment ground for the long-term, GPIF’s specific focus on ESG investments will likely help lower the bar for foreign firms with global ESG investment expertise to enter into the Japanese market. As the ESG aspects of Japanese companies are scrutinised, one would notice that some elements are evidently absent because Japanese companies tend to focus more on the E (Environment) aspect. For the S (Social) and G (Governance) aspects, more work is needed. Because Japanese companies rely heavily on human capital, its shrinking and ageing population poses a huge challenge. Gender equality and diversity across the workforce, and structures of boards and group companies in Japan are said to lag behind global counterparts. Underlying issues are now slowly being addressed and the shift is boosted by the GPIF announcement and Kishida’s policy. This creates new opportunities for foreign financial and finance-related firms with a global ESG investment view to come into the Japanese market and demonstrate their expertise and influence.
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