Can Sustainable Investing Sustain Itself in Japan?

Can Sustainable Investing Sustain Itself in Japan?

Advocates of sustainable investing in Japan are struggling, according to a new report co-authored by William Burchart and Jessica Ziegler of The Investment Integration Project (TIIP). Their research is based on a literature review and discussions with more than 50 industry experts.

The paper was released Sept. 6 and is a collaborative effort betweem TIIP and the Sasakawa Peace Foundation (SPF). The SPF was created in 1986 to enhance international cooperation and is recognized for the Asia Woman Impact Fund. The TIIP is a leader in the research and consultative services behind the management of systemic risks and the solution of systemic problems. Their new report, Agenda for Action, is available in both Japanese and English.

Agenda for Action begins with an acknowledgement of the problem. Sustainable investing remains a niche market in Japan, a “boutique” business where customers are mostly long-term institutional investors such as pension funds.

Notably, the Government Pension Investment Fund (GPIF), which calls itself a “super-long-term” investor, with a century-long investment horizon, makes a point of evaluating its external managers on their engagement with environmental, societal, and governance (ESG) issues. GPIF signed the UN-supported Principles for Responsible Investment in 2015.

Though welcome, the support of such very-long-term investors hasn’t been enough to make sustainable investing part of the “mainstream financial community” in Japan. Indeed, relatively few investors know what the phrase “sustainable investing” means.

Defining Sustainable Investing

For their purposes Burchart and Ziegler understand sustainable investment to be investing that does some combination of the following three things: avoids propping up entities with poor ESG performance; takes a best-in-class approach to investing where ESG performance is good; and engages with funds and companies’ managers to encourage better ESG practices.

The first challenge to overcome in Japan is that of visibility. The sustainability investment ecosystem—funds, consultants, etc.—must put itself on the map. The authors suggest this be accomplished by mobilizing industry influencers, both individual and institutional. This has been part of the process of the growth of the same ecosystem in the United States. The authors cite Michael Bloomberg and Mary Schapiro, who were recruited to serve as Chair and Vice Chair, respectively, of the Sustainability Accounting Standards Board.

A second challenge? Among those in Japan who have heard something about sustainable investing, various invidious myths prevail. People see it as a form of philanthropy, a potential violation of fiduciary duty, something that is only the concern of the government, and a passing fad.

The proper response to mythology is evidence. The authors of this report contend that there is a large body of evidence that should be brought to the attention of the investing public in Japan that would disabuse them of these notions, such as for example Merrill Lynch’s research showing “that investors perform well financially when they invest in environmentally and socially sustainable organizations.” Such research “highlights notable developments in impact investing.”

Japanese investors, the paper says, will want to see detailed case studies of mainstream Japanese and non-Japanese investors who have been successful in their adoption of such strategies.

Awards and Breakthroughs

The authors consider it a good sign that there exists a growing number of awards and other formal acknowledgements in Japan related to sustainable investing. These awards create opportunities for the dissemination of success stories.

For example, they write, “In 2019, the Tokyo Metropolitan Government awarded the first-ever Tokyo Financial Award in ESG Investing, which recognized Neuberger Berman East Asia Ltd., Robeco Japan Co. Ltd., Sompo Holdings Inc. and Sumitomo Mitsui Trust Asset Management Co. Ltd. as financial services companies that are working to advance sustainable investments.”

The report concludes that four “breakthroughs” are necessary. There has to be a general increase of visibility; the dissemination of information about such investing as a successful style of asset management; an available stockpile of practical guidance and tools for interested investors; and support for the sustainable investment industry, in a coordinated way, by policy makers, including cabinet level agencies, in Japan.

 

 

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